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 03 TEL AVIV 002517 
 
SIPDIS 
 
NEA FOR FRONT OFFICE; NEA/IPA FOR WILLIAMS, GREENE, 
WAECHTER; NSC FOR ABRAMS, LOGERFO; TREASURY FOR ADKINS, 
SZUBIN 
 
E.O. 12958: DECL: 06/21/2016 
TAGS: ECON EFIN ETRD PGOV PINR IS KWBG KPAL EPREL SCRM ISRAELI PALESTINIAN AFFAIRS ECONOMY AND FINANCE
SUBJECT: MOF CONFIDENT BANKING CRISIS WILL BE RESOLVED 
 
REF: TEL AVIV 2301 
 
Classified By: Economic Counselor William Weinstein for reasons 1.4 b a 
nd d. 
 
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Summary 
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¶1.  (C) Stressing the need to prevent a humanitarian crisis 
in the territories, the Ministry of Finance (MOF) DG Yossi 
Bachar and his senior advisor said on June 20 that the 
Temporary International Mechanism (TIM) was acceptable to the 
MOF as long as it did not become an avenue for sending funds 
to the PA's Hamas government.  They expressed frustration 
regarding the issue of supplying medical assistance to the 
Palestinians, with Bachar saying that "everyone involved is 
dealing with determining a proper mechanism rather than 
actually getting assistance to those who need it."  On the 
Israel-Palestinian banking issue, they said that all of those 
involved understood the importance of resolving the issue, 
and were confident that the banks' agreement to delay cutting 
off the Palestinian banks until August 15 would provide 
sufficient time to find a solution.  On the possibility of 
revisiting and signing onto the customs agreement in order to 
subject those crossing the Israel-Gaza border to 
internationally-recognized limitations on the transport of 
currency and giving the EU-BAM something concrete to monitor, 
they said that doing so would require a political decision by 
the Prime Minister's office.  Bachar also expressed deep 
concern regarding allegations of corruption and 
inefficiencies at Karni that were impeding the movement of 
U.S. products into the territories, and offered to facilitate 
a meeting for the Economic Counselor with the temporary Chief 
of the Airport Authority to discuss the problems.  End 
summary. 
 
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Temporary International Mechanism 
--------------------------------- 
 
¶2.  (C) At a June 20 meeting between NEA/IPA Director 
Williams, the Economic Counselor and Deputy Counselor, and 
Finance Ministry DG Yossi Bachar and Senior Advisor to the 
DG, Rani Loebenstein, Bachar stressed the need to prevent a 
humanitarian crises among the Palestinians, which he said 
would ultimately hurt Israel as well.  He noted that the TIM 
was acceptable to the Finance Ministry as long as it does not 
become an avenue for sending funds to the PA's Hamas 
government.  Loebenstein explained that the GOI's main 
concern is that the data to be used to determine where the 
money should go will all originate from Hamas.  Will the 
doctors and teachers designated to receive the funds be real 
doctors and teachers?  He said that an earlier attempt in 
2002 to inspect PA expenditures by means of the World Health 
Organization and an international accounting firm came to 
naught, and wondered why this time would be  different. 
Williams replied that any money paid would be a "stipend, not 
a salary."  Salaries are a "red line," for the EU as well, 
and would remain the responsibility of the Hamas government. 
He added that the TIM would show the international 
community's concern for the Palestinians, maintain essential 
services in the health sector, and give the donors the 
opportunity to remain involved, consistent with the 
requirements of the Quartet.  Bachar noted that the effect of 
the political friction between Hamas and Fatah was beyond any 
outsider's control. 
 
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NIS 50 million Medical Assistance 
--------------------------------- 
 
¶3.  (C) With regard to the provision of NIS 50 million in 
medical assistance to the Palestinians from PA customs fees 
that Israel has been collecting, Bachar noted that this is 
another instance where everyone involved is dealing with 
determining a proper mechanism rather than actually getting 
assistance to those who need it.  He called it a "very 
delicate situation with no magic solution."  In response to 
the Economic Counselor's question as to whether the TIM could 
be used as a conduit for the medical assistance funds, Bachar 
said it was not clear if the Palestinians would agree. 
Loebenstein said that the GOI will be holding a total of 
about NIS 750 million in Palestinian revenue by the end of 
June. 
 
