Who Bears the Risk of Violating Personal Sanctions?

When US President Donald Trump took office, it seemed the question of personal sanctions against extremist right-wingers in Israel was off the table. Indeed, in one of his first decisions, Trump lifted the sanctions imposed on a small number of Jewish settlers whom the United States had accused of committing violence against Palestinians in the West Bank, as well as on several extremist right-wing organizations, including Order 9, which took action to prevent the passage of humanitarian aid trucks into Gaza. However, at the beginning of June 2025, new international sanctions on Israelis were imposed. On June 10, several western countries (among them the UK, Canad and Australia) announced the imposition of sanctions on Finance Minister Bezalel Smotrich and National Security Minister Itamar Ben-Gvir.

On June 4 (before personal sanctions were imposed on him), Smotrich sent a letter to the Israeli Supervisor of Banks, demanding that he prevent the implementation of personal sanctions on Israeli citizens. Smotrich issued a threat to the Israeli banks that, if they refuse to provide services to sanctioned individuals, he will promote legislation obligating them to pay heavy compensation to these customers. He further declared that if the banking system refuses to provide the services, he will take action to obligate the Bank of Israel itself to provide them.

The very next day, the Supervisor of Banks published a draft directive to banks on the subject of sanctions. It appears these directives are indeed aimed at moderating the banks’ “zero risk” policy toward anyone included in the sanctions list, which was supported by the Banking Supervision Department.

The Supervisor of Banks’ draft directive states that an automatic sweeping refusal to provide any service to anyone included in the sanctions list will be deemed “unreasonable refusal” to provide banking services. The Supervisor is also obligating banks to formulate detailed policies and procedures regarding the services they will provide to customers included in the sanctions list. Additionally, the draft directive states that banks must ensure they possess the necessary expertise (including by way of external experts) to contend with the sanctions.

Purpose of the Draft Directives

The purpose of the draft directives is to try to compel banks to formulate a more flexible policy toward implementation of the sanctions.

We note a few salient points:

A sanction imposed by the US Treasury Department, which has global applicability and violation of which may place financial institutions at considerable risk, is not the same as sanctions imposed by European countries. European sanctions are largely territorial by nature, i.e., their applicability is limited to rights and assets located within the borders of the sanctioning country.

Furthermore, sweeping sanctions, which freeze all assets of a particular person and prohibit all economic activities with him, including disposition of his property, are not the same as partial sanctions designed to prevent the execution of specific actions.

The risks also vary, of course, depending upon whether the Israeli banking corporation is subject to the regulatory authority in the sanctioning country due to its banking activities in that country, or if it has no banking activities in such sanctioning country.

Consequently, considerable expertise is needed to deal with the complexities and nuances of each sanction regime. This is a dynamic, evolving issue with substantial repercussions. Demanding that bank tellers contend alone with these dilemmas is an unreasonable expectation that could prompt banks to adopt a straightforward, unequivocal policy, notwithstanding a public protest that may exact a price on the bank. (See previous instances of calls for boycotts due to the perception a bank has a particular political leaning.)

Even if banks are aided by sanctions experts, the policy the Supervisor of Banks is pushing to adopt will still create an impossible situation for them. If a bank aligns itself with the international banking norm, it will be exposed to sanctions for violating the Israeli Banking (Service to Customer) Law. On the other hand, if it complies with Israeli law, it will be at risk of violating international sanctions.

In other words, banks will often have to ask themselves, “Who has the heaviest hammer?” At the same time, it is hard to believe banks in Israel have the risk appetite to violate US sanctions, or are willing to assume the legal and economic risks involved in aiding and abetting violations of sanctions imposed by other countries.

The policy being adopted by the Supervisor of Banks, which, coincidentally or not, aligns with Smotrich’s policy, is one of risk transfer. The imposition of personal sanctions by various western countries on individuals and organizations in Israel derives from actions relating to political activities. Only the Israeli government has the power and capability to contend with international sanctions and the risks they create. However, instead, Smotrich is transferring that risk to the banks.

This policy is unreasonable. The State of Israel should have prevented the imposition of sanctions, or guaranteed indemnity or insurance to banks that assume the risk. However, it did neither. Under these circumstances, banks have no choice but to develop solid expertise in the sanctions field, enabling them to contend with the Supervisor of Banks’ directives, so long as the State refuses to assume the risks deriving from the imposition of sanctions.

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Adv. Niv Polani is an of counsel on banking law at Barnea Jaffa Lande.

Prof. Amichai Cohen is an of counsel on international law at Barnea Jaffa Lande.