August 2007

07LONDON3175 2007-08-17 08:08 2010-12-03 21:09 CONFIDENTIAL Embassy London

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E.O. 12958: DECL: 08/16/2017
TAGS: PTER KPRP PGOV PHUM PREL BA KU IR IS UK
SUBJECT: IRAN: BROTHER OF IRGC’S SAFAVI SAYS A U.S. TERROR
DESIGNATION OF IRGC WILL PRECLUDE IRAQ SECURITY COOPERATION

Classified By: Political Minister Counselor Maura Connelly for reasons
1.4 (B) and (D).

¶1. (C) Summary. xxxxxxxxxxxx Iran
Revolutionary Guard Corps (IRGC) xxxxxxxxxxxx told London Iran Watcher
xxxxxxxxxxxx
that Iran’s cooperation on security in Iraq, though not yet
evident, would be forthcoming, but in the same breath argued
that a U.S. terrorist designation of the IRGC would prevent
any such cooperation. xxxxxxxxxxxx for the USG to hold its
hand on designation came xxxxxxxxxxxx engaged with the invited group at length
on Tehran’s view of U.S.-Iran relations, Iraqi security, and
the nuclear issue. xxxxxxxxxxxx candid remarks, which included
extremely vigorous exchanges with xxxxxxxxxxxx alternated between aggressive
characterizations of Iran’s relations in the Persian Gulf,
admissions of the IRGC’s presence and role in Iraq and
Afghanistan, and apparently earnest statements of Iran’s
desire for cooperation with the United States. xxxxxxxxxxxx
appeared to pay close attention to xxxxxxxxxxxx message on need
for Iran’s behavior in Iraq to match its stated support for
Iraqi stability and for Iran to weigh the benefits of the
E3 3 incentives package and “suspension for suspension” offer
which remains on the table. End Summary.

xxxxxxxxxxxx Private Plea on IRGC Designation
——————————————
¶2. (C) xxxxxxxxxxxx made his private plea on not designating the
IRGC under U.S. law after a three-hour long larger group
discussion during which xxxxxxxxxxxx had stressed that attacks on
U.S. forces in Iraq by militias using Iranian-provided
ordnance had actually increased from May to July, despite
Iran’s claim to support Iraqi stability. xxxxxxxxxxxx stated that
the USG would soon see (he was vague on how soon) evidence of
Iranian security cooperation in the form of diminished
attacks, taking the July discussions in Baghdad — as opposed
to those held in May — as the point at which the IRGC had
decided it could go forward with such cooperation. xxxxxxxxxxxx
described how IRGC orders to “our allies” are “in the
pipeline,” but it takes time for such orders to be
disseminated throughout Iraqi militia networks and acted upon
(“it is a very large machine, with delayed effect”).

¶3. (C) By way of illustration of this delayed implementation
phenomenon, xxxxxxxxxxxx said there had been an unintended attack
“by our (Shiite Iraqi) allies” on UK forces immediately after
the release of the UK naval hostages last April. xxxxxxxxxxxx said
the IRGC had indeed issued an order for attacks on UK forces,
in response to what he called an earlier UK attack on the
Iranian consulate in Basra, but that Iranian expression of
unhappiness had been satisfied with the hostage episode, and
that IRGC authorities were consequently exasperated by the
militia attack occuring shortly after the hostage resolution.
xxxxxxxxxxxx said their Iraqi “allies” explained the incident as
the result of a standing “general order” to launch such
attacks, which had not yet been rescinded. xxxxxxxxxxxx indicated
that similar organizational snafus lie behind the current
continuing attacks on U.S. forces in Iraq.

