CENTRAL BANK GOVERNOR CONVEYS ISRAELI BANKING

S E C R E T SECTION 01 OF 03 TEL AVIV 001982

SIPDIS

NEA FOR FRONT OFFICE; NEA/IPA FOR WILLIAMS, GREENE,
WAECHTER; NSC FOR ABRAMS, DORAN, LOGERFO; TREASURY FOR
ADKINS; TREASURY FOR SZUBIN

E.O. 12958: DECL: 05/18/2016
TAGS: ECON EFIN EAID PGOV PREL IS KWBG KPAL ISRAELI PALESTINIAN AFFAIRS ECONOMY AND FINANCE
SUBJECT: CENTRAL BANK GOVERNOR CONVEYS ISRAELI BANKING
FEARS TO TREASURY U/S LEVEY

REF: A. TEL AVIV 1368

B. JERUSALEM 1383

Classified By: Ambassador Richard H. Jones for reasons 1.4 (b) and (d).

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Summary
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1. (S) Bank of Israel Governor Stanley Fischer and his
antiterrorism finance team told Treasury U/S Stuart Levey and
the Ambassador on May 2 that Israeli banks want to end their
relationships with Palestinian banks due to fears of being
accused of involvement with terror finance. They said that
Israel Discount Bank has followed Bank Hapoalim,s lead and
decided to end its check-clearing relationship with
Palestinian banks, although this has not yet been publicly
announced. (It was announced a few days later.) This will
have a severe impact on the Palestinian economy, which is
highly dependent on Israel, and could force much of it to
function on a cash basis. The Bank of Israel has developed a
list of security measures for Palestinian banks that should
allow Israeli banks a greater degree of confidence in
maintaining their mutual business relationship. Check
clearing for Palestinian banks is a very low-margin,
high-risk business and, unless the GOI can identify a way to
indemnify the Israeli banks that do it from all possible
harm, they are likely to exit the business completely. End
Summary.

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OFAC Allows Some Transactions with PA Entities
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2. (S) U/S Levey said that the U.S. is getting many requests
for information from banks on dealing with PA banking
institutions, but that the Treasury has not yet issued
detailed guidance beyond the Office of Foreign Asset
Control,s (OFAC) six general licenses delineating specific
classes of permitted transactions with the PA.

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Hapoalim Wants GOI and USG Guarantees
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3. (S) Bank Supervisor Yoav Lehman then said that there is
no need for Israeli banks to clear non-shekel checks, and
that any foreign bank could do it. But only Israeli banks
can do shekel-clearing and that is very important for the PA
economy, especially for trade with Israel. Due to an
increase in terrorism-related lawsuits, Israeli banks are
leery of any connection whatsoever with PA banks since there
is no clarity regarding the question of which of them might
be involved in financing terrorism. Bank Hapoalim is very
nervous about the issue and is pulling out of its
check-clearing relationships with Palestinian banks. To
continue clearing checks, it wants the GOI to issue clear
rules on the subject and not hold it liable for any possible
terrorism connection if all the rules are adhered to. Lehman
added that Hapoalim wants the USG to give it the same sort of
guarantee as well.

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Banks Always Vulnerable to Lawsuits
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4. (S) Levey responded by saying that the Treasury
Department does not control the U.S. legal system and a bank
would be vulnerable to private lawsuits brought by the
families of terror victims regardless of the Treasury
Department,s statements. He did note that Treasury would be
unlikely to take enforcement action against an Israeli bank
that had clearly abided by all of the rules in the event that
a terrorist organization cleared checks through the bank.
When asked by Fischer if he would be willing to give a public
statement to that effect, Levey said he would have to
consider it. Fischer raised the question of the USG speaking
on behalf of Israeli financial institutions in the event that
they were sued. Levey said that this was an altogether
different situation. Levey stressed again, though, that the
PA elections had not changed U.S. policy or regulations
concerning dealings with private Palestinian entities, and
that, &we do not consider every private organization to be
Hamas.8 Israeli institutions should examine institutions on
a case-by-case basis to determine terror finance risk.

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GOI Rules for PA Banks
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5. (S) Lehman said that Israel will institute a number of
measures to deal with the problem of PA bank involvement with
terror finance. They are as follows:
-- PA banks that want any sort of relationship with an
Israeli bank must not deal with any of the institutions or
individuals named on a list published by the GOI of
institutions suspected of having terrorist ties.
-- PA banks would have to prohibit processing of checks with
third party endorsements.
-- If a check is greater than five to ten thousand (the
amount is still undecided),the transaction must be reported
to the Israeli Money Laundering and Terror Financing
Prohibition Authority (IMPA).
-- Any transactions below the threshold amount that appear
suspicious must also be reported to IMPA.