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Banking Relationships 
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¶4.  (C) Bachar said that the GOI had been close to an 
agreement with Israeli banks that would have allowed them to 
continue their relationships with private Palestinian banks. 
However, Bachar admitted that the Attorney General had solid 
legal reasons for not accepting the proposed agreement.  The 
Israeli banks agreed to extend their deadline for cutting off 
relations with Palestinian banks from July 5 until August 15, 
to allow more time for the negotiations to succeed.  Bachar 
stressed that the issue must be resolved in a way that will 
fully satisfy the Attorney General as to its legality.  He 
added that the Bank of Israel (BOI) is interested in 
maintaining the shekel as the chief Palestinian currency, 
which would only be possible were the banks to maintain their 
relationships. 
 
¶5.  (C) Loebenstein said that the changes required in banking 
regulations would not be merely administrative but would 
likely require the Knesset to consult with BOI regulators and 
then approve the changes.  In addition, Palestinian banks 
will also have to comply with more stringent requirements 
such as including more information on checks to make it 
easier to track the flow of funds.  He said that the Israeli 
banks also want the U.S. Treasury to somehow affirm the 
agreement so as to have some assurances that they would not 
run afoul of U.S. anti-terror-financing laws.  Bachar added 
that the situation involves many complex legal issues and 
needs to be worked through carefully.  Williams noted that 
the only recent change regarding terrorist financing 
pertained to dealings with those parts of the PA government 
now controlled by Hamas -- other restrictions on dealing with 
FTOs remained the same.  He asked why Israeli banks are so 
concerned now?  Bachar replied that the election of the Hamas 
government has shined a spotlight on the issue of financial 
dealings with the Palestinians, engendering in Israeli banks 
an increased sense of risk across the board.  Loebenstein 
noted that the accusations against the Arab Bank in New York 
last year had also increased awareness of the anti-terror 
finance issue among banks worldwide.  Bachar said he was 
optimistic that a solution to the problem would be found 
because all of the parties involved, including the Attorney 
General, understood the need to resolve it.  He added that 
Loebenstein is handling the issue for the MoF, and is working 
closely with the Ministry of Justice and the BOI. 
 
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British Gas 
----------- 
 
¶6.  (C) The Economic Counselor asked if the Palestinians are 
interested in selling gas to Israel via British Gas.  Bachar 
said that they were playing their cards very closely, and 
noted that they have not yet exercised their influence on the 
issue.  He added that Israel has made a strategic decision 
not to rely exclusively on Egyptian gas. 
 
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Hamas Money Smuggling 
--------------------- 
 
¶7.  (C) The Economic Counselor raised the issue of the 
inability of the EU-BAM to monitor Hamas smuggling of large 
amounts of cash across the Gaza border.  He remarked that the 
Palestinians had signed a customs agreement covering movement 
from Rafah to Gaza and suggested that it would be worthwhile 
for the GOI to revisit and sign onto the customs agreement as 
well.  Activating it would enable the application of 
international limitations on the movement of currency at the 
crossings and would give the EU-BAM something concrete to 
monitor.  This would, for example, require the reporting of 
more than USD 10,000 in cash by any individual.  Loebenstein 
said that everything the GOI had feared would happen as a 
result of disengagement regarding the issue of "leaky 
borders" was now happening.  He added that the customs 
agreement was a political issue which would have to be 
decided on by the office of the Prime Minister. 
 
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Corruption at Karni 
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¶8.  (C) The Economic Counselor then raised the issue of 
corruption at Karni, which has become a significant 
U.S.-Israel trade problem impeding the distribution of U.S. 
products in the territories (see reftel).  He added that the 
reservation system for moving products at Karni is not 
transparent, efficient, or logical, aside from the 
allegations of corruption.  He also said that USAID has funds 
available for improving efficiency at border crossings, such 
as setting up an internet sign-up system which will tell 
every transport company where its load stands in the queue. 
Bachar indicated that these problems were of great concern 
and offered his help in setting up a meeting for the Economic 
Counselor with Shaul Tsemach, the temporary Chief of the 
Airport Authority, whose office is located in the Finance 
Ministry. 
 
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