Last Wednesday, Minister of Finance Bezalel Smotrich dropped a bombshell when he threatened to interfere with the independence of the Bank of Israel if the bank would not act against restrictions on the bank accounts of Jewish settlers in Judea and Samaria who are subject to international sanctions.
Smotrich warned against the intention of European Union countries of imposing further sanctions on "Israelis living in Judea and Samaria." He even threatened to oblige the Bank of Israel to provide financial services to anyone whose activity at the banks has been restricted because of sanctions, and to promote legislation obliging the banks to pay compensation to customers who have been harmed.
The current saga began in 2024, when the Biden administration in the US imposed sanctions on settlers and others involved in violence in the territories. The EU, Canada, and the UK joined in these sanctions. When President Donald Trump took office, the US sanctions on these settlers were cancelled, but those imposed by the other countries remained in force.
Contrary to what is commonly thought, the sanctions do not forbid all banking transactions. Adv. Liat Eini-Netzer, a senior partner at the firm of B. Levinbook & Co., who specializes in representing banks, explains that a person on whom sanctions have been imposed can still operate a current account, pay wages, and pay the authorities and in the supermarket, but he or she is restricted when it comes to certain transactions, such as transfers of foreign currency.
"Israeli legislation obliging the banks not to comply with sanctions is liable to cause significant damage to the Israeli economy, as the banks themselves are liable to be considered sanctions breakers, and that would be liable to cut the Israeli economy off from the global banking system," Eini-Netzer says. "Such legislation is also liable to harm those on whom sanctions have been imposed, since money they transfer to a bank overseas is liable to be frozen there."
It doesn’t end there. Also liable to be harmed are ordinary customers who need banking services overseas, such as money transfers and obtaining credit, and who could find themselves restricted. This is one reason that the banks in Israel are punctilious about complying with sanctions as part of their risk management, even if the law in Israel does not oblige them to act that way.
Banks under pressure
The timing of Smotrich’s strongly worded letter to Supervisor of Banks Daniel Hahiashvili, and his decision to publicize it on social networks, were not coincidental. Smotrich knew that the Banking Supervision Department of the Bank of Israel was about to publish draft guidelines to the banks on the implementation of sanctions. He rushed to anticipate that and send a message to his political base, apparently in order to seize the narrative and show that he was fighting the threat of European sanctions, and to lay the responsibility on the banking system.
Smotrich seeks to present the risks as negligible, since, he says, "it’s a matter of European sanctions, the consequences of which and the risks they bear for the banking system are minimal - unlike US sanctions, the risk of infringing which is considerably greater." But Smotrich himself called at the time for resistance to US sanctions as well, although he says that breaching them is dangerous.
Smotrich put himself on a collision course with the banks over compliance with international sanctions last year, when the Biden administration imposed sanctions on several settlers. "We are not a banana republic of the US," the minister of finance said, and pressured the Bank of Israel to find solutions for the customers on whom sanctions had been imposed.
This resulted in the new instructions from the Banking Supervision Department. The instructions ultimately defend the banks’ complete discretion on compliance with sanctions, to Smotrich’s chagrin. But they also give the Religious Zionism party leader some "semantic" achievements to cling to in the face of his political base, such as barring the banks from automatically freezing services to a customer on whom sanctions have been imposed without providing service at a minimum level.
"The banks will have to maneuver"
The Bank of Israel of course opposes legislation that would interfere with its independence and with the banks’ discretion. Nevertheless, the draft instructions circulated by Hahiashvili last Thursday continue the cautious line that the Banking Supervision Department has adopted in recent years.
Thus, the draft instructs the banks to carry out "effective risk management" in order to avoid exposing themselves to breaches of sanctions. The banks are required to formulate policies and procedures, and even to seek the aid of external experts.
The Banking Supervision Department makes clear that a bank that has formulated a policy may refuse to provide service to a customer on whom sanctions have been imposed, without that being considered "unreasonable refusal." The central banks thus lends it backing to the banks in the face of Smotrich’s criticism.
On the other hand, the draft forbids the banks from implementing a policy of "complete avoidance in advance" of providing services. In other words, the banks may not refuse in advance to serve customers on whom sanctions have been imposed, but must examine each case on its merits.
If it is decided to restrict a customer’s activity, the bank must notify that customer as soon as possible and state the grounds for the restrictions, and also state which transactions the customer will continue to be allowed to carry out and the service channels available to him or her.
Prof. Ruth Plato-Shinar, head of the Center for Banking Law and Financial Regulation at the Netanya Academic College, believes that in the wake of recent events the banks find themselves in a more complicated situation than in the past. "It’s now no longer possible to comply in a blanket way to sanctions regimes, but the banks have to exercise discretion in relation to each customer," she says.
Plato-Shinar explains that the banks will have to examine what sort of sanctions regime is involved (which country has imposed it and how strict it is), who the customer is (an individual or a corporation), what behavior is attributed to him or her, and what banking services he or she seeks to receive.
"It may be that the bank will be able to allow the customer basic financial management, but to block other financial transactions such as transfers overseas or activity in foreign currency or securities. In simple words, the banks will have to maneuver."
Lawsuits against the banks
Will the banks ultimately succeed in keeping everyone happy? Plato-Shinar is optimistic. "The Banking Supervision Department has in effect imposed a quasi-judicial function on the banks, with all the complexity that that involves," she says. "But it’s not for the first time. The money laundering and terrorism financing rules also oblige the banks to exercise judgement and make decisions about customers’ transactions. Experience shows that the banks generally succeed in doing so."
Meanwhile, the banks are being strict about compliance even at the cost of being exposed to lawsuits. For example, Eitan Yardeni of Havat Maon filed a NIS 1.1 million suit against Bank Leumi, payments company Paybox , and credit card company Max, for restricting his account and his financial activity.
Shlomo Sarid, one of the founders of Tsav 9, an organization that has taken action against the delivery of humanitarian aid to the Gaza Strip and on which the US imposed sanctions, filed a NIS 600,000 suit against Bank Hapoalim for restricting activity in his bank account. He too also sued Paybox and Max.
Similar lawsuits have been filed by Avichai Suissa, head of Hashomer Yosh, and Ateret Yardeni, wife of Eitan Yardeni.
Although the Trump administration has removed the US sanctions, the lawsuits already filed over the matter against the banks continue to run, on the grounds of damage caused, or seeking a decision in principle in favor of the claimants.
Published by Globes, Israel business news - en.globes.co.il - on June 9, 2025.
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