ISRAELI BANK DETERMINED TO CUT GAZA BANKING TIES

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 001508 SIPDIS E.O. 12958: DECL: 07/10/2018 TAGS: ECON PREL KWBG IS SUBJECT: ISRAELI BANK DETERMINED TO CUT GAZA BANKING TIES Classified By: Economic Counselor William Weinstein for reasons 1.4 b a nd d. -------------- Summary -------------- ¶1. (C) Bank Hapoalim (BH) informed the Bank of Palestine (BOP) in a July 6 letter that it will no longer provide it with cash transfer services. The decision was made independent of any consultation with or approval by the GOI or the Bank of Israel (BOI) and was triggered by a BOP request for a NIS 25 million transfer in early July. BH's action was in line with its long-standing desire to exit the Gaza business due to the minimal profits it generated compared to the high risk it entailed of being accused of involvement in terror finance. This risk was intensified after the Hamas takeover of Gaza and the consequent GOI classification of Gaza as a "hostile entity," and was made concrete when the Arab Bank brought a lawsuit against BH last year accusing it of involvement in terror finance. The BOI is still working to convince the Israel Postal Bank (IPB) to take over the Israeli-Palestinian banking relationship. However, the head of IPB is leaving and the resulting bureaucratic shakeup will likely result in a delay in the negotiations. The BOI has not yet formulated its reaction to BH's action, and will hold intensive discussions on the issue next week. Regardless, the BOI states unequivocally that it agrees with the GOI policy that maintaining the Israeli-Palestinian banking relationship is in Israel's interest. -------------- BH Want Out of Gaza -------------- ¶2. (C) Boaz Raday, Head of Government Affairs at BH, told Dep EconCouns on July 10 that his bank has long been determined to end its business relationship with Gazan banks. He said that the BH letter of July 6 to the Bank of Palestine BOP stating that BH was ending its cash transfer services was triggered by BOP's early-July request for a cash transfer of NIS 25 million. Raday said that BH had provided this service in the past but that the bank's management was extremely unhappy about the negative publicity that it had received for doing so. According to Raday, the press reported the story as if BH were funneling money to Gaza that would eventually end up in the hands of Hamas, without mentioning the "high-level GOI clearances the bank had received from agencies such as the Anti Money-Laundering Authority" before it agreed to transfer the cash. That experience, together with BH's long-time desire to cut its ties to Gazan banks prompted the decision to send the July 6 letter ending cash transfer services in response to the BOP's request for the cash transfer. Also on July 10, David Zaken of the BOI's Banking Supervision Department told Dep EconCouns that the BOI has not yet formulated a reaction to BH's letter and had not yet directly contacted the bank, confirming Raday's earlier statement that BH had not yet heard any reaction from the BOI. Zaken stated unequivocally that the BOI agrees with the GOI position that it is in Israel's interest that Israeli banks continue to provide all necessary services to Palestinian banks in Gaza, and that there would be intensive discussions at the BOI next week on how to proceed. -------------- Large Risk Small Reward -------------- ¶3. (C) Raday explained that even before the Hamas takeover of Gaza, the bank profited little from its Palestinian correspondence and money transferring business, but incurred great risks due to the possibility of being charged with having links to terror finance. After a BH "campaign" several years ago to pressure the GOI to indemnify it against such potential charges, it was ultimately indemnified only against criminal charges filed in Israel, leaving the bank "completely exposed to all other types of lawsuits filed anywhere in the world." When Hamas took over Gaza and the GOI declared Gaza to be a "hostile entity," BH decided to exit Gaza completely, as the risks associated with continuing the Gaza business became truly unjustifiable from a business standpoint. These risks assumed concrete form last year when the Arab Bank filed a lawsuit against both BH and Israel Discount Bank -- the other private Israeli bank providing correspondent banking services to Palestinian banks -- accusing them of involvement in terror finance. Throughout the conversation, Raday repeatedly stressed that BH has enjoyed an excellent working relationship with the BOP management, for which it has enormous respect. None of the TEL AVIV 00001508 002 OF 002 actions BH was taking should be construed as being directed specifically at the BOP or its personnel. It was a straight risk-reward business decision. -------------- BH Believes BOI Stringing it Along -------------- ¶4. (C) Raday claimed that BH would long ago have exited the Gaza business if not for various machinations by the GOI to force it to continue providing services. He did not go into detail, but said that the GOI was using all sorts of technical measures to prevent BH from acting on its threat to sever its Gaza ties. With regard to the possibility of the Israeli Postal Bank (IPB) providing banking services in place of the private banks, Raday said that he had little faith in the BOI's efforts to make this happen. He said that he had been in constant contact with the BOI until about a month ago regarding the IPB issue and heard "endless promises" about how "just a few more things need to be worked out" in order for the IPB to take over the business. He indicated that he no longer believes that the BOI is serious in its effort to convince the IPB to take over, and has not talked to the BOI about the issue for the last month. -------------- IPB Negotiations Temporarily Stuck -------------- ¶5. (C) When asked about the status of the IPB negotiations, the BOI's Zaken said that the BOI is still working extremely hard to overcome the hurdles preventing IPB from taking over the business. However, the major hurdle now is the impending departure of the IPB Chairman, which is preventing the organization from taking on a major new commitment at this time. Zaken noted that it would likely take some time for the bureaucratic reshuffling at IPB to work itself out and allow the negotiations to be successfully concluded. He also noted that he has been in contact with the Palestinian monetary chief, Jihad al-Wazir. He understands from Al-Wazir that the Palestinians are under constant and extreme pressure to figure out ways to get cash into Gaza and to deal with the banking problems presented by the BH decision to sever ties to Gaza. However, he added that "the Palestinians often claim there's a cash crisis, but usually manage to figure out a way to pay." He also said that Israel Discount Bank has not followed BH's example so far and has not announced a similar decision. -------------- BOI Will Not Act as Commercial Bank -------------- ¶6. (C) Raday had proposed as an immediate solution to a Palestinian cash crunch that the BH give the BOP a check which it could present to the BOI for cash. However, when asked about this possibility, Zaken said that the BOI could not engage in such a transaction since it is not a commercial bank. When pressed, he noted that while there are always exceptional situations that might warrant one-time extraordinary actions, what is really needed here is a comprehensive solution to the problem. ********************************************* ******************** 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