¶4. (C) xxxxxxxxxxxx went on to argue, however, that a USG
designation of the IRGC as a terrorist organization would
effectively end all interest, or political ability, of the
IRGC to cooperate with the USG on Iraqi or Afghan security.
He stressed that, unlike “a few years ago, under Khatami,”

London 00003175 002 of 003

the IRGC plays a central and preeminent role in the Iranian
government and that, if the IRGC is designated as a terrorist
organization, the USG will have no Iranian partner with which
to engage on security or other issues of mutual concern.
xxxxxxxxxxxx said it makes no difference to Iran whether the
proposed IRGC designation is done under U.S. domestic law or
international authority — all sanctions, financial measures
and designations are seen by Iranian authorities and the
public as authored by America, with international partners
such as the E3 plus 3 and the UN as mere cutouts for U.S.
initiatives. The practical effects of such measures are
unimportant to the Iranian Government, but the symbolic and
psychological consequences do matter.

Group Discussion Highlights
—————————
¶5. (C) The evening’s larger group discussion had several
highlights:

— A (surprising) degree of self-professed confusion by
xxxxxxxxxxxx at the what he called the “multiple and conflicting
signals” on Iran policy from various parts of the USG
including the Congress;

— An open acknowledgment by xxxxxxxxxxxx that the IRGC is present
and operating in both Afghanistan and Iraq (with U.S.
occupation and Sunni attacks on Shias given as a
justification);

— xxxxxxxxxxxx description of Shiite militias in Iraq as “our
allies, whom we created against Saddam;”

— Fiery statements by xxxxxxxxxxxx on U.S. injustices perpetrated
over the years against Iran, on Iran’s resolve and
capabilities to launch military and asymmetric responses, and
on how Iran should replace or join with the United States as
the Gulf region’s “co-manager,” all of which provoked
vehement rejoinders from xxxxxxxxxxxx;

— xxxxxxxxxxxx reflections on a more mature Iran’s
no-longer-revolutionary approach to its foreign relations;

— xxxxxxxxxxxx repeated return to the theme of desiring a
constructive and cooperative relationship with the U.S.,
first on Afghanistan and Iraq and secondly on the nuclear
issue;

— xxxxxxxxxxxx near-gloating remarks on Hezbollah’s 2006
conflict with Israel; and

— xxxxxxxxxxxx description of the United States as having become
Iran’s “hostage” in Iraq (“you cannot stay and you cannot
leave … your forces there and in the region are our
target”).

Comment
——-
¶6. (C) Although impeccably turned out, outwardly genial, and
speaking with confidence and an evident sense of authority,
xxxxxxxxxxxx appeared to be under significant stress and at great
pains to listen carefully and closely to all interlocutors,
and especially to xxxxxxxxxxxx (standard) comments on the E3 plus
3 offer, as well as the need for Iranian behavior change in
Iraq. xxxxxxxxxxxx apparently genuine desire to engage and move
towards cooperation was coupled to his equally apparent sense
that Iran is entitled to use violent means against us until

London 00003175 003 of 003

such time as there a change in the USG’s “regional behavior.”

Biographical Background
————————
¶7. xxxxxxxxxxxx

Visit London’s Classified Website:
http://www.state.sgov.gov/p/eur/london/index. cfm
tuttle

07TELAVIV2652 2007-08-31 12:12 2010-11-28 18:06 SECRET Embassy Tel Aviv

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E.O. 12958: DECL: 08/24/2017
TAGS: PREL PTER MARR MASS KNNP UNSC PK IR IZ ZP
JO, EG, RS, CH, LE, SY, IS
SUBJECT: U/S BURNS’ AUGUST 17 MEETING WITH ISRAELI MOSSAD
CHIEF MEIR DAGAN

Classified By: Ambassador Richard H. Jones. Reasons: 1.4 (b)(d).

——-
SUMMARY
——-

¶1. (S) In an August 17 meeting, Israeli Mossad Chief Meir
Dagan thanked Under Secretary Burns for America’s support of
Israel as evidenced by the previous day’s signing of an MOU
that provides Israel with USD 30 billion in security
assistance from 2008-2018. Dagan provided his assessment of
the Middle East region, Pakistan and Turkey, stressing
Israel’s (a) concern for President Musharraf’s well-being,
(b) view that Iran can be forced to change its behavior, and
(c) sense that Turkey, Egypt, Jordan, Syria and Lebanon are
unstable with unclear futures ahead of them. Dagan probed
for more detail about XXXXXXXXXXXX U.S. military assistance
to the Gulf states, and — while signaling agreement with the
U.S. approach to the Gulf states vis-a-vis Iran — cautioned that
they may not be able to absorb significant military assistance.
Dagan reviewed Israel’s five-pillar strategy concerning
Iran’s nuclear program, stressed that Iran is economicall
vulnerable, and pressed for more activity with Iran’s
minority groups aimed at regime change. Dagan urged
caution in providing assistance to the Siniora government in
Lebanon, noting Syrian and Iranian efforts to topple the GOL.

