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. ********************************************* ******************** 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