BOI TO ACCEPT EXCESS SHEKELS, STILL SEEKS

C O N F I D E N T I A L SECTION 01 OF 03 TEL AVIV 002379 SIPDIS NSC FOR PREM KUMAR, TREASURY FOR DMOGER AND CKNOWLES, STATE FOR NEA/IPA AND SEMEP E.O. 12958: DECL: 10/28/2019 TAGS: EAID EFIN PREL KPAL IS SUBJECT: BOI TO ACCEPT EXCESS SHEKELS, STILL SEEKS PERMANENT FIX REF: A. JERUSALEM 1952 ¶B. TEL AVIV 1471 ¶C. TEL AVIV 1719 Classified By: Economic Counselor David R. Burnett; reasons 1.4 b/d - - - - Summary - - - - ¶1. (SBU) The Bank of Israel (BOI) will accept another tranche of surplus shekels from the West Bank "by the end of the week (i.e. 31 October)," according to Dudu Zaken, Assistant Supervisor of Banks. The sum of the deposit will be approximately NIS 400 million. BOI Governor Stanley Fischer is aware of the urgency of the situation (see ref A) as are Zaken and Yacov Peled, Head of the Institutional Evaluation Unit and AML/CFT (the technical experts on this issue). As of 27 October, Zaken and Peled agreed to recommend to Governor Fischer the approval of a deposit of surplus shekels as soon as possible. However, they stressed that this was a temporary arrangement and that the BOI seeks a more permanent solution -- with the assistance of the USG and international community. BOI officials also updated Econoff on related banking issues, including the bilateral Israeli-Palestinian dialogue, social security payments and cash transfers to Gaza. End Summary. - - - - - - - - Surplus shekels - - - - - - - - ¶2. (SBU) The BOI recognizes that there is a surplus shekel crisis in the West Bank and hopes to establish a long-term solution. According to Peled, the temporary solution of depositing surplus shekels in the Israeli central bank is untenable for several reasons. Bank of Israel law stipulates that the central bank cannot open accounts for foreign entities. Any foreign bank that seeks to make deposits in the central bank must obtain a license to operate domestically in Israel. In accepting these excess shekels, the BOI is circumventing this measure by depositing the surplus in Bank Hapoalim's account. This raises legal and technical questions (the BOI has traditionally only had direct relations with banks, and not operated with third-party arrangements). The BOI overlooked the third-party problems with Bank of Palestine's (BoP) mid-August deposit of NIS 300 million. According to Peled, this was because the BOI developed confidence that the BoP was a reliable partner through the bilateral banking dialogue. As part of a longer-term solution, the PMA has asked the BOI to accept deposits from seven other Palestinian banks, several of which the BOI does not have any pre-existing relationship with or knowledge of. The BOI is unwilling to accept deposits from these other banks, but does not want to create a situation whereby Palestinian banks funnel money through the BoP. (Note: The BOI is content with the PMA's description of where the excess shekels are coming from now, but still suspect that both Palestinians and Israelis are taking advantage of the Palestinian banking system for illicit transactions. However, when pressed, Peled was unable to provide direct proof of this to Econoff. End Note.) ¶4. (SBU) The BOI sees re-establishment of full correspondent relationships between Israeli and Palestinian private banks as the appropriate long-term solution. While the BOI cannot offer a letter of indemnification or force Israeli banks to engage with their counterparts, Zaken and Peled believe that a robust banking dialogue will allow the BOI to give some sort of "seal of approval" for the private banks to restart relations. The BOI also requests USG support in encouraging Israeli banks to re-establish such relations. (Note: Our private bank contacts have told us repeatedly that they are looking for financial incentives from the Palestinians and international community to re-engage to overcome PR concerns (see ref B) along with GOI support. End Note.) - - - - - - - - - - - - - Bilateral banking dialogue - - - - - - - - - - - - - ¶5. (C) Zaken and Peled emphasized that the ongoing bilateral Israeli-Palestinian banking dialogue is central to moving forward on all of the related banking issues. The BOI believes that this dialogue builds confidence in the professional relationships among many different parties on TEL AVIV 00002379 002 OF 003 the two sides and provides political cover for the technical experts. Peled acknowledged that others may perceive the banking dialogue to be a GOI stalling tactic, but underscored its importance. For the BOI, this dialogue is the key element in restoring corespondent relationships. Peled said that while a few BOI and PMA officials have