¶2. (S) Under Secretary Burns cited the MOU as tangible
evidence of the USG’s commitment to Israel, and stressed that
the U.S. would support all of its friends — Arabs included
— in the Middle East, and will remain engaged in the region
for the long term. He described U.S. efforts to support the
Musharraf and Karzai governments as they face opposition from
Al-Qaeda and the Taliban, and explained that the Gulf
Security Dialogue is meant to bolster Gulf states facing
threats from Iran. The Under Secretary reviewed U.S. efforts
to isolate Iran and increase pressure on it, stressing that
the U.S. is currently focused on the diplomatic track. He
shared USG thinking about the Siniora government in Lebanon,
and urged that the U.S. and Israel continue to consult on
Lebanon. END SUMMARY.

——————————————–
THE SECURITY ASSISTANCE MOU AND ISRAEL’S QME
——————————————–

¶3. (S) Dagan observed that the signing of the MOU on
security assistance could not have come at a better time, and
stressed that Israel appreciated America’s support. The
Under Secretary agreed about the timing, noting that the
U.S., Israel and like-minded countries were facing multiple
threats around the world, and that the Middle East is a very
dangerous region. He said that the MOU serves as a concrete
reminder that the U.S. stands by its long-term security
commitments to its friends, and is ready to help them with
their needs. The Under Secretary noted that the Middle East
is now at the heart of American interests. Because Egypt
also plays a vital role in the region, the U.S. would also
renew its security assistance commitment to that country.
U.S. relations with the Gulf states were longstanding, and
America would stay true to those friendships, as well. The
Under Secretary stressed that the USG is committed to
Israel’s QME. He noted that the majority of systems and
equipment that the U.S. would sell to Egypt and other Arab
partners would replace items that had been sold to those
countries in the past.

——————————————-
DAGAN REVIEWS MIDDLE EAST, PAKISTAN, TURKEY
——————————————-

¶4. (S) Assessing the region, Dagan said Israel sees itself in
the middle of a rapidly changing environment, in which the
fate of one Middle Eastern country is connected to another.
Dagan then said he was concerned about how long Pakistani
President Musharraf would survive: “He is facing a serious
problem with the militants. Pakistan’s nuclear capability
could end up in the hands of an Islamic regime.” Turning to
Iran, Dagan observed that it is in a transition period.
There is debate among the leadership between Rafsanjani and
Ahmadinejad and their respective supporters. Instability in
Iran is driven by inflation and tension among ethnic
minorities. This, Dagan said, presents unique opportunities,
and Israelis and Americans might see a change in Iran in

TEL AVIV 00002652 002 OF 005

their lifetimes. As for Iraq, it may end up a weak, federal
state comprised of three cantons or entities, one each
belonging to the Kurds, Sunnis and Shias.

¶5. (S) Dagan said that the Gulf states and Saudi Arabia are
concerned about the growing importance of Iran and its
influence on them. They are taking precautions, trying to
increase their own military defensive capabilities.
Referring to the Gulf Security Dialogue (GSD), Dagan warned
that these countries would not be able to cope with the
amount of weapons systems they intend to acquire: “They do
not use the weapons effectively.”

¶6. (S) Dagan said that Jordan has successfully faced down
threats from the Muslim Brotherhood and Hamas, and that Egypt
is struggling with the question of who will replace President
Mubarak. He said he sees no hope for the Palestinians, and
that Israel looks at Syria and Lebanon, and sees only
instability. Further afield, it looks at Turkey and sees
Islamists gaining momentum there. The question, he asked, is
how long Turkey’s military — viewing itself as the defender
of Turkey’s secular identity — will remain quiet.