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Risk Reduced, Not Eliminated
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6. (S) Lehman added that a major problem arises if a name of
a suspect institution does not appear on the Israeli list,
but is published elsewhere in a publicly available source to
which a bank would be expected to have access. The banks do
not want to be liable for doing business with such an entity
if its terror ties escaped the bank,s notice. Leaving this
issue aside, Lehman concluded that if the GOI and USG are
satisfied with the measures being instituted by PA banks to
protect against dealing with terror-related entities, it is
possible that Israeli banks would be as well. But Levey
again noted that these measures would reduce risk, not
eliminate it, and that the USG would not be able to protect
institutions against suit by private plaintiffs.

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Exit a High-Risk, Low-Reward Business
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7. (S) Lehman stated that the easiest thing the Israeli
clearing banks can do is to simply get out of the business.
Check clearing is a very low-margin -- and now, an extremely
high-risk -- business, and that Israeli banks are simply
making a rational business decision to shut down these
operations. He noted that the Israeli banks have asked to be
indemnified by the GOI, but, so far, the government has
refused.

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Shekel Vital to PA Economy
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8. (S) Fischer underscored that Israel,s obligation to the
Palestinian Territories to provide clearing services for
shekel checks is anchored in the 1967 Paris Agreements.
Ending those services and even completely cutting ties with
the Palestinian economy would hardly be noticed in Israel,s
USD 125 billion economy, but the impact on the USD 5-10
billion PA economy would be very significant, forcing many
transactions to be made in foreign currencies or cash. Since
the majority of transactions in the PA use shekels, and the
bulk of the PA,s trade is with Israel, life would become
very difficult in the PA. He added, however, that people are
resourceful and will find a way around the difficulties.
Lehman noted that moneychangers could fill part of the
vacuum, but there is no one good solution. Large commercial
entities and private individuals as well could open accounts
in Israeli banks, but using the accounts would be difficult
in light of the restrictions on Palestinian entry into
Israel. There was some talk about the PA establishing its
own currency, but Fischer said that that is a bad idea for a
government that is unable to balance its books.

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Discount Bank Joins Hapoalim in Exiting the Business
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9. (S) In response to Levey,s query as to why there is
increased fear now on the part of the banks of being
implicated in terror financing, Lehman said that the present
situation is not normal. The PA, in reality, is ruled by a
terrorist organization. The pressure to counter terror
financing has increased in the last few years, and several
lawsuits alleging bank involvement in terror finance have
generated concern. He added that, although not yet announced
publicly, the Israel Discount Bank has decided to follow Bank
Hapoalim,s lead and cease clearing shekel checks. On the
issue of whether the GOI can do check clearing, Bank of
Israel Anti Money Laundering Director Dudu Zaken said that
the Central Bank of Israel could not but that the Israeli
Postal Bank could, in certain limited cases.
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PMA Useless Now But Worthwhile in the Long Run
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10. (S) GOI officials asked about the Palestinian Monetary
Authority (PMA). Levey said that the OFAC licenses allowed
dealing with the PMA. Central Bank officials said that the
PMA could not be relied upon in the fight against terror
finance. It has no developed legal structure, and no power,
and was, in any case, not equipped to follow money flows. In
the long run, however, it might become an effective
organization. Lehman suggested declaring the entire PA
banking system ) including the PMA ) to be
&non-cooperative8 in the battle against terror finance,
which might encourage the Europeans to be stricter in their
dealings with it. Levey downplayed the idea, and the
Ambassador pointed out that there could be an advantage in
allowing the organization to develop so that a monetary
authority infrastructure exists when Hamas no longer rules
the PA.

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PA Needs Two Separate Banking Systems
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11. (S) Levey suggested that GOI might use the Israeli list
of suspected terrorist institutions and individuals as
leverage with the PA banks -- that banks seeking to hold
correspondent accounts with Israeli banks commit not to do
business with entities and individuals on the list. When
Lehman pointed out that the public list is not complete due
to Israeli intelligence community concerns, Levey said that
it might, nevertheless, be the most comprehensive list
available. In response to Levey,s query as to whether PA
banks could be relied upon to adhere to the restrictions,
Fischer replied that that was easily put to the test. Also,
Fischer noted that PMA Chief George Abed had told Fischer to
&tell me what to do and I,ll do it.8 Fischer indicated
that a possible outcome might be two separate sets of banks
within the PA: one that does business with Hamas-related
entities, and a second that does not.

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Attendance
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12. (C) U.S.:
Treasury U/S for Terrorism and Financial Intelligence Stuart
Levey
Ambassador Richard H. Jones
Senior Advisor Adam Szubin
Financial Analyst Matt Epstein
Policy Advisor Kristen Hecht
Brian Grant, Regional Treasury Attach, Amman
Deputy Econ Counselor (note taker)
Econoff

Israel:
Governor of the Bank of Israel Stanley Fischer
Supervisor of Banks Yoav Lehman
Director of the Anti Money Laundering Authority in the Office
of the Supervisor of Banks David Zaken


13. (U) This cable was cleared by Under Secretary of the
Treasury Stuart Levey.

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