SHIN BET TALKS GAZA ECONOMICS

S E C R E T SECTION 01 OF 03 TEL AVIV 000413



NOFORN

SIPDIS



STATE FOR NEA/IPA AND SEMEP; NSC FOR KUMAR; TREASURY FOR

MOGER/KNOWLES



E.O. 12958: DECL: 02/22/2020

TAGS: ECON, PTER, KPAL, KTFN, IS

SUBJECT: SHIN BET TALKS GAZA ECONOMICS



REF: A. JERUSALEM 276

B. TEL AVIV 2446



Classified By: Economic Counselor David R. Burnett; reasons 1.4 b/d



1. (S/NF) Summary: In February 16-17 meetings, Senior Shin

Bet officials outlined for Emboffs their views on recent

trends in the Gaza Strip's economy, including the paradoxical

effect of "clean" Palestinian Monetary Authority

(PMA)-regulated banks serving Hamas interests, the operating

dynamics of a market split between legitimate and illicit

activity, and the growing economic division between Gaza and

the West Bank. The legitimate market sector, anchored by the

PMA-regulated private banking system is mirrored by an

alternative Hamas financial system, both of which are linked

by currency flows and trade. End Summary.



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The PMA-regulated private banking system

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2. (S/NF) The PMA-regulated private banking network provides

the backbone for the legitimate sector of Gaza's market.

Salaries paid by the Palestinian Authority, international

aid, and legitimate trade finance all flow through these

banks. New Israeli Shekels (NIS) and U.S. Dollars (USD)

comprise the majority of hard currency transfers. The

private banks that operate under PMA-supervision are

well-regulated according to PMA-prescribed Anti-Money

Laundering legislation. According to Shin Bet, suspicious

activity is usually reported, and Hamas has been unable to

make any significant inroads in bank activities. The banks

have maintained their independence from the Hamas regime with

the threat that they will close if Hamas attempts

infiltration. The banks will not let Hamas operatives open

bank accounts or have their salaries deposited in any

existing accounts. Shin Bet has not seen any attacks on the

banks by Hamas-affiliated groups or individuals.



3. (S/NF) However, Shin Bet officials assess that Hamas is

significantly benefiting from the PMA-regulated banks, even

though they do not directly utilize them for commercial

activity. These well-operated banks, which are "clean" of

money-laundering or terror finance, provide the non-Hamas

population of the Gaza Strip with a key financial service

that improves their quality of life. Shin Bet believes that

due to a lack of successful strategic messaging by the PA and

PMA that makes clear how they--and not Hamas--are providing

these private banks as a public service, Hamas has been able

to take full credit. Hamas has led the Gaza population to

believe that it is their leadership which has enabled these

banks to function relatively effectively and without

corruption. As such, even though they are not under Hamas

control, the PMA-regulated private banks support Hamas

because they provide a necessary financial service at no cost

to the Hamas regime. Shin Bet argues that this is why the

banks' threats of closure have proven effective against Hamas

encroachment.



4. (S/NF) Shin Bet also believes that the private Palestinian

banks operating branches in Gaza would prefer to close them

due to low profitability relative to risk. Political

considerations and pressure from the PA, PMA, and others, are

the primary reason why they remain in operation. While Shin

Bet faults the PA for not getting more street credit for the

Gaza banking system, they agree that a pull-out by the banks

would be a political and psychological blow to the PA.



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The Hamas Alternative Financial System

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5. (S/NF) A Hamas alternative financial system exists

parallel to the PMA-regulated banking system. Hamas smuggles

in large quantities of foreign currencies (primarily USD and

Euros) in order to fund its operating expenses. According to

Shin Bet, their budget consists of three major parts: 1) USD

200 million annually for government operating expenses; 2)

USD 50 million each year to support the Hamas movement's

civilian side and organization; and, 3) USD 40 million

annually for its military wing and security apparatus. Over

the past several months, shortages of cash for Hamas salary

payments (usually made in USD) have been reported (see REFs A

and B). Shin Bet now believes that this was due primarily to

Israeli efforts to thwart terror funds and Egyptian

counter-smuggling operations, not a lack of actual funding

from abroad. Recently, however, Hamas has adapted to this



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crackdown and re-rerouted its smuggling operations, bypassing

Cairo and heading directly through Sinai, thereby more easily

evading detection. They have also reduced the size of

amounts smuggled into Gaza at one time to avoid large losses

after any one interdiction. Shin Bet also notes dwindling

levels of support from the Egyptians in stemming this flow of

funds. Additionally, Hamas has increased tax collection, as

detailed in REF A.