¶7. (S) If Israel’s neighborhood were not unstable enough,
Dagan observed, it did not help that Russia is playing a
“very negative role” in the region. He observed that all of
these challenges have to be addressed globally — they could
not be dealt with individually. Returning to Jordan as an
example, he noted that the more than one million Iraqi
refugees in Jordan were changing Jordanian society, and
forcing it into a new relationship with Saudi Arabia. This
is evidenced by Saudi King Abdullah’s recent visit to Jordan,
which implies greater understanding between the Jordanians
and the Saudis.

—————————————-
DISCUSSION OF THE GULF SECURITY DIALOGUE
—————————————-

¶8. (S) Turning to the Gulf Security Dialogue (GSD), Dagan
said that enhancing the capabilities of the Gulf states “is
the right direction to go,” especially as they are afraid of
Iran. Such a U.S. commitment will be a stabilizing factor in
the region. Dagan clarified that he would not oppose U.S.
security assistance to America’s Arab partners. He expressed
concern, nevertheless, about the current policies of those
partners — especially with regards to Syria and Iran. Dagan
added that if those countries must choose between buying
defensive systems from the U.S. or France, then he would
prefer they buy systems from the U.S., as this would bring
them closer to the U.S.

¶9. (S) Dagan observed that the challenge facing the U.S. now
is how to unite the Gulf states under a shared policy, and
pointed to Qatar as the weakest link in the chain, trying to
play all sides. Under Secretary Burns replied that the U.S.
is trying to get Qatar and its neighbors to look at issues
from a regional perspective, and to focus on threats in a
unified way. Acting PM Assistant Secretary Mull expressed
understanding for Israel’s frustration with how the region
looked, but stressed nevertheless that if America did not
engage the Gulf states through the GSD, the situation would
become much worse. It is critical to get the Gulf states
focused on the Iran threat, and to adopt a regional approach
to countering it. Encouraging and supporting their
counterproliferation efforts would be crucial. Dagan said he
agreed with this approach, stressing that the threat of
radical Islam is real.

——————————————— —-
IRAN: DAGAN REVIEWS ISRAEL’S FIVE PILLAR STRATEGY
——————————————— —-

¶10. (S) Dagan led discussion on Iran by pointing out that the
U.S. and Israel have different timetables concerning when
Iran is likely to acquire a nuclear capability. He clarified
that the Israel Atomic Energy Commission’s (IAEC) timetable
is purely technical in nature, while the Mossad’s considers
other factors, including the regime’s determination to
succeed. While Dagan acknowledged that there is still time
to “resolve” the Iran nuclear crisis, he stressed that Iran
is making a great effort to achieve a nuclear capability:
“The threat is obvious, even if we have a different
timetable. If we want to postpone their acquisition of a

TEL AVIV 00002652 003 OF 005

nuclear capability, then we have to invest time and effort
ourselves.”

¶11. (S) Dagan described how the Israeli strategy consists of
five pillars:

A) Political Approach: Dagan praised efforts to bring Iran
before the UNSC, and signaled his agreement with the pursuit
of a third sanctions resolution. He acknowledged that
pressure on Iran is building up, but said this approach alone
will not resolve the crisis. He stressed that the timetable
for political action is different than the nuclear project’s
timetable.

B) Covert Measures: Dagan and the Under Secretary agreed not
to discuss this approach in the larger group setting.

C) Counterproliferation: Dagan underscored the need to
prevent know-how and technology from making their way to
Iran, and said that more can be done in this area.

D) Sanctions: Dagan said that the biggest successes had so
far been in this area. Three Iranian banks are on the verge
of collapse. The financial sanctions are having a nationwide
impact. Iran’s regime can no longer just deal with the
bankers themselves.

E) Force Regime Change: Dagan said that more should be done
to foment regime change in Iran, possibly with the support of
student democracy movements, and ethnic groups (e.g., Azeris,
Kurds, Baluchs) opposed to the ruling regime.

