DEMARCHE REQUEST: SEEKING HALT TO TERMINATION OF

C O N F I D E N T I A L STATE 122043

SIPDIS

E.O. 12958: DECL: 11/13/2018
TAGS: EFIN KNNP KTFN KPAL PREL IS
SUBJECT: DEMARCHE REQUEST: SEEKING HALT TO TERMINATION OF
CORRESPONDENT BANKING SERVICES

REF: A. TEL AVIV 2447

B. TEL AVIV 2452

Classified By: A/S David Welch, reasons 1.4 (b) & (d)


1. (U) This is an action request: see paragraph 3.


2. (C) Summary: Banks Hapoalim and Israel Discount Bank (IDB)
have indicated that they plan to terminate all correspondent
banking services for Gaza branches of Palestinian banks.
Washington is concerned that the planned action by the only
two Israeli banks providing Shekel clearing and other
services to Gaza will destroy Gaza's formal banking sector,
drive currency and commercial transactions in Gaza to the
black market, weaken the entire Palestinian financial system
- a critical institution of a future Palestinian state - and
ultimately benefit Hamas in Gaza. We should press the Bank
of Israel to find a solution prior to Bank Hapoalim's
announced deadline of November 30, 2008 to allow the
continued operation and viability of the Palestinian banking
sector in Gaza. End summary.


3. (SBU) Action Request: The Department requests that Embassy
Tel Aviv demarche Stanley Fischer, Chairman of the Bank of
Israel (BOI),as soon as possible prior to November 30 and
attempt to forestall the threatened termination of
correspondent banking services for Gazan branches of
Palestinian banks.

Objectives
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4. (U) The Department instructs Embassy Tel Aviv to pursue
the following objectives and issues with Fischer:

- Gain BOI assurance that it will establish a mechanism to
provide continued and uninterrupted correspondent banking
relations for Palestinian banks, including their Gaza
branches.

- Emphasize that Bank Hapoalim's and IDB's threatened
termination of correspondent banking services will cause
banks in Gaza to fail, thereby weakening a critical
institution of a future Palestinian state, and ultimately
undermining Israeli security by increasing black market
transactions and strengthening Hamas. Note that we already
have seen evidence of increased currency transactions on the
local economy in Gaza, which benefit the smugglers and Hamas.

Reporting Deadline
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5. (U) Please report all host country responses to NEA/IPA
Desk Officer Andrew Lentz by November 20.

Background
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6. (C) Bank Hapoalim and Discount have long been concerned
that providing banks in Gaza with cash and other services
makes them vulnerable to charges that they are indirectly
funding Hamas operations against Israel and opens them to
litigation risk. Washington is concerned, however, that the
banks' termination of correspondent banking services,
including cash transfers, letters of guarantee, and credit
and credit confirmations, will have wide-ranging negative
effects in Gaza and the West Bank that ultimately will serve
to strengthen Hamas and undermine Israeli security. The loss
of Shekel-clearing and cash transfer services will result in
severe cash liquidity shortages in Gaza and have an immediate
effect on the ability of the PA, NGOs and UNRWA to make
salary and social welfare payments. Deprived of their link
to the outside world, Palestinian banks likely will close
their Gaza branches. We are also concerned that the collapse
of banks in Gaza will weaken the entire Palestinian financial
sector.


7. (C) If Gaza's formal banking system fails, Palestinians
will lose one of the critical institutions necessary to help
stabilize the economy and conditions once calm returns. As
Post recommended in reftels, one possible solution is for the
BOI to expedite approval of the proposal to shift
correspondent relationships from the private banks to the
Ministry of Communication's Postal Bank. If this is not
possible now for political or technical reasons, the BOI
could appeal to the banks to postpone termination until a
solution can be found.


8. (C) The institutional viability of banks operating in Gaza
- as well as that of the entire Palestinian financial system
- is a separate issue from that of Gaza's liquidity needs.

Point of Contact
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9. (U) Please contact Andrew Lentz at (202) 647-2268 or via
e-mail at lentzan@state.gov for further background
information or points to meet our objectives.
RICE