Israeli Banks Threaten to Halt Financial Services to Palestinian Authority Over Terror Funding Risks

Israeli banks Discount and Hapoalim, which provide correspondent banking services to Palestinian banks, have warned the Israeli Finance Ministry they may stop these services within two to three months. This move stems from increasing concerns that funds transferred through these channels could be diverted to terror activities. The banks are demanding that the Israeli government assume responsibility for the risks involved by establishing a government-owned bank to handle these transactions, as previously promised.

Correspondent banking involves one bank providing services such as account management, international transfers, and clearing to another bank, enabling smaller financial institutions to access foreign markets without opening branches abroad. Under the Oslo Accords' Paris Protocol, Israel and the Palestinian Authority agreed to maintain correspondent banking relations, allowing Palestinian banks to convert excess Israeli shekels into foreign currency through the Bank of Israel.

Currently, Israeli banks Discount and Hapoalim manage about 51 billion shekels annually in transactions for the Palestinian Authority. However, anti-terror financing laws expose these banks to legal and financial risks due to connections with Palestinian banks that may channel money to families of terrorists. To mitigate this, the Israeli government issues indemnity letters to cover potential losses and provides legal protection, but these are temporary and periodically renewed.

Since 2016, Israeli banks have expressed intentions to cease these services. A government interministerial team recommended creating a fully state-owned company to represent the Palestinian banking system within Israel's payment infrastructure. Although the cabinet approved this in 2018 and updated the decision in 2022, implementation has stalled, leading to the current threat to halt correspondent banking services.

This development poses a significant financial crisis risk for the Palestinian Authority, which relies heavily on these banking channels for its economic operations. The situation underscores ongoing challenges in balancing security concerns with economic cooperation between Israel and the Palestinian territories.