ENGAGING HAPOALIM, GOI ON CORRESPONDENT BANKING

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 000139

SIPDIS

NSC FOR PREM KUMAR, TREASURY FOR DMOGER AND CKNOWLES, STATE
FOR NEA/IPA AND SEMEP

E.O. 12958: DECL: 01/22/2020
TAGS: EAID EFIN PREL KPAL IS
SUBJECT: ENGAGING HAPOALIM, GOI ON CORRESPONDENT BANKING

REF: A. TEL AVIV 2756

B. TEL AVIV 1471

Classified By: DCM Luis G. Moreno; reasons 1.4 b/d


1. (U) This is an action cable (see para 7).

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Hapoalim reiterates concerns to OQR
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2. (SBU) Firas Raad, Development Advisor in the Office of the
Quartet Representative (OQR),briefed Econoff on recent
discussions with senior management at Bank Hapoalim on
re-establishing correspondent cash services with the Bank of
Palestine (BOP). Hapoalim Senior VPs reiterated concerns
about providing correspondent cash services due to the
AML/CFT standards of Palestinians banks and the resulting
risks from litigation (such as from another Arab Bank-like
case in the U.S.) as well as the perceived public relations
costs Hapoalim would have to pay with its Israeli customers
from business ties and cooperation with Palestinians.
Hapoalim's Board of Directors has requested that the Bank of
Israel (BOI) and Government of Israel provide much more
explicit policy guidance in support of the resumption of
commercial correspondent relations, to no avail. (Note: Raad
was not told specifically what Hapoalim requested of the BOI,
but Raad suggested that it was likely some sort of
indemnification or comfort letter, tracking with what
Hapoalim has previously told the Embassy (ref A). End Note).

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OQR, BOP next steps
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3. (C) Raad also said that Hashem Shawa, General Manager of
the Bank of Palestine, is planning to meet with Yair
Seroussi, Chairman of the Board at Bank Hapoalim, on February
2nd or 3rd to discuss these issues further. Raad believes
that BOP has built a good case for reestablishing full
relations with Hapoalim--including possible financial
incentives due to projected growth. Raad felt that this
meeting could be an inflection point which will determine the
timeline and direction of Hapoalim's decisions on its
relationship with BOP.


4. (C) OQR is considering its own further outreach on several
fronts. Raad will meet the week of January 25 with David
Zaken, Assistant Supervisor of Banks at BOI, to follow up on
his conversation with Hapoalim (Emboffs have been invited by
Raad to participate in this meeting). OQR is still pondering
whether a letter from Tony Blair to Hapoalim, stressing the
importance of the resumption of correspondent relations to
Palestinian institution building and the Middle East Peace
Process, could be useful. Raad asked if the USG would
support a similar letter from Special Envoy Mitchell, or a
joint Mitchell/Blair letter. Emboff noted that the USG would
be very reluctant to provide anything in writing that could
be used to argue for indemnification in the future.
Following advice from Silvan Shalom's office, Raad also plans
to reach out to HSBC and other international banks operating
in Israel to determine whether they could provide
correspondent services to Palestinian banks. (Note: Embassy
has previously engaged with other international banks on this
issue. All voiced concerns similar to Hapoalim's, along with
noting that they did not provide many of the services here in
Israel that the Palestinian banks would need (see ref B).
End Note).

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Future USG engagement: Embassy comment and guidance request
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5. (C) From Raad's read-out and previous Embassy
conversations, it appears that there are several perceived
risks which private Israeli banks will need to address
internally before deciding to resume correspondent cash
relations with Palestinian banks. These include public
relations concerns, litigation risks (both domestically and
internationally),assessements of Palestinian AML/CFT
standards and implementation, and the overall political
environment. We believe that any USG or international
engagement on this issue will be most productive if it seeks
to address one or more of these concerns, or postpones a
decision by the private Israeli banks until these concerns
have been addressed via other means. Hapoalim's threat to
sever all relations with BOP could be a bluff intended to
force the indemnification issue, but if the above concerns

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remain unaddressed, Hapoalim will, at best, maintain the
status quo in its relationships with Palestinian banks.


6. (C) While the Bank of Israel supports re-establishing
correspondent relations, it is very unlikely to indemnify
private Israeli banks, as Hapoalim has requested, leaving it
with few tools to encourage Hapoalim, Discount, and other
banks to restore relations with Palestinian counterparts.
Embassy will continue to encourage broader GOI support for
this initiative (including a demonstration of this support to
the Israeli private sector in novel ways other than an
indemnification letter). We will also continue to coordinate
with OQR to pursue other possible solutions, including
encouragement of international and/or other smaller Israeli
banks to take the lead as the Israeli partner in providing
correspondent services. However, the current political
climate does not bode well for positive overtures from the
GOI to the PA. In fact, several of our GOI interlocutors say
they are actively searching for sticks to get the PA to the
negotiating table, as they feel the carrot approach has not
been successful.


7. (C) Action Requested: Post would appreciate guidance
regarding:

a) participation in a joint OQR-Embassy meeting with BOI to
present a united front on this topic, and

b) Raad's proposal for letters from Tony Blair and SE
Mitchell or a joint Blair/Mitchell letter to Hapoalim and/or
BOI on the importance of correspondent relations to
Palestinian institution-building and the Middle East Peace
Process.
CUNNINGHAM