The government reached an unprecedented decision last week when it granted Israeli banks that work with Palestinian banks in the West Bank immunity from lawsuits in Israel, as well as indemnity from suits filed overseas that accuse them of involvement in financing terrorism.
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The security cabinet decision last Sunday was made in light of threats by the two Israeli banks to suspend working with the Palestinian banks. If this happened, it could lead to the collapse of Palestinian banks and possibly even the Palestinian Authority, a senior Israeli official said.
Last February, the Maariv weekend newspaper reported that Bank Hapoalim had informed the Finance Ministry it intended to stop providing banking services to Palestinian banks in the West Bank because of fears that Hapoalim could face criminal charges by authorities overseas – in particular in the United States – for violating laws on money laundering and funding of terrorism. These laws have been made much stricter in recent years.
Bank Hapoalim demanded that the government provide it with a way of defending itself, both legally and financially, in order to continue working with the banks.
Bank Hapoalim is the main Israeli bank working with the Palestinians and provides them with services such as clearing, guarantees and other services, which lets them receive credit overseas for importing and other needs. Israel Discount Bank also works with the Palestinian banks and joined Hapoalim in its demands.
Supplying services to Palestinian banks is part of the Israeli commitment from the Paris Agreement of 1994, which regulates the financial relations between Israel and the PA. Ending the availability of such services could also paralyze the Palestinian banking system, which could then lead to the economic collapse of the PA itself.
The security cabinet ministers approved the recommendations of a team headed by Finance Ministry Director General Shai Babad and which included representatives of the justice, foreign and defense ministries, along with representatives of the intelligence community. The group had been working on the issue for the past 10 months.
They recommended that Attorney General Avichai Mendelblit give Bank Hapoalim and Israel Discount Bank legal immunity in Israel concerning the essential banking services they provide to Palestinian banks. In addition, they recommended that the treasury provide both banks with full indemnity if they are sued overseas for cooperating with Palestinian banks in such cases.
The arrangement will run for two years. During this period, an alternative solution will be formulated that will transfer the responsibility for providing the banking services from private Israeli commercial banks to another mechanism, probably governmental.
Finance Ministry officials told the security cabinet that Azzam Shawwa, governor of the Palestinian central bank, had written an official letter in which he committed the PA to carrying out any actions required to guarantee that the Palestinian banks meet international standards concerning money laundering and the financing of terrorism.
Palestinian banks do not currently meet such international standards, a senior Israeli official said. Shawwa agreed to invite an audit from the International Monetary Fund and to implement its recommendations in order to prevent the transfer of funds for terrorism or money laundering, the Israeli official added.
A number of ministers at the meeting said the fear of the PA collapsing allows Palestinian banks to evade responsibility while continuing to transfer money to the families of terrorists. “They are relying on us to continue subsidizing them,” one of the ministers said during the meeting.
In response, it was decided that the Finance Ministry would conduct an examination of the Palestinians’ implementation of their commitments in 12 months’ time, and report back to the security cabinet on its findings.
If the Palestinians show progress on the issue, the agreement will then continue for a second year. But if the Palestinians don’t show any improvement, the security cabinet could decide to freeze the arrangement.
The decision is exceptional because the banks are private businesses and also, providing the Palestinian banks with these services doesn’t generate any profit; the Israeli banks are doing so only at the request of the government.
In addition, a collapse of the Palestinian banking system would lead to a shift toward more cash being used in the West Bank. This would make it even harder to prevent money laundering and the funding of terrorism.
Israel has also received European and American support and guarantees to continue providing these banking services to the Palestinians, the Finance Ministry noted.
A senior Israeli official noted that a number of weeks ago, the deputy U.S. secretary of state and the deputy U.S. treasury secretary sent official letters to Israel expressing their support for the new arrangement. They also promised to back it should a suit be filed in the U.S. against one of the Israeli banks for violation of the laws preventing the financing of terrorism and money laundering. A similar letter was passed along from senior European Union officials.
The Israeli official said that Finance Minister Moshe Kahlon pressed for the decision to pass cabinet, as part of a series of steps he has taken in the past year-and-a-half to stabilize and improve the economic cooperation between Israel and the Palestinians. These include the agreement signed a few months ago to settle the Palestinian debt to the Israel Electric Corporation.
"In the end, it's in our security interests that the economic situation in the Palestinian Authority be stabilized and improve," the official said.