Escalating US sanctions on violent settlers, initially taken as a mostly political rebuke to extremists, are now seen by some inside Israel as a potential threat to the financial viability of all Israeli settlements and companies in the occupied West Bank.
The Biden administration’s new controls on a handful of men and organisations linked to attacks on Palestinian civilians, first announced in February then expanded twice in March and April, have generally been treated in Israel and beyond more as a humiliating public censure of a close ally than as a major political shift.
But experts from across Israel’s political spectrum say this underestimates the ferocity with which the US implements its financial controls and the scope of the new sanctions framework.
They told the Observer that the relatively small list of sanctions targets in West Bank settlements could still prompt financial institutions to draw back from offering services to any people or companies based there, because of fears they could accidentally facilitate illegal transactions.
And while sanctions so far have focused only on violent individuals and small groups, a new executive order gives the US a very broad remit to target any person or entity “responsible for or complicit in … threaten[ing] the peace, security, or stability of the West Bank”.
That explicitly includes politicians who support or enable them, stating actions subject to sanctions include “directing, enacting, implementing, enforcing or failing to enforce policies”, wording that could be used to target people at the heart of Israel’s government.
“Israel must do more to stop violence against civilians in the West Bank and hold accountable those responsible,” US secretary of state Antony Blinken said in a statement that linked the sanctions to supporting the creation of a Palestinian state.
“The United States will continue to take actions to advance [its] foreign policy objectives … including the viability of a two-state solution.”
Many banks are already re-assessing their dealings with the West Bank after a warning from FinCEN, the US government’s Financial Crimes Enforcement Network, said Shuki Friedman, a law scholar, global sanctions consultant and former head of Israel’s Iran sanctions programme.
“Even though the [US executive] order is sanctioning only few individuals, in practice it’s actually casting a shadow on all activities that come through the West Bank,” he said.
“It delegitimises them in a way that if you’re a financial institution, insurance company, institutional investor, hedge fund, anything to do with these activities, you will be cautious about it. You take a step back. This is the real meaning of this order.”
Michael Sfard, one of Israel’s leading human rights lawyers, initially saw the order as a “political message” from the Biden administration as it tried to respond to voter pressure over its support for Israel as the war in Gaza raged. Nearly three months on, he believes the sanctions are potentially the most consequential shift in US policy for many years, one that could even halt the creeping annexation of the West Bank.
“The sanction regime could redraw the Green Line,” Sfard said, referring to Israel’s internationally recognised boundaries from the end of the 1948 Arab-Israeli war.
The Yesha Council, which lobbies the government on behalf of settlers, effectively acknowledged the sanctions reflected a policy shift which could threaten their future, even as it dismissed the bans as “absurd” and said they had “zero impact”.
“This isn’t truly about a few individuals,” Shlomo Neeman said to the Observer, speaking in his capacity as outgoing head of the council. “This is about foreign governments, led by the Biden administration, sanctioning and potentially sanctioning any Israeli who doesn’t share their vision of a so-called ‘two-state solution’.”
The settlement movement began soon after the West Bank, Gaza and East Jerusalem were seized in the six-day war in 1967. Its goal is to take areas officially under temporary occupation, which were supposed to form the heart of an independent Palestine, and build communities and roads that would weave them irrevocably into the fabric of Israel.
Although illegal under international law, there are now 500,000 Israelis living in West Bank settlements, about 5% of the population.
“The Green Line doesn’t exist in the Israeli political system, in Israeli economic life, in transportation and infrastructure. You can live and do business in the settlements without any disruption,” Sfard said.
But if the US expands the list of sanctions targets to include businesses linked to violent settlers it could become impossible for Israeli banks to keep serving businesses and communities in the West Bank.
In the wake of the first wave of sanctions, Israeli institutions came under domestic pressure to keep serving the targets. The public that didn’t understand that if the banks wanted to operate in a global system that runs on dollars, they had no choice about complying with American orders.
Other countries like Russia and Iran have partially shifted their trade to other allies and rebuilt finance systems after coming under US sanctions, but Israel has no real alternatives.
“These sanctions could potentially force Israelis to make a choice, between supporting settler extremists and keeping a connection to the international financial system,” Sfard said. “If they have to chose between a weekend in Rome or shopping in Oxford Street and supporting settlers, I know what many will chose.”
Key to the potential impact of the new US regime are “secondary sanctions”, which are imposed not for doing things the US considers criminal – in the case of the initial sanctions list, attacking Palestinian civilians – but for helping people and companies on that list evade the bans.
Anyone who makes a transaction for someone under sanctions, on purpose or unintentionally, could join them on the US blacklist.
“Very quickly once you have a scattered number of designated individuals and entities the whole West Bank settlement world becomes a minefield,” said Sfard. “The banking system doesn’t want to risk being charged with providing any kind of support to designated individuals. So every attempt to do business means reviewing whether you might stumble on a risk of secondary sanctions.”
Not everyone in Israel thinks the sanctions are a game changer. Human rights activist Yehuda Shaul welcomed the executive order but said if the US wants to halt violence it needs to target funding more directly.
“One shouldn’t only go after violent individuals,” he said, pointing out that young men attacking Palestinians are not managing the broader political project. “At 25 I didn’t have the financial capacity to build a house on hilltop with road and utilities and 500 cows. Someone is funding them.”
Others including Yehuda Shaffer, former deputy state attorney and head of Israel’s financial intelligence unit, believe Israeli banks can stick to very targeted enforcement that will have few wider repercussions.
He described the sanctions as “lip service” from a US administration under pressure. “It looks to me like an attempt to give a sense of even-handed policy, even though to be truthful, the Americans are very much supporting Israel in this war.”
In putting Israel in company with rogue states like North Korea, and some of America’s most bitter international enemies, the sanctions are humiliating.
“It is embarrassing and somewhat disappointing,” said Shaffer. “The sanctions suggest somehow that the Israeli rule of law is not up to American expectations.”
But he thinks the impact will be limited with banks strictly enforcing controls on the individuals and organisations named by the US, while continuing to serve the West Bank more broadly.
Even as he sees cause for hope in tempering violence, Sfard, says it is early days for the programme. “Even if the US means business on sanctions now, it might not stay the course,” he said.
“When trying to introduce new measures to pressure Israel on this issue, it is better not to introduce them than to do it and fail to have any impact, as that gives a sense of power to settlers.”
