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