¶12. (S) Dagan clarified that the U.S., Israel and like-minded
countries must push on all five pillars at the same time.
Some are bearing fruit now; others would bear fruit in due
time, especially if more attention were placed on them.
Dagan urged more attention on regime change, asserting that
more could be done to develop the identities of ethnic
minorities in Iran. He said he was sure that Israel and the
U.S. could “change the ruling regime in Iran, and its
attitude towards backing terror regimes.” He added, “We
could also get them to delay their nuclear project. Iran
could become a normal state.”

¶13. (S) Dagan stressed that Iran has weak spots that can be
exploited. According to his information, unemployment
exceeds 30 percent nationwide, with some towns and villages
experiencing 50 percent unemployment, especially among 17-30
year olds. Inflation averages more than 40 percent, and
people are criticizing the government for investing in and
sponsoring Hamas, saying that they government should invest
in Iran itself. “The economy is hurting,” he said, “and this
is provoking a real crisis among Iran’s leaders.” He added
that Iran’s minorities are “raising their heads, and are
tempted to resort to violence.”

¶14. (S) Dagan suggested that more could be done to get the
Europeans to take a tougher stand against Iran. Under
Secretary Burns agreed, and suggested that Israel could help

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by reaching out to the Europeans. Dagan said that Israel is
already doing this, and would continue to do so. Dagan
reiterated the need to strike at Iran’s heart by engaging
with its people directly. Voice of America (VOA) broadcasts
are important, but more radio transmissions in Farsi are
needed. Coordination with the Gulf states is helpful, but
the U.S. should also coordinate with Azerbaijan and countries
to the north of Iran, to put pressure on Iran. Russia, he
said, would be annoyed, but it would be fitting, as Russia
appears bent on showing the U.S. that it cannot act globally
without considering Russia.

¶15. (S) Under Secretary Burns stressed that the USG is
focused on Iran not only because of its nuclear program, but
also because it supports terrorism and Shiite militias in
Iraq. The U.S. approach is currently focused on the
diplomatic track and increasing pressure on Iran through
sanctions. Work in the UNSC helps to define the Iranian
nuclear threat as one that affects international security,
and not just that of Israel. While UNSC members Russia,
China and Qatar will water down efforts to increase pressure
on Iran, it is still worthwhile to push for a third sanctions
resolution. In the meantime, the U.S. will encourage the
Europeans, Japan and South Korea to implement unilateral
sanctions against Iran outside the UNSC framework. The U.S.

TEL AVIV 00002652 004 OF 005

will continue to encourage banks and financial institutions
to slow down their operations in Iran and financially isolate
it. Regarding military pressure, the Under Secretary noted
that the U.S. has deployed 1-2 carrier battle groups in the
Gulf over the last six months, and that President Bush has
stated that he will interrupt Iran’s activity in Iraq. As
for outreach to the Iranian people, the VOA is now
broadcasting programs in Farsi, and the USG is trying to get
more Iranian students to visit the U.S. to promote
people-to-people relations.

—————————————–
PAKISTAN: ISRAEL WORRIED ABOUT MUSHARRAF
—————————————–

¶16. (S) On Pakistan, Dagan said that President Musharraf is
losing control, and that some of his coalition partners could
threaten him in the future. The key question, Dagan said, is
whether Musharraf retains his commander-in-chief role in
addition to his role as president. If not, he will have
problems. Dagan observed that there has been an increase in
the number of attempts on Musharraf’s life, and wondered
whether he will survive the next few years. Under Secretary
Burns replied that South Asia has assumed vital importance in
American foreign policy since September 11. The U.S. is
committed to denying Afghanistan as a safe-haven for Taliban
and Al-Qaeda activity. The USG will continue to support
Pakistani President Musharraf, and is seeking to boost his
military defensive capabilities. At the same time, the U.S.
is encouraging Pakistan and Afghanistan to work with each
other militarily. Turning to India, Under Secretary Burns
noted that U.S.-Indian economic cooperation is growing, and
that the USG is working effectively to reduce tensions
between India and Pakistan.

