Blaming Israel, refusing to fix: The PA's economic system is in collapse
The Palestinian Authority blames Israel for the current crisis, but sources in Jerusalem claim that Ramallah has failed to fulfill its commitments to combat money laundering and terrorism financing, leading Israeli banks to threaten a cutoff of services.
This past week, the Palestinian Authority held a press conference announcing that its banking system is on the verge of collapse.
The accusations were directed at the State of Israel, with the Authority claiming that Jerusalem failed to fulfill obligations based on the Paris Protocol and a 2017 cabinet decision to regulate banking operations and facilitate their connection to the global economy.
In Israel, the situation is viewed differently: it is the Authority that failed to fulfill its commitments and rectify the deficiencies it had pledged to address. Consequently, the current model connecting Palestinian banks to the global system via two Israeli banks is unsustainable, and the alternative banking system proposed by Israel cannot be established due to the Authority's inaction.
The Authority requires banking mediation services due to its system's involvement in terrorism financing and other administrative failures. For over two decades, Israel has mitigated this through Discount and Hapoalim banks, which have received government backing, providing them with indemnity against lawsuits and immunity from criminal proceedings.
Danger to the banks
Recently, the banks announced their decision to terminate services for the Palestinian system within weeks. This is due to the legal and financial risks they face regarding the Authority's violation of anti-money laundering and counter-terrorism financing rules, which have intensified significantly since October 7.
Israeli banks are not alone in this; global financial institutions also avoid engagement with the Authority, as American legislation and international treaties prohibit cooperation with entities that finance terrorism.
Specific deficiencies remain unaddressed: Ramallah was required to provide a detailed risk assessment report on money laundering and terrorism financing, which it has failed to do. Furthermore, the Authority did not agree to the professional monitoring by the International Monetary Fund (IMF) as previously arranged.
Although the Authority enacted a law against the use of cash, experts note it was approved without implementation mechanisms, such as digital and traceable payment tools. In effect, the law exists, but there is no viable alternative to cash.
Sources familiar with the matter claim that by pointing an accusing finger at Israel, the Authority is attempting to shirk its responsibility. All proposed steps were agreed upon jointly by Israeli and Palestinian representatives, yet the Authority has consistently stalled.
"Repeated and recurring Israeli efforts to raise the issue through technical discussions and official correspondence remained unanswered by the Palestinian Authority," sources emphasized. "It seems they stalled to exert international pressure on Israel, preferring to continue a policy of supporting terrorism and money laundering while blaming Israel for the consequences."
Will there be a solution by 2027?
Finance Minister Bezalel Smotrich has extended the legal indemnity provided to the banks until the end of 2026 to prevent an immediate collapse of the Palestinian banking system. However, Hapoalim and Discount banks maintain that the legal and economic risks have increased since October 7, and the current indemnity is no longer a sufficient response.
