Tuesday, April 11, 2006

Bank crisis pushes Hamas gov't to financial brink

Bank crisis pushes Hamas gov't to financial brink
By Adam Entous and Wafa Amr

JERUSALEM (Reuters) - The reluctance of banks to risk U.S. sanctions and lawsuits by dealing with a Hamas-led government has pushed the Palestinian Authority to the brink of financial collapse sooner than donors had expected, diplomats said.

The rapid onset of a banking crisis -- within days of Hamas's swearing-in on March 29 -- could further depress Palestinian incomes, fuel political unrest and speed the arrival of a humanitarian crisis with which donors are not yet prepared to cope, according to diplomats and Palestinian officials.

Western diplomats and private-sector experts said Hamas's troubles finding a bank has for now eclipsed Western aid cuts as the biggest immediate threat to the new government's viability.

"This is by far the biggest crisis facing the Palestinian Authority and the Palestinian economy. It could have profound long-term consequences," said Gidi Grinstein, president of the Reut Institute, an independent Israeli think tank.

Hamas cabinet members and other Palestinian officials have accused the Bush administration of sparking the crisis by pressuring Amman-based Arab Bank to stop managing the Palestinian Authority's main treasury account.

Diplomats and Palestinian officials said the account was effectively shut down, jeopardizing Hamas's ability to carry out basic functions like securing foreign aid and paying vendors.

"Even if you get emergency money together, there's no way to bring it in," without banks to make the transfers and hold the money, said a Western diplomat monitoring the crisis.

Hamas is already more than a week late paying March salaries to 140,000 Palestinian Authority workers and it was unclear when the government will be able to secure the funds to meet payroll.

In addition to pressuring the Arab Bank, "the Americans informed (other) Palestinian banks that if they deal with the Hamas government they could risk legal and political measures against them," a senior Palestinian official said.

But Western diplomats said Washington's role was unclear.

The Arab Bank sent a letter to the U.S. Treasury Department shortly after Hamas won a January 25 parliamentary election, seeking assurances it would not face U.S. penalties under the Patriot Act and other anti-terrorism laws if it continued to manage the so-called "single treasury account", diplomats said.

The Treasury Department did not formally respond to the Arab Bank's letter, the diplomats said.

But Treasury spokeswoman Molly Millerwise said: "We're engaged in conversations with the Arab Bank on these and other issues through our embassy in Jordan."

A U.S. official, who spoke on condition of anonymity, said the Treasury did not tell the Arab Bank to freeze the Palestinian Authority's account. The official did not elaborate on what the embassy told the bank about its legal exposure.

Experts said the banks's legal concerns stemmed from provisions of the Patriot Act and other U.S. laws which give the Bush administration sweeping powers to crack down on individuals and companies that provide any "material support" to Hamas.

The Arab Bank is already under particular scrutiny from U.S. regulators. It was fined $24 million last year over alleged failures to comply with anti-money laundering laws aimed at blocking funding for banned "terrorist organisations".

The Arab Bank could also face new civil lawsuits for handling Palestinian accounts, said Gary Osen, an attorney who has sued the Arab Bank on behalf of Americans killed in suicide bombings, alleging it had a role in helping get funds to Hamas.

"In a day or a year when Hamas blows up a cafe or a commuter bus, the Arab Bank or any other bank that provides financial services to PA would risk substantial liability," said Osen.

The risk of running afoul of the Patriot Act was also a factor for Israel's largest bank, Hapoalim, in severing banking ties to the Palestinians, a bank official said.

Grinstein said: "The irony is that it is driven not by the state of Israel, but by the United States."

(Additional reporting by Luke Baker)