6. (S/NF) With these modifications, the parallel economy has

been flourishing, and the delayed salary payments are not

symptomatic of a more endemic problem. Hamas has also

established a second branch of its own National Islamic Bank

in Khan Yunis, and is attempting to initiate correspondent

relations abroad. Shin Bet reiterated the importance of a

timely U.S. designation of the Hamas "bank" to prevent this

from happening, given that it would significantly increase

the ease by which Hamas could receive and transfer funds.

Hamas also continues to receive funding from Iran.



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Overall Gaza Market Dynamics

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7. (S/NF) These parallel dynamics lead to an overall Gaza

economy based on imports from Egypt through the smuggling

tunnels, paid for in foreign currency--not Israeli shekels.

There has been a steady influx of shekels -- mostly from PA

salary payments into Gaza -- with limited outbound

circulation. Instead, these shekels are used predominately

for internal exchange. Under the PMA-regulated private

banking system, individuals are paid in NIS from the

Palestinian Authority. Local merchants conduct their business

with the average Gazan in NIS, who in turn use NIS for most

of their daily purchases. However, in order to procure

non-Israeli imports (through the smuggling tunnels),the

local merchants are required to convert these NIS into USD,

since the exporters from Egypt and elsewhere operate

primarily in USD. This results in a large amount of outgoing

foreign currency for imported goods, while an insignificant

amount of shekels leave the Gaza market due to the near

complete lack of trade with ISRAEL (and, to a lesser degree,

the West Bank). When combined with Israel's restrictions on

the transfer of hard currency both into and out of Gaza, this

has led to a surplus of shekels and deficit in foreign

currencies (including USD and Jordanian Dinars),which has

allowed speculators (including Hamas, merchants and banks) to

exploit the system and profit from arbitrage.



8. (S/NF) In the long run, Shin Bet assesses that these

currency imbalances destabilize Gaza's economy and will lead

to pendulating NIS/USD exchange rates, the result of

intermittent incremental changes in currencies permitted in

and out by Israel, variation in the quantities and types of

currencies smuggled into Gaza, and incentives to exploit

systemic changes through arbitrage. They are concerned that

there will be an eventual shift from the current mixed

currency system, dominated by NIS, to sole use of foreign

currency (likely USD). Local merchants have already

attempted to require that Gazans pay for goods in USD or

other foreign currencies, to minimize exchange-rate losses

when they are forced to exchange the shekels for dollars or

other foreign currencies, whether through the banking system

or through the Hawala (money-changers),to purchase restock

imported inventories. Because of the current shortage of USD

in the banking system, Gazans have been unable to oblige and

the local merchants have relented, according to Shin Bet

analysts. Israel's policy, per the Paris Protocol, is to

maintain use of shekels in the Palestinian territories, and

the GOI worries that if the shift to a non-shekel economy in

Gaza takes place, it will further solidify the separation of

Gaza from the West Bank.



9. (S/NF) From a counter-terrorism perspective, Shin Bet sees

less of a security threat from a shekel-based Gaza economy

than a foreign-currency-based Gaza. It sees no direct

security threat from excess shekels in Gaza. Shin Bet

analysts have not seen any attempts to rob banks vaults, nor

are they concerned that Hamas or others could use shekels to

purchase any materials from abroad that could be used for

terrorism (given that they would have to be exchanged first

for currently lacking foreign currencies). Given the

separation between Hamas and the PMA-regulated private banks,

Shin Bet assesses there to be little connection between these

banks' stability and Israel's counter-terrorism goals. In

the short-term, security concerns from a decrease in

confidence in these banks by average Gazans is negligible for



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Israel. However, in the long-run, Shin Bet officials

conceded that it is important to preserve these institutions

as one of the few alternatives to Hamas in the Gaza Strip,

and as a foundation for economic stability in Gaza.

Cunningham