GOI STILL UNCERTAIN THAT POSTAL BANK WILL MANAGE

C O N F I D E N T I A L TEL AVIV 001075

SIPDIS

L FOR DOLA
TREASURY FOR DAS GLASER

E.O. 12958: DECL: 05/20/2018
TAGS: ECON EFIN KWBG KTFN
SUBJECT: GOI STILL UNCERTAIN THAT POSTAL BANK WILL MANAGE
ISRAELI-PALESTINIAN CORRESPONDENT RELATIONSHIP

REF: A. (A) TEL AVIV 624 B. (B) 07 TEL AVIV 3201

Classified By: AMB Richard H. Jones for Reasons 1.4 (b) and (d)

1.(C) SUMMARY: The Bank of Israel indicated that after many
months of negotiation, it was still uncertain whether the
Israeli Postal Bank will succeed the commercial banking
sector in providing correspondent banking services to
Palestinian banks. The Postal Bank has resisted taking over
this function, and is using the GOI,s request that it do so
as a springboard for negotiations on unrelated matters.
Although the GOI has the legal authority to order the Postal
Bank to undertake this role, it is unclear that the political
will exists to invoke such legal authorities in this case.
The BOI also reports on the implementation of new procedures
for clearing Palestinian checks, intended to prevent terror
financing, fraud and money laundering by Palestinian clients
through Israel,s banking system. END SUMMARY

2.(C) In a meeting at the Bank of Israel (BOI) on April 27,
David Zaken, the Assistant Supervisor of Banks and Head of
Off-Site Examination and Licensing for the BOI, told Adam
Szubin, the Director of Treasury's Office of Foreign Assets
Control (OFAC),his senior policy advisor, Ori Lev, and
econoff that the transfer of correspondent banking services
from Israel's commercial banking sector to its semi-private
Postal Bank was likely to happen but that negotiations with
Postal Bank were still on-going.

3.(C) Zaken stated that the commercial banks (Israel Discount
Bank (IDB) and Bank Hapoalim) have continued to clear
Palestinian transactions at the GOI,s request pending the
outcome of negotiations with Postal Bank. Delays in
transferring the function have been a result of strong
resistance by the Postal Bank, which is also using this
opportunity to engage with the GOI on unrelated matters as
part of its negotiating strategy. Zaken stated that no
banking entity in Israel wants the function: the risk is
very high and carries with it little if any profit. In
accordance with its continued policy of maintaining the
shekel as the PA,s currency, the GOI appears prepared to
enter into an indemnity agreement with the Postal Bank, to
protect it against the financial risk that may result from
providing the service.

4.(C) Zaken also stated that IDB feels as if it is receiving
enhanced scrutiny over an Anti-Money Laundering (AML) issue
from several years ago as a result of the media reporting
surrounding the Arab bank lawsuit in which Arab Bank has
sought to make IDB a third-party defendant (see reftels).

5.(U) Zaken noted that the BOI has been working to improve
security in its shekel clearing protocols for Palestinian
banks. In a bank circular recently issued by the Banking
Supervision division of the BOI, several new security
conditions have been placed on Palestinian banks, dealings
with Israeli banks. The BOI will altogether prohibit Israeli
banks from honoring any checks endorsed from one Palestinian
to another prior to being deposited (although he recognized a
loophole for Palestinian residents of East Jerusalem). For
checks drawn on Palestinian banks, the face of the checks
must contain either the name of the individual or
corporation, and his/her/its corresponding Israeli ID number
and address, all in Latin characters. Checks drawn on
Israeli banks for deposit in Palestinian banks must be
accompanied by an electronic file containing the following
details on the account in which the check is being deposited:
(1) the bank number, (2) branch number, (3) account number,
(4) the number of the account holder, (5) the name(s) of the
account holder, in Latin characters, and (6) the identity
number(s) of all the account holders. Checks printed with
different information from that on the electronic file will
be returned. The BOI has also applied the electronic file
requirement to any transfer between banks equaling or
exceeding 5,000 shekels.

6.(U) The BOI requires that an Israeli bank upon which a
check is drawn or into whose customer,s account a check is
deposited check the Israeli and OFAC lists of designated
entities. Zaken commented that the system, which has now
been in place for several months, has been working well,
though on occasion Israeli and Palestinian banks have
difficulty physically passing the diskettes containing the
electronic files back and forth. Zaken noted that the BOI has
implemented new regulations that allow Palestinians to use
either an Israeli-issued national ID number or a PA passport
number.

7.(C) Zaken said that the BOI arranged a meeting just before
the Passover holiday in Israel that included representatives
of both Israeli and Palestinian banks as well as the
Palestine Monetary Authority (PMA). He spoke positively
about the parties, progress in addressing technical issues
related to the implementation of the new BOI regulations on
shekel clearing during this meeting.

8.(C) Finally, Zaken noted that the PMA has asked that the
BOI be permitted to clear checks on behalf of Palestinian
banks by means of an account to be established at the BOI.
Zaken indicated that the BOI is not interested in such an
arrangement, both because it is not within the purview of
BOI,s functions and because it would serve to transfer the
responsibility of risk assessment and review to the PMA and
BOI, as opposed to the banks themselves.

9.(U) This cable has been cleared by Treasury/OFAC.

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