Amid Prospect of War, Israel Deepens Palestinian Banking Ties

(Bloomberg) -- Israeli and Palestinian authorities have agreed on a new mechanism to facilitate Palestinian banking transactions, which would eliminate the threat of terrorism-financing lawsuits for Israeli banks and improve transparency in the Palestinian economy.

Even as violent protests on the Gaza border threaten to spiral into war, Israel’s cabinet approved a joint proposal by the country’s central bank and the Palestine Monetary Authority to form a state-owned Israeli entity to help approve checks and wire transfers from banks operating in Palestinian territory, PMA Governor Azzam Shawwa said in an interview in his Ramallah office.

The new arrangement would pass those responsibilities, currently assumed by Bank Hapoalim Ltd. and Israel Discount Bank Ltd., to a new body to be supervised by the Bank of Israel, Shawwa said. The two Israeli lenders have demanded for years that the government release them from this obligation -- whose roots lie in the Oslo Accords of the 1990s -- for fear they could be held liable for approving transactions that financed terrorism. A Bank of Israel spokesman declined to comment for the story.

Fines for facilitating money laundering or terrorist attacks have escalated dramatically in recent years. In 2014 BNP Paribas SA agreed to pay $9 billion for violating U.S. sanctions against Iran and Sudan, two nations accused of sponsoring terrorism. The following year Arab Bank Plc, Jordan’s biggest lender, settled a lawsuit by American families who allege it financed attacks carried out by the Palestinian militant group Hamas, though the verdict was later overturned after an appeals court said the jury had been improperly briefed.

Economic Peace

The relationship between Israelis and Palestinians has been marked by decades of war, but their interlocking financial systems reflect how closely their economies are intertwined. Israel must serve as the clearinghouse for the Palestinian economy because Israel’s shekel is the primary currency used in the Palestinian territories.

Palestinian labor in Israel and its settlements is a major contributor to the West Bank economy: Around 140,000 Palestinians are registered employees of Israeli businesses. Shawwa says the real number is closer to 185,000, nearly 15 percent of the area’s workforce. Those Palestinians typically earn at least three times the average wage in the West Bank.

Beyond cheap labor, Israel has an interest in avoiding the collapse of the Palestinian economy. Prime Minister Benjamin Netanyahu has long backed an “economic peace” to help ease Palestinian animosity toward Israel, a position seconded by Finance Minister Moshe Kahlon. Palestinian officials fear that might become a substitute for a political solution.

Cash Economy

The partnership with the Bank of Israel also will allow the PMA to focus on reducing the use of cash, something that can make the Palestinian economy more transparent. Nearly all Palestinians working in Israel are paid in cash, Shawwa said, but the two banking authorities are working on a system to force employers to process payrolls digitally.

“I keep reminding myself that if we one day have a two-state solution,” it will resemble how the central banks interact with each other, Shawwa said.

The sides will have to move fast. Earlier this year, Israeli granted Hapoalim and Discount immunity from indictment in local courts for money laundering and terrorism financing linked to Palestinian banks, but only through May 2019.

Shawwa is doubtful the new entity will be up and running by then. The agreement still needs input from technical and legal teams at the PMA and BOI, and the governments need to allocate budgets to the project.

“At least we’re showing the banks signs of serious intent that can’t be ignored,” Shawwa said. “And whatever the ultimate cost will be, we’ll do it.”

©2018 Bloomberg L.P.