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### Viewing cable 10TELAVIV413, SHIN BET TALKS GAZA ECONOMICS

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
10TELAVIV413 | 2010-02-22 14:02 | 2011-01-28 00:12 | SECRET//NOFORN | Embassy Tel Aviv

`

    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.

     - - - - - - - - - - - - - - - - - - - - -
     The PMA-regulated private banking system
     - - - - - - - - - - - - - - - - - - - - -

     ¶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.

     - - - - - - - - - - - - - - - - - - - -
     The Hamas Alternative Financial System
     - - - - - - - - - - - - - - - - - - - -

     ¶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.

     - - - - - - - - - - - - - - -
     Overall Gaza Market Dynamics
     - - - - - - - - - - - - - - -

     ¶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

`