"Banks must comply with US sanctions on Israelis"

Bank Leumi branch credit: Eyal Izhar
Bank Leumi branch credit: Eyal Izhar

Israeli ministers have protested, but experts with whom "Globes" spoke say local banks have no option but to freeze the accounts of the four Israelis that the US accuses of violence against Palestinians.

Bank Leumi and Israel Postal Bank have frozen the accounts of two of the residents of Judea and Samaria on whom sanctions were placed by the US, through an executive order, because of claims that they were involved in violence against Palestinians. Altogether, four Israelis were the subject of the executive order. The other two maintain accounts at Bank Hapoalim, which stated that it "respects the international sanctions and will comply with any legal order." Israel Postal Bank similarly stated that it "is obliged to respect international legal sanctions and orders, as required in the international financial system."

The freeze on the accounts at Bank Leumi was imposed after the US executive order to freeze assets and bank accounts of four Israeli citizens - David Chai Chasdai, Einan Tanjil, Shalom Zicherman and Yinon Levi. The order includes a ban on trading with them via the US banking system. Levi has the account at Bank Leumiף Chasdai has the account at Israel Postal Bank.

US President Joe Biden wrote in the order that "The situation in the West Bank - in particular high levels of extremist settler violence, forced displacement of people and villages, and property destruction - has reached intolerable levels and constitutes a serious threat to the peace, security and stability."

The order further states: "These actions undermine the foreign policy objectives of the United States, including the viability of a two-state solution and ensuring Israelis and Palestinians can attain equal measures of security, prosperity, and freedom. They also undermine the security of Israel and have the potential to lead to broader regional destabilization across the Middle East, threatening United States personnel and interests."

The order details the actions attributed to the four Israelis sanctioned, describing violence against Palestinians, burning of fields, and destruction of property.

Minister of Finance Bezalel Smotrich and Minister of Communications Shlomo Karhi have spoken out against the sanctions. Smotrich called for the order to be ignored, while Karhi wrote on X that it was an arbitrary order and constituted abuse of Israeli citizens with no proper legal procedure, and that if it was found that he had the authority to do so, he would order the block on the bank accounts to be removed.

Are banks in Israel obliged to act in accordance with the US order? What sanctions could be imposed on anyone who fails to comply with it, and what can those whose accounts have been blocked do about it?

Must Israeli banks comply with the US order?

The banks are required to act in accordance with the US order as part of the anti-money laundering and terror finance prevention regime. Failure to do so could lead to the banks being cut off from the SWIFT international money transfer system, for example.

In May 2022, the Bank of Israel issued a circular to the banks stating that they were obliged to pay attention to international and national sanctions of foreign countries.

The Bank of Israel has now come to the banks’ defense: "Circumventing sanctions regimes could expose banking corporations to substantial risks, among them compliance risks, money laundering and terror finance risks, legal risks, and reputational risks."

The Bank of Israel further states that the banks need to maintain proper banking procedure and set policy on international sanctions "for the sake of preserving orderly business activity, maintaining proper relationships in the global economy, and finally for the sake of the proper functioning of the Israeli economy." Bank of Israel officials stress that the solution to the problem lies on the diplomatic plane.

Adv. Yuval Shalheveth, a partner and banking law specialist at Arnon, Tadmor-Levy, explains that the banks are bound by the sanctions. "Under the money laundering and terror finance prevention regime, there is a prohibition on handling money for anyone on lists of sanctioned persons of the US and the UN."

Shalheveth says that sanctions by the UK and the EU do not have direct force in Israel, but that the Bank of Israel requires these sanctions too to be checked, and their implementation considered case by case.

"An Israeli bank that does not agree to declare that it undertakes to respect the US sanctions will not be able to do business in the US banking system," Shalheveth adds.