—————————–
LEBANON: DAGAN URGES CAUTION
—————————–

¶17. (S) Dagan urged caution with respect to Lebanon, noting
that the results of efforts there to bolster the Siniora
government would impact Syria and Iraq. The U.S. and Israel,
he said, are on the edge of achieving something in Lebanon,
and so cannot afford to drop their guard. What is necessary
is finding the right way to support PM Siniora. “He is a
courageous man,” Dagan said. Syria, Iran and Hizballah are
working hard against him. Dagan noted that much of what is
animating the leadership of Lebanon to take on Syria is
personal: “Hariri, Jumblat and others had their parents
executed by the Syrians.” This anti-Syrian sentiment has
forged an alliance based on personal and national interests.
Siniora has worked well with the situation, but Dagan
suggested that the odds are against him. Under Secretary
Burns replied that the U.S. is trying to give PM Siniora as
much support as possible, and that we would continue to
consult closely with Israel on Lebanon. He noted that he
would return to Israel in October.

——————–
MEETING PARTICIPANTS
——————–

18, (SBU) Accompanying Under Secretary Burns in the meeting
were:
— Ambassador Richard H. Jones
— Acting PM Assistant Secretary Stephen Mull
— Acting Assistant Secretary of Defense for International
Security Affairs Mary Beth Long
— NEA/IPA Deputy Director Nicole Shampaine
— Embassy Tel Aviv Counselor for Political Research
— Embassy Tel Aviv Political-Military Officer (notetaker)

¶19. (SBU) Accompanying Mossad Chief Meir Dagan in the meeting
were:
— Israeli Ambassador to the U.S. Salai Meridor
— Advisor to Foreign Minister Livni Omer Caspi
— Two unidentified Mossad officials

¶20. (U) Under Secretary R. Nicholas Burns cleared on this
cable.

********************************************* ********************
Visit Embassy Tel Aviv’s Classified Website:
http://www.state.sgov.gov/p/nea/telaviv

TEL AVIV 00002652 005 OF 005

You can also access this site through the State Department’s
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JONES

07JERUSALEM1719 2007-08-17 07:56 2011-05-19 23:30 SECRET Consulate Jerusalem

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FOR ABRAMS/SINGH; TREASURY FOR HECHT/GRANT/HIRSON;

E.O. 12958: DECL: 08/13/2017
TAGS: EFIN ECON KWBG PTER OVIP
SUBJECT: (S) FAYYAD ASKS U/S LEVEY FOR HELP WITH QATAR AND
TRADE-BASED MONEY LAUNDERING

Classified By: Acting Principal Officer Thomas Duffy, for reasons 1.4 b
,d.

¶1. (S) Summary. Palestinian Authority (PA) Prime Minister
Salam Fayyad told Under Secretary of Treasury Stuart Levey
that Qatar was “”willfully bad”” on issue related to financing
of terrorist organizations, including HAMAS. He said the PA
was ready to move on terror financing legislation, but would
begin to shift responsibility for these issues from the
Palestine Monetary Authority (PMA) with which he is
increasingly unhappy, to Government Ministries and his own
office. While committed to going after banks and charities
that provide illicit funding, Fayyad said that trade-based
money laundering was probably a much larger problem – and
much more difficult to counter. Levey promised to respond
positively to requests for assistance from the PA, and asked
Fayyad to articulate them in a way that the USG might best
assist. End Summary.

“”Qatar is willfully bad””
————————

¶2. (S) PA Prime Minister Fayyad, meeting with Under Secretary
of the Treasury Stuart Levey on August 10 in Jerusalem, said
that he was extremely worried about Qatar and its continued
support for HAMAS and other Islamist organizations in the
West Bank and Gaza. “”Qatar is a very lousy country, in every
possible way,”” he said, claiming that they provide “”more
support to fundamentalists than Kuwait or Saudi Arabia.””
Fayyad said that there was lots of money coming into the
region from Qatar. Qatar’s support for these organizations
“”on camera in the Security Council”” (a reference to Qatar’s
recent sponsorship of a Council statement that Ramallah saw
as one-sided) should, he suggested, be a strong indication of
where their financial support is going. He added that Qatar
is using charitable organizations to move funds to Gaza.
“”Qatar is willfully bad on money,”” Fayyad said, and he
encouraged the USG “”to make life difficult for Qatari banks
in the U.S.””

