The lawsuit revolves around allegations that Bank of China knowingly allowed Palestinian terrorists to use its accounts to finance their operations, including the suicide attack that killed 16-year-old Daniel Wultz, and 10 others. Bank of China denies the allegations.
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The parent's filing revealed for the first time the existence of a secret unit run jointly by the Mossad, Shin Bet and National Security Council under the auspices of the Prime Minister's Office which is charged with blocking the transfer of funds to terror organizations.
The unit was established in 2002 and answered directly to then-Prime Minister Ariel Sharon and Mossad head Meir Dagan. It was headed by Uzi Shaya and Shlomo Matalon.
According to a report filed by Yedioth Ahronoth's Nahum Barnea and Shimon Shiffer, the unit enlisted bereaved families and encouraged them to file civil lawsuits against financial institutions funneling money to the terror groups who had killed their loved ones.
The Israeli government for its part supplied them with incriminating intelligence information regarding the transactions, as well as offering the send security officials to testify on their behalf.
Wultz's parents, who live in Florida, hoped that evidence from Shaya, a former Israeli intelligence officer, who allegedly told Chinese counterparts in 2005 about the suspicious bank transactions, would prove decisive.
But in May 2013, Netanyahu, together with his wife and children, flew to China for a highly publicized state visit and the promise of Shaya's testimony evaporated. The family's lawyers, which learnt about Israel's change of heart at a later date, were furious, and threatened to subpoena Shaya. The damage was done: The bereaved family felt betrayed and the US claimed that Israel abandoned the fight against terror.
After initially helping Wultz's parents prepare the US lawsuit against China's fourth largest lender, the Israeli government hit the brakes and filed a petition seeking to prevent Shaya from giving testimony.
The documents filed on Tuesday by the Wultz family lawyers and seen by Reuters, call on a US district court in Washington to reject the Israeli petition, accusing Prime Minister Benjamin Netanyahu of buckling to pressure from China in the case.
Yedioth Ahronoth revealed the affair in July, and in November Israel officially announced to the American court that it would not allow Shaya to testify. The latest development happened Tuesday when the Wultz family lawyers filed a long document to the court meant to undermine the Israeli government's case.
Representatives from the Prime Minister's Office said Wednesday in response that the "State of Israel, who has been under the threat of constant terror attacks since its establishment, acts assertively and determinedly to protect the security of all those residing within its boundaries. As well, the State's authorities have an obligation to ensure that the information that they are revealed to as public servants in the framework of their duty remains classified.
"Therefore the State of Israel has appealed to the American court to cancel the subpoena order that is compelling a (former) Israeli public servant to testify in the United States in a damage claim that was filed by the victims of terror against the Bank of China.
"After a comprehensive examination of the subject, the State of Israel has decided that it will not allow its former worker to give information that he was privy to while performing his duty as a public servant. Providing information, as noted, is capable of damaging Israel's national security, jeopardizing Israel's ability to protect those who are residing in its area due to the threat of terror and other severe threats and damaging international cooperation on the war of terror."
The Wultzes dismiss this argument, saying Israel's government and Mossad had actively encouraged them to launch the case and handed over copious evidence.
"The complaint was filed only after the GOI (Government of Israel) repeatedly assured my attorneys that it would provide cooperation and support for our allegations," Daniel's father, Yekutiel Wultz, said in a written declaration.
"The GOI also identified and voluntarily designated Uzi Shaya as the witness," he said, adding that Shaya had made clear he was happy to give evidence if allowed to.
Under Chinese pressure
In their documents, the Wultzes say they were told in April 2012 by Netanyahu's office that Shaya would testify.
A year later, the position changed. Israeli media reported that Netanyahu had done a U-turn in order to secure an invitation for an official visit to China in May.
"While we are respectful of China's interests, and of the diplomatic pressure to which Israel has been subjected, those interests and that pressure cannot be permitted to obstruct the ability of American courts to hear critical evidence," David Boies, the lead Wultz family lawyer, said in a statement.
Israel has not responded to charges it caved into Chinese pressure. On Tuesday, Netanyahu's office reiterated a Nov. 16 statement, which said Shaya's evidence might jeopardize international efforts to tackle terrorism.
The US legal move coincided with the start of a high-profile visit to Israel by Chinese Foreign Minister Wang Yi.
The 2006 bombing in Tel Aviv came during the Second Intifada. The Wultzes were in Israel on holiday at the time.
Israeli intelligence agencies set up a unit to try to stop funds from reaching Palestinian militant groups, including the Islamic Jihad, which claimed responsibility for the 2006 blast.
Shaya was part of the unit and traveled to Beijing to urge the Chinese government to shutter suspect accounts.
Israel has until January 6 to file a response to the motion.
Shimon Shiffer and Reuters contributed to this report
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