Update on the FBME Bank Case

18 September 2014

On 17 July, FinCEN announced a Notice of Findings and a Notice of Proposed Rulemaking against FBME Bank. The notices allow for public comments to be submitted to FinCEN by 22 September. The international law firm Hogan Lovells was instructed to engage with FinCEN and they in turn retained anti money laundering (AML) experts at Ernst and Young to carry out a thorough and independent investigation of FBME Bank and its policies and procedures, especially with regard to AML policies, procedures and practices in line with EU regulations, and specifically the latest Central Bank of Cyprus Fourth AML Directive.

At 11 pm on 21 July the Central Bank of Cyprus announced that it was placing the Cyprus branch of FBME Bank – a healthy and highly liquid bank – under a Resolution Decree designed for use with insolvent institutions. This was done without coordination with the Bank of Tanzania, the Home Supervisor of FBME. As a result the authorities in Tanzania appointed a Statutory Manager to run the affairs of FBME’s head office, its Tanzanian branches and to oversee the Cyprus branch. All attempts by the Statutory Manager in Dar es Salaam to work closely with the Cyprus Central Bank have proven fruitless on account of the refusal to cooperate by the Cypriot authorities.

The Central Bank of Cyprus appointed Dinos Christofides as the Administrator of the Cyprus branch on 22 July. He announced that his intention was to sell the branch, again without recourse to the Home Supervisor or the owners of FBME. Mr Christofides had a relationship with a Swedish financial services firm which has announced its wish to acquire a banking license in Cyprus. Presumably aware of the potential serious conflict of interest, Mr Christofides stepped down from his position with this firm in a resignation letter on 31 July backdated to 28 July.

At no point did Mr Christofides attempt to coordinate a sale with the owners of FBME who, as a consequence, launched a legal campaign against what they described as a ‘hostile takeover’. Analysts have described the action of the Central Bank of Cyprus as an “expropriation” and have questioned the motives and practices of the Cypriot authorities.

On 30 July, international lawyers and forensic accountants arrived in Cyprus to carry out a comprehensive review of FBME Bank’s anti money laundering compliance programme and to conduct transaction testing in order to respond to the notices issued by FinCEN. They were refused access to FBME’s premises by the Administrator, Mr Christofides, without explanation, a decision the CBC overturned on advice by the Supreme Court.

Operations in FBME Bank’s Cyprus branch were declared suspended under Resolution measures for 23, 24, 25 and 28 July. The branch then reopened as it had to under law, but in fact transactions continued to be refused by the Administrator. Thus, contrary to the spirit and letter of the law, the branch remained effectively closed. The Administrator claimed this was due to the refusal of correspondent banks to deal with FBME even though management was advising him of banks who had agreed to honour correspondent obligations.

Despite repeated attempts to get written statements approved by the Administrator so that depositors and the public could be advised of the facts of the situation, all that he permitted was an anodyne comment to be given verbally. Aware of the damage this block on communications was causing to the bank and its depositors, FBME’s shareholders launched their own media campaign.

Unable to obtain funds to pay merchants, FBME Card Services suspended operations on 7 August. Despite pleas to the Administrator to release monies for Card Services to resume in business, the Administrator refused all requests, directly leading to the redundancy of 72 Card Services’ employees and the suspending of a viable company.

On 18 August, the Administrator ordered correspondent banks holding FBME deposits to transfer these funds to an account in the Central Bank of Cyprus. This move was prevented by the Statutory Manager in Tanzania who ordered the taking down of the SWIFT lines. No explanation has been given for the action of the Administrator in Nicosia, and in this regard it is important to note that the Central Bank of Cyprus currently holds over 100 million Euros of FBME deposits.

On 1 September, the Administrator announced that some depositors could gain access to their funds in Cyprus in amounts of EUR10,000 a day, while other depositors still had their accounts frozen. Those who were permitted access to their money had to obtain a cheque from FBME and open an account at the Bank of Cyprus. This half-measure, possibly made because of all the criticism the Central Bank was receiving, still precluded depositors based outside Cyprus from accessing their funds and those who have frozen accounts, though they are in the same depositor class.

Stung by criticism of his actions in inflicting serious harm to depositors and businesses both in Cyprus and abroad, the Administrator has made verbal threats to FBME employees, including the withholding of payments and salaries. There is evidence of damage done, too, to the reputation of Cyprus as a centre for business as a result of his actions.

On September 5, the fbmeltd.com website of the shareholders was taken down in what appeared to have been a massive targeted denial-of-service hacking attack. Within 24 hours the site was recovered and moved outside the Republic of Cyprus.

The District Court hearing calling for a halt to the proposed sale of the FBME Cyprus branch is adjourned in Nicosia on 15 September when the Republic of Cyprus failed to file its opposition on time. The new date is 29 September.

The report of the forensic accountancy investigation is prepared for submission to FinCEN.