VZCZCXRO9755
PP RUEHROV
DE RUEHTV #0413/01 0531424
ZNY SSSSS ZZH
P 221424Z FEB 10
FM AMEMBASSY TEL AVIV
TO RHEHNSC/NSC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHC/SECSTATE WASHDC PRIORITY 5586
INFO RUEHXK/ARAB ISRAELI COLLECTIVE PRIORITY

S E C R E T SECTION 01 OF 03 TEL AVIV 000413 
  
 NOFORN 
 SIPDIS 
  
 STATE FOR NEA/IPA AND SEMEP; NSC FOR KUMAR; TREASURY FOR 
 MOGER/KNOWLES 
  
 E.O. 12958: DECL: 02/22/2020 
 TAG ECON, PTER, KPAL, KTFN, IS 
 SUBJECT: SHIN BET TALKS GAZA ECONOMICS 
  
 REF: A. JERUSALEM 276 
      ¶B. TEL AVIV 2446 
  
 Classified By: Economic Counselor David R. Burnett; reasons 1.4 b/d 
  
 ¶1. (S/NF) Summary: In February 16-17 meetings, Senior Shin 
 Bet officials outlined for Emboffs their views on recent 
 trends in the Gaza Strip's economy, including the paradoxical 
 effect of "clean" Palestinian Monetary Authority 
 (PMA)-regulated banks serving Hamas interests, the operating 
 dynamics of a market split between legitimate and illicit 
 activity, and the growing economic division between Gaza and 
 the West Bank.  The legitimate market sector, anchored by the 
 PMA-regulated private banking system is mirrored by an 
 alternative Hamas financial system, both of which are linked 
 by currency flows and trade.  End Summary. 
  
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 The PMA-regulated private banking system 
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 ¶2. (S/NF) The PMA-regulated private banking network provides 
 the backbone for the legitimate sector of Gaza's market. 
 Salaries paid by the Palestinian Authority, international 
 aid, and legitimate trade finance all flow through these 
 banks.  New Israeli Shekels (NIS) and U.S. Dollars (USD) 
 comprise the majority of hard currency transfers.  The 
 private banks that operate under PMA-supervision are 
 well-regulated according to PMA-prescribed Anti-Money 
 Laundering legislation.  According to Shin Bet, suspicious 
 activity is usually reported, and Hamas has been unable to 
 make any significant inroads in bank activities.  The banks 
 have maintained their independence from the Hamas regime with 
 the threat that they will close if Hamas attempts 
 infiltration.  The banks will not let Hamas operatives open 
 bank accounts or have their salaries deposited in any 
 existing accounts.  Shin Bet has not seen any attacks on the 
 banks by Hamas-affiliated groups or individuals. 
  
 ¶3. (S/NF) However, Shin Bet officials assess that Hamas is 
 significantly benefiting from the PMA-regulated banks, even 
 though they do not directly utilize them for commercial 
 activity.  These well-operated banks, which are "clean" of 
 money-laundering or terror finance,  provide the non-Hamas 
 population of the Gaza Strip with a key financial service 
 that improves their quality of life.  Shin Bet believes that 
 due to a lack of successful strategic messaging by the PA and 
 PMA that makes clear how they--and not Hamas--are providing 
 these private banks as a public service, Hamas has been able 
 to take full credit.  Hamas has led the Gaza population to 
 believe that it is their leadership which has enabled these 
 banks to function relatively effectively and without 
 corruption.  As such, even though they are not under Hamas 
 control, the PMA-regulated private banks support Hamas 
 because they provide a necessary financial service at no cost 
 to the Hamas regime.  Shin Bet argues that this is why the 
 banks' threats of closure have proven effective against Hamas 
 encroachment. 
  
 ¶4. (S/NF) Shin Bet also believes that the private Palestinian 
 banks operating branches in Gaza would prefer to close them 
 due to low profitability relative to risk.  Political 
 considerations and pressure from the PA, PMA, and others, are 
 the primary reason why they remain in operation.  While Shin 
 Bet faults the PA for not getting more street credit for the 
 Gaza banking system, they agree that a pull-out by the banks 
 would be a political and psychological blow to the PA. 
  
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 The Hamas Alternative Financial System 
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 ¶5. (S/NF) A Hamas alternative financial system exists 
 parallel to the PMA-regulated banking system.  Hamas smuggles 
 in large quantities of foreign currencies (primarily USD and 
 Euros) in order to fund its operating expenses.  According to 
 Shin Bet, their budget consists of three major parts: 1) USD 
 200 million annually for government operating expenses; 2) 
 USD 50 million each year to support the Hamas movement's 
 civilian side and organization; and, 3) USD 40 million 
 annually for its military wing and security apparatus.  Over 
 the past several months, shortages of cash for Hamas salary 
 payments (usually made in USD) have been reported (see REFs A 
 and B).  Shin Bet now believes that this was due primarily to 
 Israeli efforts to thwart terror funds and Egyptian 
 counter-smuggling operations, not a lack of actual funding 
 from abroad.  Recently, however, Hamas has adapted to this 
  
 TEL AVIV 00000413  002 OF 003 
  
  
 crackdown and re-rerouted its smuggling operations, bypassing 
 Cairo and heading directly through Sinai, thereby more easily 
 evading detection.  They have also reduced the size of 
 amounts smuggled into Gaza at one time to avoid large losses 
 after any one interdiction.  Shin Bet also notes dwindling 
 levels of support from the Egyptians in stemming this flow of 
 funds.  Additionally, Hamas has increased tax collection, as 
 detailed in REF A. 
  
