The agency said that seven civil society groups involved in humanitarian work in the Israeli-occupied West Bank had “defrauded and deceived several European countries”.
Money from Switzerland, Germany, the Netherlands, the UK, Belgium, Sweden, Spain and the EU had been diverted to the Popular Front for the Liberation of Palestine (PFLP), which has been designated a terrorist group by several Western states.
An Israeli official, speaking to reporters on condition of anonymity, indicated the funds channelled to the PFLP amounted to millions of euros (dollars).
The Shin Bet said a suspect in the case was Juana Rashmawi, who has Spanish citizenship.
It said an investigation revealed “the diversion of considerable amounts of funding, received from official governmental institutions in Europe, towards the financing of the PFLP’s organisational and militant terrorist activities in the West Bank”.
It did not give specific figures.
“None of the governments knew where the money was going,” the Israeli official said, despite “flashing red lights” that could have warned the European donors.
The Shin Bet said the aid groups collaborating with the PFLP had used fake projects, inflated invoices, forged bank documents and inflated salaries to deceive the donors.
Rashmawi was Thursday indicted in an Israeli military court in the West Bank, with charges including membership of a banned organisation and moving money for it.
The agency also identified three other suspects, all from the West Bank and involved in the civil society groups.
They had provided “extensive material that educates as to the scope of the fraud that PFLP institutions carried out against European countries”, it said.
The Israeli official said the probe began some two years ago, with documentation uncovered showing “money laundering” primarily since 2014, with some instances reaching as far back as 2006.
Israel’s foreign ministry said it had summoned “ambassadors of the relevant European countries”, while “Israeli diplomats in Europe met at foreign ministries of each of the respective countries” to present the evidence.
It said Israel “demanded that funding transfers be frozen immediately” to the aid groups implicated, calling on donor states to “establish a dialogue intended to improve control measures and supervision of funds transferred” to Palestinian NGOs.
The PFLP, a group that pioneered plane hijackings in the 1970s to highlight the Palestinian cause, had no immediate comment on the charges.