This record is a partial extract of the original cable. The full text of the original cable is not available.

S E C R E T SECTION 01 OF 03 TEL AVIV 001982 
 
SIPDIS 
 
NEA FOR FRONT OFFICE; NEA/IPA FOR WILLIAMS, GREENE, 
WAECHTER; NSC FOR ABRAMS, DORAN, LOGERFO; TREASURY FOR 
ADKINS; TREASURY FOR SZUBIN 
 
E.O. 12958: DECL: 05/18/2016 
TAGS: ECON EFIN EAID PGOV PREL IS KWBG KPAL ISRAELI PALESTINIAN AFFAIRS ECONOMY AND FINANCE
SUBJECT: CENTRAL BANK GOVERNOR CONVEYS ISRAELI BANKING 
FEARS TO TREASURY U/S LEVEY 
 
REF: A. TEL AVIV 1368 
     ¶B. JERUSALEM 1383 
 
Classified By: Ambassador Richard H. Jones for reasons 1.4 (b) and (d). 
 
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Summary 
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¶1.  (S) Bank of Israel Governor Stanley Fischer and his 
antiterrorism finance team told Treasury U/S Stuart Levey and 
the Ambassador on May 2 that Israeli banks want to end their 
relationships with Palestinian banks due to fears of being 
accused of involvement with terror finance.  They said that 
Israel Discount Bank has followed Bank Hapoalim,s lead and 
decided to end its check-clearing relationship with 
Palestinian banks, although this has not yet been publicly 
announced.  (It was announced a few days later.) This will 
have a severe impact on the Palestinian economy, which is 
highly dependent on Israel, and could force much of it to 
function on a cash basis.  The Bank of Israel has developed a 
list of security measures for Palestinian banks that should 
allow Israeli banks a greater degree of confidence in 
maintaining their mutual business relationship.   Check 
clearing for Palestinian banks is a very low-margin, 
high-risk business and, unless the GOI can identify a way to 
indemnify the Israeli banks that do it from all possible 
harm, they are likely to exit the business completely.  End 
Summary. 
 
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OFAC Allows Some Transactions with PA Entities 
--------------------------------------------- - 
 
¶2.  (S) U/S Levey said that the U.S. is getting many requests 
for information from banks on dealing with PA banking 
institutions, but that the Treasury has not yet issued 
detailed guidance beyond the Office of Foreign Asset 
Control,s (OFAC) six general licenses delineating specific 
classes of permitted transactions with the PA. 
 
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Hapoalim Wants GOI and USG Guarantees 
------------------------------------- 
 
¶3.  (S) Bank Supervisor Yoav Lehman then said that there is 
no need for Israeli banks to clear non-shekel checks, and 
that any foreign bank could do it.  But only Israeli banks 
can do shekel-clearing and that is very important for the PA 
economy, especially for trade with Israel.  Due to an 
increase in terrorism-related lawsuits, Israeli banks are 
leery of any connection whatsoever with PA banks since there 
is no clarity regarding the question of which of them might 
be involved in financing terrorism.  Bank Hapoalim is very 
nervous about the issue and is pulling out of its 
check-clearing relationships with Palestinian banks.  To 
continue clearing checks, it wants the GOI to issue clear 
rules on the subject and not hold it liable for any possible 
terrorism connection if all the rules are adhered to.  Lehman 
added that Hapoalim wants the USG to give it the same sort of 
guarantee as well. 
 
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Banks Always Vulnerable to Lawsuits 
----------------------------------- 
 
¶4.  (S) Levey responded by saying that the Treasury 
Department does not control the U.S. legal system and a bank 
would be vulnerable to private lawsuits brought by the 
families of terror victims regardless of the Treasury 
Department,s statements.  He did note that Treasury would be 
unlikely to take enforcement action against an Israeli bank 
that had clearly abided by all of the rules in the event that 
a terrorist organization cleared checks through the bank. 
When asked by Fischer if he would be willing to give a public 
statement to that effect, Levey said he would have to 
consider it.  Fischer raised the question of the USG speaking 
on behalf of Israeli financial institutions in the event that 
they were sued.  Levey said that this was an altogether 
different situation.  Levey stressed again, though, that the 
PA elections had not changed U.S. policy or regulations 
concerning dealings with private Palestinian entities, and 
that, &we do not consider every private organization to be 
Hamas.8  Israeli institutions should examine institutions on 
a case-by-case basis to determine terror finance risk. 
 
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GOI Rules for PA Banks 
---------------------- 
 
¶5.  (S) Lehman said that Israel will institute a number of 
measures to deal with the problem of PA bank involvement with 
terror finance.  They are as follows: 
-- PA banks that want any sort of relationship with an 
Israeli bank must not deal with any of the institutions or 
individuals named on a list published by the GOI of 
institutions suspected of having terrorist ties. 
-- PA banks would have to prohibit processing of checks with 
third party endorsements. 
-- If a check is greater than five to ten thousand (the 
amount is still undecided), the transaction must be reported 
to the Israeli Money Laundering and Terror Financing 
Prohibition Authority (IMPA). 
-- Any transactions below the threshold amount that appear 
suspicious must also be reported to IMPA. 
 