 ¶6. (S/NF) With these modifications, the parallel economy has 
 been flourishing, and the delayed salary payments are not 
 symptomatic of a more endemic problem.  Hamas has also 
 established a second branch of its own National Islamic Bank 
 in Khan Yunis, and is attempting to initiate correspondent 
 relations abroad.  Shin Bet reiterated the importance of a 
 timely U.S. designation of the Hamas "bank" to prevent this 
 from happening, given that it would significantly increase 
 the ease by which Hamas could receive and transfer funds. 
 Hamas also continues to receive funding from Iran. 
  
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 Overall Gaza Market Dynamics 
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 ¶7. (S/NF) These parallel dynamics lead to an overall Gaza 
 economy based on imports from Egypt through the smuggling 
 tunnels, paid for in foreign currency--not Israeli shekels. 
 There has been a steady influx of shekels -- mostly from PA 
 salary payments into Gaza -- with limited outbound 
 circulation.  Instead, these shekels are used predominately 
 for internal exchange.  Under the PMA-regulated private 
 banking system, individuals are paid in NIS from the 
 Palestinian Authority. Local merchants conduct their business 
 with the average Gazan in NIS, who in turn use NIS for most 
 of their daily purchases.  However, in order to procure 
 non-Israeli imports (through the smuggling tunnels), the 
 local merchants are required to convert these NIS into USD, 
 since the exporters from Egypt and elsewhere operate 
 primarily in USD.  This results in a large amount of outgoing 
 foreign currency for imported goods, while an insignificant 
 amount of shekels leave the Gaza market due to the near 
 complete lack of trade with Israel (and, to a lesser degree, 
 the West Bank).  When combined with Israel's restrictions on 
 the transfer of hard currency both into and out of Gaza, this 
 has led to a surplus of shekels and deficit in foreign 
 currencies (including USD and Jordanian Dinars), which has 
 allowed speculators (including Hamas, merchants and banks) to 
 exploit the system and profit from arbitrage. 
  
 ¶8. (S/NF) In the long run, Shin Bet assesses that these 
 currency imbalances destabilize Gaza's economy and will lead 
 to pendulating NIS/USD exchange rates, the result of 
 intermittent incremental changes in currencies permitted in 
 and out by Israel, variation in the quantities and types of 
 currencies smuggled into Gaza, and incentives to exploit 
 systemic changes through arbitrage.  They are concerned that 
 there will be an eventual shift from the current mixed 
 currency system, dominated by NIS, to sole use of foreign 
 currency (likely USD).  Local merchants have already 
 attempted to require that Gazans pay for goods in USD or 
 other foreign currencies, to minimize exchange-rate losses 
 when they are forced to exchange the shekels for dollars or 
 other foreign currencies, whether through the banking system 
 or through the Hawala (money-changers), to purchase restock 
 imported inventories.  Because of the current shortage of USD 
 in the banking system, Gazans have been unable to oblige and 
 the local merchants have relented, according to Shin Bet 
 analysts.  Israel's policy, per the Paris Protocol, is to 
 maintain use of shekels in the Palestinian territories, and 
 the GOI worries that if the shift to a non-shekel economy in 
 Gaza takes place, it will further solidify the separation of 
 Gaza from the West Bank. 
  
 ¶9. (S/NF) From a counter-terrorism perspective, Shin Bet sees 
 less of a security threat from a shekel-based Gaza economy 
 than a foreign-currency-based Gaza.  It sees no direct 
 security threat from excess shekels in Gaza.  Shin Bet 
 analysts have not seen any attempts to rob banks vaults, nor 
 are they concerned that Hamas or others could use shekels to 
 purchase any materials from abroad that could be used for 
 terrorism (given that they would have to be exchanged first 
 for currently lacking foreign currencies).  Given the 
 separation between Hamas and the PMA-regulated private banks, 
 Shin Bet assesses there to be little connection between these 
 banks' stability and Israel's counter-terrorism goals.  In 
 the short-term, security concerns from a decrease in 
 confidence in these banks by average Gazans is negligible for 
  
 TEL AVIV 00000413  003 OF 003 
  
  
 Israel.  However, in the long-run, Shin Bet officials 
 conceded that it is important to preserve these institutions 
 as one of the few alternatives to Hamas in the Gaza Strip, 
 and as a foundation for economic stability in Gaza. 
 Cunningham