Israeli banks cutting ties with Palestinian Authority

Discount Bank and Bank Hapoalim have surprised the Ministry of Finance and are expected to halt bank transfers to the Palestinian Authority within two to three months, amid growing estimates that such transfers are financing terrorism. The banks are demanding that the state should take responsibility for the risk of financing terrorism and money laundering by operating a government bank, as it undertook to do four years ago. The problem now goes to be handled by Prime Minister Benjamin Netanyahu.

Trade with the Palestinian Authority was worth over NIS 21 billion in 2025, but its existence requires an infrastructure of money transfers between Israel and the Palestinian Authority via two correspondent banks that provide clearing and money transfer services for banks in the Palestinian Authority, Hapoalim and Discount. Laws against terror financing place the banks at risk, among other things because of the routine connection with the Bank of Palestine, the largest bank in the Palestinian Authority, which serves as a pipeline for transferring money to families of terrorists under the Palestinian Authority’s policy of support for them.

Not sufficing with a promise

To compensate the banks, the government issues a letter of indemnity promising to cover losses arising from lawsuits in this area, and the attorney general protects the banks from criminal consequences. The letter of indemnity is temporary, and is extended from time to time, but the banks no longer believe that it is enough to protect them. It was originally planned that a government correspondent bank would be set up to take upon itself the responsibility, but delays by Minister of Finance Bezalel Smotrich led Discount Bank to take an independent step and initiate the severing of these connections.

At the end of last week, Palestinian banks announced that the Israeli banks responsible for money transfers to them would end this activity. In the banking system, estimates have mounted recently of the risk of money being transferred to terrorists, leading to an investigation at the end of which it was decided to halt correspondent banking vis-à-vis the Palestinian Authority. Discount Bank was the first to act, and set the closest date for ending the relationship (September). The banks in Israel fear severe consequences, including lawsuits from entities such as Deutsche Bank and Citibank, which provide them with correspondent bank services, and think that there is no further justification for taking this risk.

Ella Rosenberg, a senior fellow at the Jerusalem Center for Foreign Affairs and a member of Forum Dvorah (Women in Foreign Policy and National Security), says, “Laws preventing terror financing around the world could be a basis for financial claims or even the severing of connections with any entity in the terror financing chain. In the extreme scenario, the Israeli banks are liable to lose their access to the ability to carryout international transfers in euros via Deutsche Bank and in dollars via Citigroup.”

The planned solution to this risk was the formation of a special government company, Correspondent Services Ltd., a decision that was passed in 2022 under Avigdor Liberman as minister of finance to rescue the banks from their legal exposure, but the idea got stuck and was not implemented. Minister of Finance Bezalel Smotrich explained to “Globes”: “People could not be found who were prepared to be directors of a bank that transfers money to terrorist elements. The previous government tried to run with this bluff, but without success.” Smotrich made clear that he was not prepared for the state to take these risks on itself. For its part, the Bank of Israel opposed halting the services and warned of severe damage to both the Palestinian and the Israeli economies. Following reports on overseas websites at the weekend, the Ministry of Finance also expressed concern at the step now being taken by the banks.

The banks are demanding that the government should take responsibility and set up the correspondent bank that was promised. To pressure the government to act, they have taken the initiative and themselves declared that the relationship will be severed. The matter bypasses Smotrich and will go directly to the prime minister, who will have to make a decision on the issue, with all the diplomatic consequences for cooperation with the Palestinian Authority.

Rosenberg adds in this context: “They will switch to cash, foreign currency, and crypto, and the ability to trace money laundering and terror financing will be substantially harmed.” An economist at one of the banks described the situation thus: “Business always finds a way. So instead of trading in shekels they’ll trade in dollars. Monetary history shows us that companies don’t come to a standstill in these cases; there are always alternatives. It won’t bring about the effect that Smotrich hopes for, and Israel will lose power and influence.”

Responses

Discount Bank stated in response: “Discount Bank has for years acceded to the state’s requests to continue providing correspondent services temporarily until a permanent solution is formulated. In 2018, the government decided to set up a special government company to provide the services, but although additional steps have been taken over the years towards setting it up, to this day it has yet to start operating. Discount Bank recognizes the importance of the matter and the need for a permanent solution. At the same time, given the growing risks involved in providing the services and out of a sense of responsibility towards its customers, depositors, and shareholders, the bank has brought its stance to the attention of the authorized agencies. Our offer of assistance in the operational aspects during the transition period stands, provided that the state bears the responsibility and the risks, as it undertook to do.”

Bank Hapoalim: “The matter is under review.”

Published by Globes, Israel business news – en.globes.co.il – on July 27, 2026.

Source link