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). -------------- Summary -------------- ¶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. -------------- - OFAC Allows Some Transactions with PA Entities -------------- - ¶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. -------------- Hapoalim Wants GOI and USG Guarantees -------------- ¶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. -------------- Banks Always Vulnerable to Lawsuits -------------- ¶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. -------------- GOI Rules for PA Banks -------------- ¶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. -------------- Risk Reduced, Not Eliminated -------------- ¶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. -------------- Exit a High-Risk, Low-Reward Business -------------- ¶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. -------------- Shekel Vital to PA Economy -------------- ¶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. -------------- -------------- Discount Bank Joins Hapoalim in Exiting the Business -------------- -------------- ¶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. -------------- - PMA Useless Now But Worthwhile in the Long Run -------------- - ¶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. -------------- PA Needs Two Separate Banking Systems -------------- ¶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. -------------- Attendance -------------- ¶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. ********************************************* ******************** Visit Embassy Tel Aviv's Classified Website: http://www.state.sgov.gov/p/nea/telaviv You can also access this site through the State Department's Classified SIPRNET website. ********************************************* ******************** JONES