Financial crisis threatens the Palestinian Authority due to correspondent banking

Every week, we explain professional concepts from the worlds of government and policy that appear in current contexts, in order to deepen readers’ knowledge of the public system and how it affects their lives. The Monitor is a collaboration between Globes and the Center for Empowering Citizens, published every two weeks on Thursdays on the Globes website.

The concept

Correspondent banking is the provision of banking services by one bank to another, such as clearing, account management, and international money transfers.

The current context

Last week, Discount Bank and Poalim, which serve as correspondent banks providing clearing and money transfer services for banks in the Palestinian Authority, informed the Ministry of Finance that they expect to halt banking transfers to the Authority within two to three months due to the intensification of concerns regarding money transfers to terror. They demand that the state take responsibility for the risks involved by activating a government bank, as it had previously committed to do.

What is correspondent banking?

Correspondent banking is the provision of banking services by one bank to another. These services may include managing accounts in different currencies, international money transfers, check clearing, foreign-currency exchange, and additional payment services. This arrangement enables local banks to gain access to foreign financial markets through an intermediary bank, allowing them to carry out international transactions without the need to establish foreign branches.

The arrangement with the Palestinian Authority

As part of the Oslo Accords, the “Paris Protocol” regulates economic relations between the State of Israel and the Palestinian Authority. The protocol stipulates that both sides will maintain correspondent relations and that the Palestinian Authority will have the right to exchange surplus shekels received from Palestinian banks into foreign currency at the Bank of Israel.

Today, banking ties between Israel and the Palestinian Authority rely on correspondent banking carried out by Poalim and Discount. These banks clear approximately NIS 51 billion per year for the Palestinian Authority. However, anti-terror financing laws place Israeli banks at risk, particularly regarding transfers to families of terrorists. To compensate for this risk, the government issues a “letter of indemnification” to cover potential losses, and the government’s legal counsel protects them from criminal implications. These letters are granted temporarily and extended periodically.

Israeli banks are not satisfied with this arrangement. As early as 2016, they announced their intention to stop providing services to Palestinian banks. An inter-ministerial team recommended establishing a government-owned company to represent the Palestinian banking system within Israel’s payment array. The cabinet adopted this recommendation in 2018 and reaffirmed it in 2022, but it has not been implemented, leading the banks to decide to halt correspondent banking services.

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