Smotrich orders: Cancel indemnification for Palestinian banks

Finance Minister Bezalel Smotrich ordered on Tuesday evening the cancellation of the indemnification mechanism provided to correspondent banks operating with banks in the Palestinian Authority. The directive was issued to the Accountant General at the Finance Ministry, Yali Rothenberg.

The decision follows a campaign by the Palestinian Authority to delegitimize Israel on the international stage, as well as the imposition of personal sanctions by five countries on Israeli government ministers - including Smotrich and National Security Minister Itamar Ben Gvir.

The indemnification mechanism was originally created to enable Israeli banks to maintain financial ties with the Palestinian Authority banking system, despite the legal risks stemming from the potential involvement of Palestinian Authority entities in terrorist activities. Israeli banks feared lawsuits both in Israel and abroad over the transfer of funds to organizations possibly linked to hostile activities.

To mitigate this risk, the Israeli government had committed to indemnifying the banks in the event of legal action resulting from their transactions with the Palestinian Authority. This guarantee allowed financial institutions to operate normally and helped sustain the Palestinian Authority economy, which heavily depends on financial interactions with Israeli banks.

The cancellation of the indemnification mechanism is expected to affect how banks engage with the Palestinian Authority financial system, potentially slowing the flow of funds and disrupting the operations of Palestinian Authority economic institutions.