DEADLINE FOR ENDING ISRAELI-PALESTINIAN BANKING

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 002345 SIPDIS NEA FOR FRONT OFFICE; NEA/IPA FOR WILLIAMS, GREENE, WAECHTER; NSC FOR ABRAMS, LOGERFO; TREASURY FOR ADKINS, SZUBIN E.O. 12958: DECL: 06/14/2016 TAGS: ECON EFIN ETRD EAID PGOV PREL IS KWBG KPAL ISRAELI PALESTINIAN AFFAIRS ECONOMY AND FINANCE SUBJECT: DEADLINE FOR ENDING ISRAELI-PALESTINIAN BANKING RELATIONSHIPS MAY EXTEND TO AUGUST 15 REF: 1. TEL AVIV 1982 2. TEL AVIV 1978 3. TEL AVIV 1368 Classified By: Ambassador Richard H. Jones for reasons 1.4 b and d. -------------- Summary -------------- ¶1. (C) A senior Bank Hapoalim official said that all Israeli banks were set to cut ties with Palestinian banks due to the fear of being implicated in a chain of financial transactions that might enable a terrorist attack. He said that the banks want the GOI to issue them a list of suspect individuals whose transactions they should not handle. If they follow the GOI instructions to the letter, they want immunity from prosecution under Israel's tough anti-terror finance laws. They refuse to accept liability for cases where "they should have known" that an individual was suspect, even though his name did not appear on the list. Bank of Israel Governor Stanley Fischer proposed that the banks not end their cooperation with PA banks until August 15, instead of on the present July 5 deadline. The banks have demanded immunity from prosecution for the interim period between July 5 and August 15. The Ministry of Finance informed the Economic Counselor that an agreement on extending the deadline is all but certain. End Summary. -------------- -------------- Israeli Terror Finance Law an Obstacle to All Israeli Banks -------------- -------------- ¶2. (C) In a June 14 meeting, Boaz Raday, the Vice President for Government Relations at Bank Hapoalim told the Deputy Economic Counselor that the problem that Israeli banks have in doing business with Palestinian banks goes way beyond the issue of clearing shekel checks. He said that the clearing issue was easily solvable. However, in examining it, it became clear to the banks that Israel's "draconian" anti-terror finance law presented serious obstacles to the continuation of any sort of commercial relationships between private Israeli and Palestinian banks, regardless of the check-clearing issue. All Israeli banks, led by Hapoalim and Discount because of their original involvement in the clearing issue, are negotiating with different elements of the GOI to solve the problem of possible liability under Israeli law for involvement anywhere in the chain of financial transactions that may enable a terrorist attack. The banks' view is that the law is ambiguous, and the goal of the negotiation is to remove all of the ambiguity. -------------- -------------- Banks are not in the "National Security Business" -------------- -------------- ¶3. (C) The banks are willing to accept any list of "suspect people" given them by the GOI, regardless of how many names are on it - whether it be "a thousand or a million," according to Raday, and make sure not to process any transactions involving these names. However, the banks refuse to get "involved in national security affairs," meaning that they demand full immunity for processing a check to or from anyone not on the list, even if the person was discussed in the morning newspapers as a terror suspect, and they "should have heard about it." He stressed that the banks wanted it "black or white, without any gray -- if we follow the GOI's instructions to the letter, we want immunity - it's as simple as that." He added that the banks completely accept the notion that anyone who knowingly cooperates in any way with terror finance should be criminally liable, but full compliance with name checking against a list provided by the GOI should absolve everyone involved from any liability. -------------- Fischer Asks for More Time -------------- ¶4. (C) Raday said that the Ministry of Finance and the Bank of Israel completely understood the banks' concerns, but that Yehuda Sheffer, Director of IMPA - the Israeli Money Laundering and Terror Financing Prohibition Authority at the Justice Ministry, and Assistant Attorney General Livnat Moshiach were the ones causing the problem. He added that in a June 13 meeting with all of the concerned parties, Stanley Fischer, the Governor of the Bank of Israel, urged Bank Hapoalim and Israel Discount Bank to extend their deadline for ending their correspondence relationships with Palestinian banks until August 15, to provide more time to find a solution. Fischer said that a deal needed to be completed by July 15, in order to provide Palestinian banks enough time to adjust to any new reality. ¶5. (C) At the same meeting, the banks asked Fischer and the other GOI officials present about their liability for anything that might happen in the interim period between the original deadline of July 5 and the new August 15 date. When the GOI representatives gave evasive answers, Raday said that the banks put it very plainly that they would not even consider extending the deadline without ironclad written assurances from the government that they would be immune from prosecution for anything that might occur during that period. He said that his bank is now waiting from a reply from the Attorney General's office on this issue. It should come in a few days, at which point, the bank's board -- which he described as being extremely risk averse - and its legal advisor, will decide whether or not to extend the deadline. Raday's personal feeling was that if the banks get the immunity for the interim period, they will likely agree to the extension. -------------- End of Banking Relationships Damages Everyone -------------- ¶6. (C) He also explained that the banks are loathe to end their commercial ties with Palestinian banks, as many important Israeli companies, such as Tnuva and Strauss, do a great deal of business in the Palestinian Authority (PA). He also said that a break in ties would be catastrophic for the Palestinian economy, which would, in large measure, be reduced to operating in cash. (Note and comment: In 2005, the PA imported approximately USD 2 billion from Israel, and exported about USD 300 million to it. In the first quarter of 2006, imports were USD 477 million and exports USD 62 million. These numbers indicate that the Palestinian economy is heavily dependent on imports from Israel, which would be reduced dramatically should Israeli banks end their commercial relations with PA banks. They also show that Israeli exporters will lose a significant nearby market. End Note and comment). He also noted the irony that a cash economy would in fact make it harder to prevent terror financing and money laundering, and that the amounts of untracked cash smuggled into the PA would grow exponentially. -------------- Deadline Will Likely be Extended -------------- ¶7. (C) In a later telcon between the Deputy Counselor and Rani Loebenstein, the Senior Advisor to the Ministry of Finance Director General, and the ministry's point man on the PA banking issue, Loebenstein confirmed the substance of what Raday said about the nature of the issue, the attitudes of the parties involved, and the possible extension of the deadline. He added that his ministry was continuing to work the issue, expressing optimism that a solution would be found. He noted, however, that the Attorney General's office was independent and not easily pressured. In a June 15 phone conversation, Loebenstein told the Economic Counselor that it was all but certain that the parties would come to an arrangement to extend the deadline until August 15. ********************************************* ******************** 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