Money trail to Hamas begins with Israeli banks

By Adam Entous - Exclusive

TEL AVIV (Reuters) - Israeli authorities tracking Hamas's funds said they made an unexpected discovery last month -- cash from one of Israel's biggest banks had found its way to a security force loyal to the Palestinian Islamists in Gaza.

Officials, speaking to Reuters this week on condition of anonymity, said the incident sparked a inquiry by the Justice Ministry's anti-money laundering authority and fuelled debate within the Israeli government and banking community over whether to cut financial links to Palestinian banks in the Gaza Strip.

That debate came to a head when Israel's largest commercial bank, Bank Hapoalim, said on Tuesday it would stop providing Israeli shekel notes and coins to Gaza. Hapoalim attributed the move to last week's declaration by Israel that Gaza, where Hamas seized control in June, is an "enemy entity".

Israeli regulators said banks including Hapoalim have been pushing for months to sever banking ties to Gaza, arguing there was little profit in it and no way to know whether their shekels could end up with Hamas, putting the banks in legal jeopardy.

Laws in Israel and the United States bar the transfer of funds to Hamas, which they deem a "terrorist" organization.

Regulators say Discount Bank and other Israeli banks plan to follow Hapoalim's lead, threatening Gaza's money supply and President Mahmoud Abbas's ability to pay public sector wages -- part of a U.S.-led, Israeli-backed strategy to bolster his West Bank-based administration and weaken Hamas.

"This is a political issue," said a senior official with Israel's central bank, the Bank of Israel.

"Allowing coins and notes into Gaza is the same as water and medicine -- part of it can go to ... members of Hamas."