Israeli Banks Plan to Halt Financial Transfers to Palestinian Authority Over Terror Funding Risks

Israeli banks Discount and Hapoalim have surprised the Finance Ministry by announcing plans to stop banking transfers to the Palestinian Authority within two to three months. This decision stems from increasing concerns that funds transferred through these banks may be diverted to support terrorism. The banks are demanding that the Israeli government assume responsibility for the risks of terror financing and money laundering by establishing a government-owned correspondent bank, a commitment made four years ago but yet to be implemented.

Trade between Israel and the Palestinian Authority exceeded 21 billion shekels in 2025, relying on financial infrastructure involving correspondent banking services provided by Discount and Hapoalim. These banks facilitate clearing and money transfers for Palestinian banks, notably Bank of Palestine, which is accused of channeling funds to families of terrorists as part of the Palestinian Authority's policy. Despite government-issued indemnity letters and legal protections extended to the banks, they no longer consider these measures sufficient to mitigate legal and financial risks.

Originally, a government-owned bank was to be created to handle correspondent banking and shield commercial banks from exposure. However, delays attributed to Finance Minister Bezalel Smotrich have stalled this plan. Consequently, Discount Bank has independently initiated the termination of these banking relationships, with a cutoff date as early as September. Palestinian banks have already reported that Israeli banks responsible for transfers are expected to cease operations soon.

Experts warn that severing correspondent banking ties could lead to severe consequences, including lawsuits from international banks like Deutsche Bank and Citibank, which provide global clearing services. There is also concern that Israeli banks could lose access to international euro and dollar payment systems. The Finance Ministry expressed apprehension about the banks' move, while the Bank of Israel opposed halting services, warning of significant harm to both the Palestinian and Israeli economies.

The issue has escalated beyond the Finance Minister to Prime Minister Benjamin Netanyahu, who will need to decide on the political and economic ramifications of cutting financial ties with the Palestinian Authority. Analysts predict that the Palestinian economy may shift to cash, foreign currency, and cryptocurrencies, complicating efforts to monitor money laundering and terror financing. Economists note that trade will likely continue through alternative channels, reducing Israel's influence and control over these financial flows.

Discount Bank emphasized its willingness to assist during the transition if the government assumes the associated risks, while Hapoalim stated the matter is under review. The situation remains unresolved, with significant implications for Israeli-Palestinian financial relations and counterterrorism efforts.