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.

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Summary
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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.

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Israeli Terror Finance Law an Obstacle to All Israeli Banks
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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.

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Banks are not in the "National Security Business"
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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.

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Fischer Asks for More Time
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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.

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End of Banking Relationships Damages Everyone
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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.

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Deadline Will Likely be Extended
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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.

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