PA ready on terror financing legislation
—————————————-

¶3. (S) Fayyad told Levey that he was prepared to act quickly
to pass legislation that would empower the PA to take action
against accounts involved in illicit financing. He noted
that the PMA had produced draft anti-money laundering (AML)
legislation that he would recommend that President Abbas (Abu
Mazen) sign into law in “”the next two weeks.”” Fayyad said
that the law, once on the books, would be hard to undo.
Fayyad welcomed USG feedback on the draft AML law, and said
that he would provide a copy to Post.

¶4. (S) Fayyad expressed concern about the performance of the
PMA on money laundering and illicit financing over the past
years, and said that he wanted to move the responsibility to
fight these issues to the Government. Fayyad said that the
PA’s Financial Intelligence Unit will not be under the
leadership of the PMA, but will be representative of all PA
agencies. The PMA will be on it, he said, but he thought
that they were too close to the banks and didn’t have enough
“”presence in the system.”” As an example, the PMA closed the
banks on August 9 for a holiday with almost no notice to the
public or other businesses. Though frustrated with the
current management, Fayyad said the problems with the PMA
were institutional, as there were problems with the previous
leadership too. Fayyad encouraged the USG and others to
continue to interact and do business with the PMA, but said
he wanted to shift the discussion with the U.S. on illicit
financing to the Government.

Focus on trade-based money laundering
————————————-

¶5. (S) “”We continue to look at bank accounts and donations to
charities,”” Fayyad said, which provide a source of regular
but small scale transfers of illicit funds. He agreed that
while banks and charities remained an area of concern, but
suggested that the U.S. look more closely – and provide
assistance – in the area of trade-based money laundering.
While still studying the problem, Fayyad said he expected it
was a “”main channel”” for illicit financing into the West Bank
and Gaza. He said he particular concerns about Hebron and
Gaza.

¶6. (S) One indication of the likely scope of the problem, he
said, was the “”suspiciously large”” deposit base in the West

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Bank and Gaza. Even as the economy deteriorates, the deposit
base continues to grow, leading to a “”macro-picture that
doesn’t make much sense””, and signaling the presence of a
significant informal economy. “”I worry that most of this
goes to finance bad things,”” he said. Fayyad promised the
USG the PA’s diagnosis of the suspected money laundering
situation, but he warned that the trade-based operations were
highly efficient and very difficult to detect. Fayyad said
that the PA would be more aggressive in this area. “”We need
sufficiently trained people.”” Levey said that Treasury would
be ready to help once Fayyad determined how the USG could
best assist the PA. . Remarking that he is “”not happy with
European aid,”” he added that he would provide more guidance
“”in the next couple weeks”” on how the USG could assist with
improving transparency in and safeguarding the PA’s financial
system.

Don’t collapse banks in Gaza
—————————-

¶7. (S) Fayyad said that he did not want to see the banking
system in Gaza, despite its problems, entirely collapse. He
worried that such a collapse would create long-term
difficulties in Gaza and would have serious repercussions on
the banking sector in the West Bank. Therefore, he would not
recommend that the Israeli banks cut off their relationships
with the Gaza banks. However, Fayyad said that he would
trust Israeli Central Bank Governor Stanley Fischer on this.
“”I have a better relationship with the Central Bank of Israel
than with the PMA.””

¶8. (S) Fayyad expressed appreciation action taken by
Jordanian banks, and in particular by the Arab Bank.
“”Notwithstanding U.S. litigation, Jordan’s doing a good job.
I am worried more about the smaller banks,”” he said.

¶9. (U) U/S Levey has cleared this message.
DUFFY

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