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Risk Reduced, Not Eliminated 
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¶6.  (S) Lehman added that a major problem arises if a name of 
a suspect institution does not appear on the Israeli list, 
but is published elsewhere in a publicly available source to 
which a bank would be expected to have access.  The banks do 
not want to be liable for doing business with such an entity 
if its terror ties escaped the bank,s notice.  Leaving this 
issue aside, Lehman concluded that if the GOI and USG are 
satisfied with the measures being instituted by PA banks to 
protect against dealing with terror-related entities, it is 
possible that Israeli banks would be as well.  But Levey 
again noted that these measures would reduce risk, not 
eliminate it, and that the USG would not be able to protect 
institutions against suit by private plaintiffs. 
 
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Exit a High-Risk, Low-Reward Business 
------------------------------------- 
 
¶7.  (S) Lehman stated that the easiest thing the Israeli 
clearing banks can do is to simply get out of the business. 
Check clearing is a very low-margin -- and now, an extremely 
high-risk -- business, and that Israeli banks are simply 
making a rational business decision to shut down these 
operations.  He noted that the Israeli banks have asked to be 
indemnified by the GOI, but, so far, the government has 
refused. 
 
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Shekel Vital to PA Economy 
-------------------------- 
 
¶8.  (S) Fischer underscored that Israel,s obligation to the 
Palestinian Territories to provide clearing services for 
shekel checks is anchored in the 1967 Paris Agreements. 
Ending those services and even completely cutting ties with 
the Palestinian economy would hardly be noticed in Israel,s 
USD 125 billion economy, but the impact on the USD 5-10 
billion PA economy would be very significant, forcing many 
transactions to be made in foreign currencies or cash.  Since 
the majority of transactions in the PA use shekels, and the 
bulk of the PA,s trade is with Israel, life would become 
very difficult in the PA.  He added, however, that people are 
resourceful and will find a way around the difficulties. 
Lehman noted that moneychangers could fill part of the 
vacuum, but there is no one good solution.  Large commercial 
entities and private individuals as well could open accounts 
in Israeli banks, but using the accounts would be difficult 
in light of the restrictions on Palestinian entry into 
Israel.  There was some talk about the PA establishing its 
own currency, but Fischer said that that is a bad idea for a 
government that is unable to balance its books. 
 
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Discount Bank Joins Hapoalim in Exiting the Business 
--------------------------------------------- ------- 
 
¶9.  (S) In response to Levey,s query as to why there is 
increased fear now on the part of the banks of being 
implicated in terror financing, Lehman said that the present 
situation is not normal.  The PA, in reality, is ruled by a 
terrorist organization.  The pressure to counter terror 
financing has increased in the last few years, and several 
lawsuits alleging bank involvement in terror finance have 
generated concern.  He added that, although not yet announced 
publicly, the Israel Discount Bank has decided to follow Bank 
Hapoalim,s lead and cease clearing shekel checks.  On the 
issue of whether the GOI can do check clearing, Bank of 
Israel Anti Money Laundering Director Dudu Zaken said that 
the Central Bank of Israel could not but that the Israeli 
Postal Bank could, in certain limited cases. 
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PMA Useless Now But Worthwhile in the Long Run 
--------------------------------------------- - 
¶10.  (S) GOI officials asked about the Palestinian Monetary 
Authority (PMA). Levey said that the OFAC licenses allowed 
dealing with the PMA.  Central Bank officials said that the 
PMA could not be relied upon in the fight against terror 
finance.  It has no developed legal structure, and no power, 
and was, in any case, not equipped to follow money flows.  In 
the long run, however, it might become an effective 
organization.  Lehman suggested declaring the entire PA 
banking system ) including the PMA ) to be 
&non-cooperative8 in the battle against terror finance, 
which might encourage the Europeans to be stricter in their 
dealings with it.  Levey downplayed the idea, and the 
Ambassador pointed out that there could be an advantage in 
allowing the organization to develop so that a monetary 
authority infrastructure exists when Hamas no longer rules 
the PA. 
 
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PA Needs Two Separate Banking Systems 
------------------------------------- 
 
¶11.  (S) Levey suggested that GOI might use the Israeli list 
of suspected terrorist institutions and individuals as 
leverage with the PA banks -- that banks seeking to hold 
correspondent accounts with Israeli banks commit not to do 
business with entities and individuals on the list.  When 
Lehman pointed out that the public list is not complete due 
to Israeli intelligence community concerns, Levey said that 
it might, nevertheless, be the most comprehensive list 
available.  In response to Levey,s query as to whether PA 
banks could be relied upon to adhere to the restrictions, 
Fischer replied that that was easily put to the test.  Also, 
Fischer noted that PMA Chief George Abed had told Fischer to 
&tell me what to do and I,ll do it.8  Fischer indicated 
that a possible outcome might be two separate sets of banks 
within the PA: one that does business with Hamas-related 
entities, and a second that does not. 
 
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Attendance 
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¶12.  (C) U.S.: 
Treasury U/S for Terrorism and Financial Intelligence Stuart 
Levey 
Ambassador Richard H. Jones 
Senior Advisor Adam Szubin 
Financial Analyst Matt Epstein 
Policy Advisor Kristen Hecht 
Brian Grant, Regional Treasury Attach, Amman 
Deputy Econ Counselor (note taker) 
Econoff 
 
Israel: 
Governor of the Bank of Israel Stanley Fischer 
Supervisor of Banks Yoav Lehman 
Director of the Anti Money Laundering Authority in the Office 
of the Supervisor of Banks David Zaken 
 
¶13. (U) This cable was cleared by Under Secretary of the 
Treasury Stuart Levey. 
 
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