good personal relationships, the banking dialogue is pivotal in building strong professional relations among a wider group of relevant individuals. He recognizes Palestinian political concerns about engaging with the Israelis on information sharing, but hoped to devise ways -- perhaps through the international community -- that the Palestinians could describe their efforts on implementation and effectiveness of the Palestinian AML regime. Peled suggested that perhaps information could be shared through reports submitted to the USG or international organizations, or even posted on the PMA's website. He stressed that the GOI is looking for broad figures, not specific details or names, a point he believes the GOI does not always clearly convey to the Palestinians. - - - - - - - - - - - - - - - - Social security payments to Gaza - - - - - - - - - - - - - - - - ¶7. (SBU) Peled said that both the GOI and Palestinians have been working toward a resolution to the social security payment issue (see ref C),noting that this could provide a positive story for both sides. The BOI was unaware of the Palestinians' serious concerns about the clause requiring the PA/PMA to draw on clearance revenues in the event of a lawsuit. Peled agreed that there could be a different arrangement, but noted that the GOI views the draft agreement returned by the Palestinians on this issue last week (date?) as problematic. Beyond the clearance revenue clause, four other major paragraphs had been removed, including requirements that: 1) identification documents from the opening of bank accounts be sent to the Israeli social security administration for verification of beneficiary; 2) the PMA declare they are required to comply with international AML/CFT standards; 3) the PMA agree to check all beneficiaries against the UN, OFAC and Israeli designation lists; and, 4)the PMA report any suspicious activity with these transfers to the Israelis. ¶8. (C) Peled agreed that the agreement had become too cumbersome. He said that the BOI would push the Israeli inter-agency team engaged on this issue for a simpler solution. Instead of the burdensome AML/CFT requirements, Peled suggested that the agreement merely involve a transfer of the money from BOI to the Bank of Palestine once the accounts were set up. If the money did not pass through PA/PMA hands, Peled said that the agreement would not have to include all of these additional clauses. Instead, the PMA could merely monitor bank transactions from the point the BoP received the money (as he supposes it would anyway). Peled suggested that an alternative to the clearance revenue and identification document issues could be a signed PMA/BoP declaration that all accounts were opened by the named beneficiary. Peled said that the BOI would accept this paper as proof of identification as well as protection against any later lawsuits. He said that he would push for such a simplified agreement with the GOI inter-agency and report within the week on the outcome. ¶9. (C) When questioned about the status of the PMA/UNRWA joint request for a cash transfer of dollars and dinars from the West Bank to Gaza in October, Zaken and Peled were uninformed and promised to investigate and respond. They believed that COGAT had raised concerns about the transfer of currency other than shekel, but were unaware of the basis for this concern. - - - - - - - - - - - - - - - - - - - - Support from the USG and int'l community - - - - - - - - - - - - - - - - - - - - ¶10. (SBU) Zaken and Peled requested support from the USG and international community in moving forward on these banking issues. The BOI is willing, in the short-term, to take temporary measures, such as the deposit of surplus cash, to remedy impending crises. In the mid-term, the BOI hopes for continued dialogue on banking institution building and AML/CFT issues, and through which correspondent banking relationships may be restored. In the long-term, the BOI hopes the Palestinians, like the Israelis, will engage in more in-depth institution building measures such as a mutual TEL AVIV 00002379 003 OF 003 evaluation by MENA-FATF or Moneyval. Zaken and Peled understand that these processes, especially the mutual evaluation will take significant amounts of time, but stress the importance of Palestinian commitment to a process to strengthen the bilateral relationship on this issues. ¶11. (SBU) Specifically, Zaken and Peled requested USG support in: 1) encouraging Palestinian commitment to a plan outlining steps forward in the short, medium, and long term from both sides, and 2) developing correspondent relationships between private Israeli and Palestinian banks. CUNNINGHAM