MOF CONFIDENT BANKING CRISIS WILL BE RESOLVED

C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 002517

SIPDIS

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

E.O. 12958: DECL: 06/21/2016
TAGS: ECON EFIN ETRD PGOV PINR IS KWBG KPAL EPREL SCRM ISRAELI PALESTINIAN AFFAIRS ECONOMY AND FINANCE
SUBJECT: MOF CONFIDENT BANKING CRISIS WILL BE RESOLVED

REF: TEL AVIV 2301

Classified By: Economic Counselor William Weinstein for reasons 1.4 b a
nd d.

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Summary
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1. (C) Stressing the need to prevent a humanitarian crisis
in the territories, the Ministry of Finance (MOF) DG Yossi
Bachar and his senior advisor said on June 20 that the
Temporary International Mechanism (TIM) was acceptable to the
MOF as long as it did not become an avenue for sending funds
to the PA's Hamas government. They expressed frustration
regarding the issue of supplying medical assistance to the
Palestinians, with Bachar saying that "everyone involved is
dealing with determining a proper mechanism rather than
actually getting assistance to those who need it." On the
Israel-Palestinian banking issue, they said that all of those
involved understood the importance of resolving the issue,
and were confident that the banks' agreement to delay cutting
off the Palestinian banks until August 15 would provide
sufficient time to find a solution. On the possibility of
revisiting and signing onto the customs agreement in order to
subject those crossing the Israel-Gaza border to
internationally-recognized limitations on the transport of
currency and giving the EU-BAM something concrete to monitor,
they said that doing so would require a political decision by
the Prime Minister's office. Bachar also expressed deep
concern regarding allegations of corruption and
inefficiencies at Karni that were impeding the movement of
U.S. products into the territories, and offered to facilitate
a meeting for the Economic Counselor with the temporary Chief
of the Airport Authority to discuss the problems. End
summary.

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Temporary International Mechanism
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2. (C) At a June 20 meeting between NEA/IPA Director
Williams, the Economic Counselor and Deputy Counselor, and
Finance Ministry DG Yossi Bachar and Senior Advisor to the
DG, Rani Loebenstein, Bachar stressed the need to prevent a
humanitarian crises among the Palestinians, which he said
would ultimately hurt Israel as well. He noted that the TIM
was acceptable to the Finance Ministry as long as it does not
become an avenue for sending funds to the PA's Hamas
government. Loebenstein explained that the GOI's main
concern is that the data to be used to determine where the
money should go will all originate from Hamas. Will the
doctors and teachers designated to receive the funds be real
doctors and teachers? He said that an earlier attempt in
2002 to inspect PA expenditures by means of the World Health
Organization and an international accounting firm came to
naught, and wondered why this time would be different.
Williams replied that any money paid would be a "stipend, not
a salary." Salaries are a "red line," for the EU as well,
and would remain the responsibility of the Hamas government.
He added that the TIM would show the international
community's concern for the Palestinians, maintain essential
services in the health sector, and give the donors the
opportunity to remain involved, consistent with the
requirements of the Quartet. Bachar noted that the effect of
the political friction between Hamas and Fatah was beyond any
outsider's control.

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NIS 50 million Medical Assistance
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3. (C) With regard to the provision of NIS 50 million in
medical assistance to the Palestinians from PA customs fees
that Israel has been collecting, Bachar noted that this is
another instance where everyone involved is dealing with
determining a proper mechanism rather than actually getting
assistance to those who need it. He called it a "very
delicate situation with no magic solution." In response to
the Economic Counselor's question as to whether the TIM could
be used as a conduit for the medical assistance funds, Bachar
said it was not clear if the Palestinians would agree.
Loebenstein said that the GOI will be holding a total of
about NIS 750 million in Palestinian revenue by the end of
June.

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Banking Relationships
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4. (C) Bachar said that the GOI had been close to an
agreement with Israeli banks that would have allowed them to
continue their relationships with private Palestinian banks.
However, Bachar admitted that the Attorney General had solid
legal reasons for not accepting the proposed agreement. The
Israeli banks agreed to extend their deadline for cutting off
relations with Palestinian banks from July 5 until August 15,
to allow more time for the negotiations to succeed. Bachar
stressed that the issue must be resolved in a way that will
fully satisfy the Attorney General as to its legality. He
added that the Bank of Israel (BOI) is interested in
maintaining the shekel as the chief Palestinian currency,
which would only be possible were the banks to maintain their
relationships.


5. (C) Loebenstein said that the changes required in banking
regulations would not be merely administrative but would
likely require the Knesset to consult with BOI regulators and
then approve the changes. In addition, Palestinian banks
will also have to comply with more stringent requirements
such as including more information on checks to make it
easier to track the flow of funds. He said that the Israeli
banks also want the U.S. Treasury to somehow affirm the
agreement so as to have some assurances that they would not
run afoul of U.S. anti-terror-financing laws. Bachar added
that the situation involves many complex legal issues and
needs to be worked through carefully. Williams noted that
the only recent change regarding terrorist financing
pertained to dealings with those parts of the PA government
now controlled by Hamas -- other restrictions on dealing with
FTOs remained the same. He asked why Israeli banks are so
concerned now? Bachar replied that the election of the Hamas
government has shined a spotlight on the issue of financial
dealings with the Palestinians, engendering in Israeli banks
an increased sense of risk across the board. Loebenstein
noted that the accusations against the Arab Bank in New York
last year had also increased awareness of the anti-terror
finance issue among banks worldwide. Bachar said he was
optimistic that a solution to the problem would be found
because all of the parties involved, including the Attorney
General, understood the need to resolve it. He added that
Loebenstein is handling the issue for the MoF, and is working
closely with the Ministry of Justice and the BOI.

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British Gas
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6. (C) The Economic Counselor asked if the Palestinians are
interested in selling gas to Israel via British Gas. Bachar
said that they were playing their cards very closely, and
noted that they have not yet exercised their influence on the
issue. He added that Israel has made a strategic decision
not to rely exclusively on Egyptian gas.

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Hamas Money Smuggling
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7. (C) The Economic Counselor raised the issue of the
inability of the EU-BAM to monitor Hamas smuggling of large
amounts of cash across the Gaza border. He remarked that the
Palestinians had signed a customs agreement covering movement
from Rafah to Gaza and suggested that it would be worthwhile
for the GOI to revisit and sign onto the customs agreement as
well. Activating it would enable the application of
international limitations on the movement of currency at the
crossings and would give the EU-BAM something concrete to
monitor. This would, for example, require the reporting of
more than USD 10,000 in cash by any individual. Loebenstein
said that everything the GOI had feared would happen as a
result of disengagement regarding the issue of "leaky
borders" was now happening. He added that the customs
agreement was a political issue which would have to be
decided on by the office of the Prime Minister.

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Corruption at Karni
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8. (C) The Economic Counselor then raised the issue of
corruption at Karni, which has become a significant
U.S.-Israel trade problem impeding the distribution of U.S.
products in the territories (see reftel). He added that the
reservation system for moving products at Karni is not
transparent, efficient, or logical, aside from the
allegations of corruption. He also said that USAID has funds
available for improving efficiency at border crossings, such
as setting up an internet sign-up system which will tell
every transport company where its load stands in the queue.
Bachar indicated that these problems were of great concern
and offered his help in setting up a meeting for the Economic
Counselor with Shaul Tsemach, the temporary Chief of the
Airport Authority, whose office is located in the Finance
Ministry.

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