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

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 002345 
 
SIPDIS 
 
NEA FOR FRONT OFFICE; NEA/IPA FOR WILLIAMS, GREENE, 
WAECHTER; NSC FOR ABRAMS, LOGERFO; TREASURY FOR ADKINS, 
SZUBIN 
 
E.O. 12958: DECL: 06/14/2016 
TAGS: ECON EFIN ETRD EAID PGOV PREL IS KWBG KPAL ISRAELI PALESTINIAN AFFAIRS ECONOMY AND FINANCE
SUBJECT: DEADLINE FOR ENDING ISRAELI-PALESTINIAN BANKING 
RELATIONSHIPS MAY EXTEND TO AUGUST 15 
 
REF: 1. TEL AVIV 1982 2. TEL AVIV 1978 3. TEL AVIV 1368 
 
Classified By: Ambassador Richard H. Jones for reasons 1.4 b and d. 
 
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Summary 
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¶1.  (C)  A senior Bank Hapoalim official said that all 
Israeli banks were set to cut ties with Palestinian banks due 
to the fear of being implicated in a chain of financial 
transactions that might enable a terrorist attack.  He said 
that the banks want the GOI to issue them a list of suspect 
individuals whose transactions they should not handle.  If 
they follow the GOI instructions to the letter, they want 
immunity from prosecution under Israel's tough anti-terror 
finance laws.  They refuse to accept liability for cases 
where "they should have known" that an individual was 
suspect, even though his name did not appear on the list. 
Bank of Israel Governor Stanley Fischer proposed that the 
banks not end their cooperation with PA banks until August 
15, instead of on the present July 5 deadline.  The banks 
have demanded immunity from prosecution for the interim 
period between July 5 and August 15.  The Ministry of Finance 
informed the Economic Counselor that an agreement on 
extending the deadline is all but certain.  End Summary. 
 
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Israeli Terror Finance Law an Obstacle to All Israeli Banks 
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¶2.  (C) In a June 14 meeting, Boaz Raday, the Vice President 
for Government Relations at Bank Hapoalim told the Deputy 
Economic Counselor that the problem that Israeli banks have 
in doing business with Palestinian banks goes way beyond the 
issue of clearing shekel checks.  He said that the clearing 
issue was easily solvable.  However, in examining it, it 
became clear to the banks that Israel's "draconian" 
anti-terror finance law presented serious obstacles to the 
continuation of any sort of commercial relationships between 
private Israeli and Palestinian banks, regardless of the 
check-clearing issue.  All Israeli banks, led by Hapoalim and 
Discount because of their original involvement in the 
clearing issue, are negotiating with different elements of 
the GOI to solve the problem of possible liability under 
Israeli law for involvement anywhere in the chain of 
financial transactions that may enable a terrorist attack. 
The banks' view is that the law is ambiguous, and the goal of 
the negotiation is to remove all of the ambiguity. 
 
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Banks are not in the "National Security Business" 
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¶3.  (C) The banks are willing to accept any list of "suspect 
people" given them by the GOI, regardless of how many names 
are on it - whether it be "a thousand or a million," 
according to Raday, and make sure not to process any 
transactions involving these names.  However, the banks 
refuse to get "involved in national security affairs," 
meaning that they demand full immunity for processing a check 
to or from anyone not on the list, even if the person was 
discussed in the morning newspapers as a terror suspect, and 
they "should have heard about it."  He stressed that the 
banks wanted it "black or white, without any gray -- if we 
follow the GOI's instructions to the letter, we want immunity 
- it's as simple as that."  He added that the banks 
completely accept the notion that anyone who knowingly 
cooperates in any way with terror finance should be 
criminally liable, but full compliance with name checking 
against a list provided by the GOI should absolve everyone 
involved from any liability. 
 
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Fischer Asks for More Time 
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¶4.  (C) Raday said that the Ministry of Finance and the Bank 
of Israel completely understood the banks' concerns, but that 
Yehuda Sheffer, Director of IMPA - the Israeli Money 
Laundering and Terror Financing Prohibition Authority at the 
Justice Ministry, and Assistant Attorney General Livnat 
Moshiach were the ones causing the problem.  He added that in 
a June 13 meeting with all of the concerned parties, Stanley 
Fischer, the Governor of the Bank of Israel, urged Bank 
Hapoalim and Israel Discount Bank to extend their deadline 
for ending their correspondence relationships with 
Palestinian banks until August 15, to provide more time to 
find a solution.  Fischer said that a deal needed to be 
completed by July 15, in order to provide Palestinian banks 
enough time to adjust to any new reality. 
¶5.  (C) At the same meeting, the banks asked Fischer and the 
other GOI officials present about their liability for 
anything that might happen in the interim period between the 
original deadline of July 5 and the new August 15 date.  When 
the GOI representatives gave evasive answers, Raday said that 
the banks put it very plainly that they would not even 
consider extending the deadline without ironclad written 
assurances from the government that they would be immune from 
prosecution for anything that might occur during that period. 
 He said that his bank is now waiting from a reply from the 
Attorney General's office on this issue.  It should come in a 
few days, at which point, the bank's board -- which he 
described as being extremely risk averse - and its legal 
advisor, will decide whether or not to extend the deadline. 
Raday's personal feeling was that if the banks get the 
immunity for the interim period, they will likely agree to 
the extension. 
 
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End of Banking Relationships Damages Everyone 
--------------------------------------------- 
 
¶6.  (C) He also explained that the banks are loathe to end 
their commercial ties with Palestinian banks, as many 
important Israeli companies, such as Tnuva and Strauss, do a 
great deal of business in the Palestinian Authority (PA).  He 
also said that a break in ties would be catastrophic for the 
Palestinian economy, which would, in large measure, be 
reduced to operating in cash.  (Note and comment: In 2005, 
the PA imported approximately USD 2 billion from Israel, and 
exported about USD 300 million to it.  In the first quarter 
of 2006, imports were USD 477 million and exports USD 62 
million.  These numbers indicate that the Palestinian economy 
is heavily dependent on imports from Israel, which would be 
reduced dramatically should Israeli banks end their 
commercial relations with PA banks.  They also show that 
Israeli exporters will lose a significant nearby market.  End 
Note and comment).  He also noted the irony that a cash 
economy would in fact make it harder to prevent terror 
financing and money laundering, and that the amounts of 
untracked cash smuggled into the PA would grow exponentially. 
 
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Deadline Will Likely be Extended 
-------------------------------- 
 
¶7.  (C) In a later telcon between the Deputy Counselor and 
Rani Loebenstein, the Senior Advisor to the Ministry of 
Finance Director General, and the ministry's point man on the 
PA banking issue, Loebenstein confirmed the substance of what 
Raday said about the nature of the issue, the attitudes of 
the parties involved, and the possible extension of the 
deadline.  He added that his ministry was continuing to work 
the issue, expressing optimism that a solution would be 
found.  He noted, however, that the Attorney General's office 
was independent and not easily pressured.  In a June 15 phone 
conversation, Loebenstein told the Economic Counselor that it 
was all but certain that the parties would come to an 
arrangement to extend the deadline until August 15. 
 
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JONES