Israel Aerospace Industries, flagship of Israel's defense industry, has been fined $260,800 for negotiating to export military equipment to an unidentified country without obtaining Defense Ministry approval.

The unusual action, reported by the liberal daily Haaretz Monday, took place in 2011, but the disclosure was the latest episode in a recent campaign to clean up Israel's arms trade that has put the industry under increased scrutiny.

The fine was imposed by the ministry's Department of Defense Export Controls, which conducted 161 investigations. The fine imposed in IAI was one of 13 instances where it took disciplinary action in 2011.

The type of equipment involved was not disclosed.

Five other cases are currently under investigation, Haaertz reported, without providing any details or naming the companies concerned.

The daily said that so far this year the department has examined 67 transactions involving military equipment for possible export violations.

"They tried to out the cart before the horse and went ahead without a permit and for that received a relatively harsh punishment," the newspaper quoted a senior defense source as saying.

He said state-owned IAI, which builds advanced unmanned aerial vehicles and Arrow interceptor missiles designed to shoot down ballistic missiles, complained that the fine was "disproportionately severe," but paid the fine in full.

The ministry's exports control division disclosed in April that in 2011 it awarded more than 8,000 export licenses to Israeli defense companies selling to 130 countries.

The disclosure about IAI came two weeks after the industry, a key exporting sector, was thrown into disarray by a government report that accused the ministry's director-general of approving exports deals involving weapons systems that the Foreign Ministry opposed.

The May 1 report by State Comptroller Micha Lindenstrauss heightened public scrutiny of the Defense Ministry, which, unlike other government departments, has long operated with great autonomy and with minimal accountability given the sensitivity surrounding national security in Israel.

Defense exports are vital to Israel's economy. In 2010, these totaled $7.6 billion, with the Israeli military buying another $2.4 billion worth. Exports in 2009 were $6.9 billion.

Four companies accounted for most of the 2010 total: IAI, Elbit Systems, Rafael Advanced Defense Systems and Israel Military Industries.

For many years, it has long been understood in Israel that the ministry, and particularly its export division, have been involved in dubious arms sales to unsavory regimes through shady weapons dealers licensed by the ministry.

Lindenstrauss' report did not directly address that issue, but it concluded the Defense Ministry's director-general, Udi Shani, violated defense export laws by approving several deals without consulting other departments.

Lindenstrauss also said Shani arbitrarily changed the ministry's policy in 2010 on how it provides export licenses to companies selling their products overseas.

On May 3, the government's quality watchdog agency, Ometz, called on Defense Minister Ehud Barak to suspend Shani immediately in light of Lindenstrauss' report until Attorney-General Yehuda Weinstein rules on whether Shani can continue as director-general at the ministry.

Shani, has been director-general at the Defense Ministry since 2010. He's been seen as a possible CEO of IAI later this year.

Lindenstrauss said that in at least three cases Shani had ignored export procedures and approved export licenses to companies to sell "military platforms" abroad even though the Foreign Ministry opposed them.

"The director-general and head of the Defense Ministry export agency overstepped their authority and acted against the law," Lindenstrauss noted.

He did not identify the weapons systems, their manufacturers or the intended buyers.

On March 8, India's Defense Ministry blacklisted state-owned IMI, along with five Indian and foreign companies, for 10 years over a 2009 bribery scandal. IMI denies any wrongdoing.

India is a one of Israel's major arms customers and that ban could have an impact on defense exports.

Israel's Defense Ministry has since ordered all defense companies to sign onto a "compliance program" to eradicate corruption in defense deals.

But all the evidence indicates the ministry keeps its registered arms dealers, who are invariably former officers, on a remarkably loose leash.

Yossi Melman, an Israeli journalist who specializes in intelligence and military affairs, observes that shady arms deals proliferate because "Israel is a small country based on an old boy network and there's insufficient supervision of the system … You can't supervise arms deals if you're promoting them."