(JTA) — When Israeli police found thousands of contraband cellphones in the car of senior Palestinian Authority official Rawhi Fattouh, he was promptly removed from office — for about two months.

A consultant to Palestinian President Mahmoud Abbas, Fattouh was reinstated in May 2008 after his driver, a state employee, confessed to the smuggling, which Israeli border police discovered when searching Fattouh’s car at a border crossing between Jordan and the West Bank.

The scandal drew international media attention, but by 2011, the case had been closed. Palestinian prosecutor Ahmed al-Moghani said his office had no information implicating Fattouh.

Still, the scandal and others like it has been seen by critics as part of a lingering corruption problem that has plagued the Palestinian Authority since it was formed under Yasser Arafat following the signing of the 1993 Oslo Accords.

Long ignored internationally in favor of more urgent business, the problem is now prompting an unprecedented degree of scrutiny from the European Union, the largest donor to the Palestinian Authority. Since 1994, $7.7 billion in EU funds have been transferred to Ramallah.

In December, the European Court of Auditors reported that the Palestinians had been using European money for years to pay Gaza workers, some of whom had not actually worked in seven years. Palestinian Labor Minister Ahmed Majdalani defended the payments, saying the employees had families to support and couldn’t just be cut off, but the European Parliament took a less sanguine view.

Last month, it adopted a nonbinding resolution last month saying that payroll problems raise concerns about money laundering and terrorist financing It noted the Palestinian Authority’s controversial salary payments to the families of terrorists serving time in Israeli jails. In an unprecedented move, the parliament also called for future EU funding to be conditioned on Palestinian compliance with reform recommendations.

“Until now, EU aid was unconditional,” said Guy Bechor, an Israeli expert on the Arab world and a former lecturer at the Interdisciplinary Center in Herzliya. “Now, for the first time, we are seeing serious moves for conditionality and transparency.”

Some analysts connect Europe’s sudden vigilance to anger over the recent collapse of peace talks between Israel and the Palestinian Authority. The EU’s ambassador to Israel, Lars Faaborg-Andersen, warned in January there would be “a price to pay” by both sides if the talks failed.

Others trace it to frustration over Ramallah’s spending habits and a general donor fatigue in Europe, where high unemployment rates and sluggish economic growth have led to belt-tightening across the continent.

“How can the European Union preserve its credibility back home when it pays salaries to people who don’t work, while millions of European citizens are unemployed?” Michael Theurer, chairman of the European Parliament’s Committee on Budgetary Control, wrote in The Wall Street Journal on April 9.

In his op-ed, Theurer linked the Palestinian Authority’s accountability problems to success of Hamas, the governing power in Gaza regarded as a terrorist group by the United States and Europe.

“The more the Palestinian Authority is perceived as corrupt by the Palestinian people, the greater their support will be for Hamas,” he wrote. “Thus, to promote peace and stability, Brussels must help the Palestinian Authority build strong and transparent institutions.”

The reference to Hamas touches on yet another potential complication for EU funding. Last month, Hamas signed a reconciliation agreement with the Fatah movement of Palestinian Authority President Mahmoud Abbas.

An EU-funded Palestinian government with Hamas aboard “would not only mean EU funds for terrorists but would conflict with the two-state solution, which is the very declared goal of the funding in the first place,” said Arie Zuckerman of the European Jewish Congress.

EU officials have said they would consider a Palestinian unity government legitimate if Hamas accepts the principles underlying the Israeli-Palestinian peace process, including recognizing Israel and committing to nonviolence. The Palestine Liberation Organization has said that any interim Palestinian government formed from the reconciliation process would not include Hamas or Fatah ministers but would rather be composed of officials who are independent of the two factions.

Some reports have suggested there are murmurings within the European Union about cutting aid to the Palestinian Authority. If true, that threat may be directed as much at Israel as at the Palestinians, according to Oded Eran, a former Israeli ambassador to the European Union and now a senior researcher at Tel Aviv University’s Institute for National Security Studies.

“The prospect of cutting aid to Ramallah has served as a veiled threat to Israel,” Eran said, “because they assume that doing so would place that financial burden on Israel.”

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Cnaan Liphshiz is JTA’s news and features correspondent in Europe. Based in the Netherlands, he covers the mosaic of cultures, languages and traditions that is European Jewry. Born in Israel, he used to work as foreign news editor for Ma’ariv and as a reporter for Haaretz.