"US law forbids US banks from doing business with banks anywhere in the world that do not comply with sanctions," he says. "This means that a bank that does not comply with sanctions could find itself banned in the US. No bank will be prepared to work with it. It’s impossible to conduct banking business in Israel without a correspondent bank in the US. So the banks know that unless they comply with the sanctions, they will be liable to be barred from the US banking system."

Prof. Asher Blass of the Department of Economics at Ashkelon Academic College and a former chief economist at the Bank of Israel explains that the US order applies to US entities and any entity that works with them, and that the banks in Israel are therefore caught by it. "US entities are forbidden to engage in commercial or financial ties with anyone named in the order. Any entity that has activity in the US or uses the SWIFT system must comply with the order. A bank will not be able to function if sanctions are imposed on it. The banks have no discretion in the matter."

Does the minister of finance have the power to instruct the banks how to act?

No. The minister of finance has no power to order a bank to ignore international sanctions lists or the requirements of the money laundering and terror finance prevention regime. None of these things are within the scope of his authority when it comes to the banks.

Is a bank required to produce evidence against a customer who is on the sanctions list before applying sanctions to him or her?

Adv. Shalheveth explains that when a list of sanctioned persons is published, a bank has no obligation to carry out an investigation of the matter, and can rely on the mere existence of the order. The bank does not have to check any facts, but only the severity of the order.

Bank Leumi recently froze the account of UNRWA (The United Nations Relief and Works Agency for Palestine Refugees in the Near East), after the Israeli government found that some UNRWA workers participated in the Hamas attack on Israel on October 7.

Bank Leumi said that many transactions had taken place n the account recently iin a way that did not enable the bank to trace their sources or destinations. Bank Leumi enquired of UNWRA representatives, but they were unable to provide satisfactory explanations. This strengthened the bank’s fear that money from UNWRA’s account was reaching terrorists in the Gaza Strip.

Shalhevet explains that there is a difference between the decision about UNWRA and decisions in respect of the US order. "The order is a fact that does not need to be checked. As soon as there is an order against a person, it makes no difference whether the claims made against that person are correct or not, or whether or not the order is justified. Had UNWRA been declared a terrorist organization in the US or Israel, there would have been no question. Here, there is a question of fact - does UNWRA aid terrorism?"

What is the significance of the freeze on an account, and what can those who are blocked do?

"The action taken by the bank depends on the severity of the order," Shalhevet says. "In some cases, the result could be that the account cannot be used at all. In less severe cases, the bank will allow money to be withdrawn, but will not provide services. It varies from case to case, in accordance with the content of the order.

"They can turn to the courts in the US to attack the sanctions regime and try to persuade the court that the claims against them are incorrect. There have been cases in which people have succeeded in this, but it isn’t easy. It would be very hard to bring a case in an Israeli court, because there is a legal obligation, and the bank will be badly damaged if it is liable to be barred from the US banking system."

Why in the case of Roman Abramovich did the court in Israel allow money to be transferred?

The Tel Aviv District Court recently ordered Mizrahi Tefahot Bank to transfer NIS 8 million that Israeli-Russian businessman Roman Abramovich wished to donate to the ZAKA search and rescue organization.

The bank had refused to transfer the money in view of sanctions imposed on Abramovich by the UK and the EU because of his connections with Russian president Vladimir Putin. The attorney general and the Bank of Israel supported the bank in its refusal.

The court found that the bank had not exercised independent judgment and had not checked the particulars of the matter, but had simply acted on the basis of the foreign sanctions.

The difference between the case of Abramovich and that of the four Israelis from Judea and Samaria is that in the former case it was a matter of EU and UK sanctions that only amount to recommendations, as opposed to a US executive order. In addition, the money in question was in Abramovich’s account for many years before the war between Russia and Ukraine because of which the sanctions were imposed on him.

Published by Globes, Israel business news - en.globes.co.il - on February 6, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Bank Leumi branch credit: Eyal Izhar
Bank Leumi branch credit: Eyal Izhar
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