TEL AVIV—A lawsuit in a New York federal court has put Israel's leader in an extraordinary bind, between nurturing a growing relationship with China and pursuing commitments to fight terrorism and help an American family seeking recompense for the death of a son.
The challenge comes to a head in July, when a former Israeli official is scheduled to testify in a terror-financing case that began six years ago, when the Israeli government asked Florida residents Tully and Sheryl Wultz to sue the Bank of China and pledged to help them with the case, the couple said.
The aftermath of the 2006 suicide bombing in Tel Aviv that killed Daniel Wultz and 10 others.
The couple and Israeli officials allege that the bank knowingly allowed Iran to use it to deliver funds to the Palestinian militant group that killed their 16-year-old son Daniel in a 2006 suicide bombing in Tel Aviv. The bank has denied the accusation and said it wouldn't comment on pending litigation.
The case hinges, the Wultzes said, on a pending deposition by a former Israeli intelligence official, who is expected to testify that he was present at 2005 meetings in which Israeli officials told China that Bank of China accounts were being used to fund militant organizations including Islamic Jihad, the Palestinian outfit that claimed responsibility for the attack that killed Daniel Wultz. The Wultzes say that they intend the deposition to show Bank of China is culpable for refusing to act to close the accounts.
But the Wultzes and a U.S. congresswoman say China is now pressing Israeli Prime Minister Benjamin Netanyahu to withdraw permission for the former intelligence official to testify.
"If they withdraw support for this case, it would be another tragedy on top of a tragedy," said Ms. Wultz.
Mr. Netanyahu's office declined to comment on the case. Chinese government officials also declined to comment.
The congresswoman, Rep. Ileana Ros-Lehtinen (R., Fla.), a member of the House Foreign Affairs Committee, wrote to Mr. Netanyahu on Wednesday to urge him to follow through on what she described as Israel's commitments to the Wultzes and allow the testimony to proceed.
A Florida family files suit after a Tel Aviv bombing
2005 Israel tells Chinese officials that Bank of China accounts were being used to funnel money from Iran to Islamic Jihad, according to affidavit by a former Israeli official.
April 2006 Florida resident Daniel Wultz, 16, is killed by an Islamic Jihad suicide bomber at a Tel Aviv restaurant
2007 Israeli officials ask Daniel's parents to file suit against the Bank of China, Iran and Syria in U.S. court, using U.S. antiterrorism statutes, according to the Wultzes.
2008 The Wultzes file suit against the Bank of China, Iran and Syria in a Washington, D.C. federal court. The Bank of China case is later moved to a New York federal court.
April-May 2012 Israeli Prime Minister Benjamin Netanyahu assures the Wultzes that a former Israeli intelligence official will be allowed to provide testimony in the case, according to the Wultzes and Rep. Ileana Ros-Lehtinen in a letter to Mr. Netanyahu
March 2013 The former Israeli official notifies lawyers in the case that he is prepared to testify
April Chinese officials raise the case with Israeli Ambassador to China Matan Vilnai, according to people familiar with the case and an Israeli official.
May Prime Minister Netanyahu makes first official visit China since 1998 in effort to boost trade ties.
June Officials from Mr. Netanyahu's office tell the Wultzes and Congress members that they are reconsidering whether or not to allow the former official to testify, according to the Wultzes and congressional aides.
July The former Israeli official is scheduled to give testimony in the case against the Bank of China.
"We are aware of mounting pressure by the BOC and other Chinese interests…to interfere with the U.S. proceedings and the deposition," she wrote, according to a copy of the letter viewed by The Wall Street Journal. The Bank of China declined to comment.
Ms. Ros-Lehtinen urged that the official testify "to reaffirm Israel's solemn commitment to the victims of terror to ensure that justice be done."
A congressional staffer who has served as a link between the Wultzes and Israeli government said Mr. Netanyahu's office is now undecided about allowing the testimony, despite previous pledges to allow it.
If Israel prevents the deposition, Mr. Netanyahu would risk being accused of betraying the commitment to battling terrorism on which he built his political career. He would also risk alienating two of Israel's most powerful congressional allies, Ms. Ros-Lehtinen and House majority leader Eric Cantor, who is Ms. Wultz's first cousin. Mr. Cantor's office didn't return calls seeking comment.
If Mr. Netanyahu supports the lawsuit, he could undermine a growing relationship with China that is worth over $8 billion a year to the Israeli economy.
Israel also needs China to help tighten the screws on Iran over its nuclear program, which for Mr. Netanyahu is Israel's biggest security threat.
In 2005, in the midst of the second Palestinian Intifada, Israeli intelligence officials mapped what they said was a network used by Iran to funnel cash to Islamic Jihad in Gaza, using Bank of China accounts, according to Israeli officials. Israeli officials went to Beijing, presented Chinese officials with evidence and asked them to close the accounts, according to an affidavit by a former Israeli official. The accounts remained open, Israeli officials said.
In April 2006, Tully Wultz and his son Daniel were eating at a food stand near the Tel Aviv bus station, when an Islamic Jihad suicide bomber blew himself up, killing Daniel and 10 others. Mr. Wultz was wounded.
In 2007, senior Israeli officials from the prime minister's office contacted the family's lawyers with a proposition, according to the Wultzes. The officials said the Wultzes could bring pressure to bear on Palestinian terror financing networks by using tough U.S. terrorism statutes only available to American citizens, according to the Wultzes.
The Israeli government pledged their full support, and offered the family classified intelligence, including scores of suspect Bank of China account numbers and records of money transfers, the Wultzes said.
"They asked us to do the lawsuit, and they said they'll fully cooperate with us and give us anything we need to win," said Mr. Wultz. That pledge was reaffirmed by Mr. Netanyahu's office in 2012, according to emails to the Wultzes reviewed by The Wall Street Journal.
The original lawsuit, filed in Washington in 2008, accused Iran and Syria of funding Islamic Jihad, and Bank of China of failing to close accounts used to fund the group. The Bank of China case was later moved to the U.S. District Court for the Southern District of New York.
The Wultzes won their case against Iran and Syria, with a judgment that orders that two countries to pay $323 million in damages, which remain unpaid.
The Bank of China case was raised in meetings between Israeli and Chinese officials in April, an Israeli official said.
The following month, Mr. Netanyahu took his first official trip to China since 1998, saying it was aimed at boosting Israel-China trade from $8 billion a year to $10 billion within three years. Mr. Netanyahu said the trip, which yielded a new $400 million trade agreement, was a success.
Write to Charles Levinson at email@example.com
A version of this article appeared June 22, 2013, on page A6 in the U.S. edition of The Wall Street Journal, with the headline: U.S. Court Case Tests Israeli Resolve.