We solved the encoding issue by setting the CHARSET value in the inbound FTP adapter's settings to "@UTF8".

I do not know if this was the right way to fix this and I need to do more research with it.   Setting the CHARSET value to "cp1252" or "hebrew" or "windows-1252" or "cyrillic" - basically anything other than "binary" or "UTF-8" - seems to work just fine. I really don't understand character sets right now.

Here are some pages I ran into while researching this: