The Federal Bank of the Middle East (FBME) was a Tanzanian-chartered commercial bank that mainly operated from Cyprus. The bank was founded in 1952 in Lebanon but moved its seat to Cyprus. FBME operated under a main banking license that was originally granted in Cyprus, then moved to the Cayman Islands until 2002. A branch license was proposed in Cyprus. Although the bank operates under a main license in Tanzania, the center of activities is in Cyprus.
FBME Bank served high net worth individuals, offshore companies and the local market in Tanzania. Payment systems like cards and internet banking were offered via the business units FBME Card Services and FBME Direct. Both entities were in Cyprus.
Most of the banks customers praise the customer service of the bank while it was still operational. Customer service departments were attainable, call back requests were honored and staff was helpful. The banks’ customers who travelled from abroad for a visit to the bank, often felt pampered; they were taken on day trips and felt welcome. Based on this exemplary work attitude, it is unfortunate that the bank was placed under resolution by the central bank of Cyprus in June 2014 and lost its license to operate in Cyprus end of December 2015.
- Banking license
The bank used a reverse strategy with its banking license where the branch locations provided most the banks’ services. Until 2002, FBME Bank worked under a main banking license that was granted in the Cayman Islands. The subsidiaries of the bank, FBME Card Services, FBME Direct and the main office, worked under the Cayman Islands license until 2002. After the relocation to Tanzania, the branch license in Cyprus remained operational.
The year 2002 is important for the current situation of FBME. The bank was about to lose its main banking license in the Cayman Islands and swiftly needed a solution to avoid the closure of the bank. Around the same time, Ketan Somaia, a notorious Kenyan businessman, used his ownership of five subsidiaries of Tanzania based Delphis bank to give the impression of financial credibility and defraud several investors. The central bank of Tanzania, BoT, intervened and placed Delphis Bank under resolution in 2001, with the aim to sell the bank and its associated main banking license. FBME needed such a license and in an unclear transaction FBME Bank took over the license of the late Delphis Bank that allowed them to stay operational, this time under a Tanzanian banking license. The central bank of Cyprus could have scrutinized the transaction and even reject the requested continuation as a branch of the bank, but they did not. FBME was still in business.
There are several reasons FBME had to leave the Cayman Islands. The official statement from the authorities is that FBME failed to comply with capital controls. Another reason is that the Cayman Islands wanted to implement new legislation for banks with a main banking license. As of 2010, all banks with a main banking license in the Cayman Islands need to have physical presence and substance on the islands. FBME operated thus far as a mailbox firm; they had a main banking license under a ‘mailbox’.
- Business activities and customers
Although its operations took place in Cyprus, considered onshore, the bank had a strong focus on activities to assist offshore companies and high net worth individuals. Most competitors of FBME Bank also operated in other niches and had different business units, resulting in a blurred and diversified operation. Due to its strategy to focus on a specific market, where the bank could excel, customer acquisition was relatively easy and tailor made services were offered to offshore companies and high net worth individuals.
The bank became well known under specific clientele for its clever approach of the market. Loan-back techniques, originated from the thirties, were used in suspicious transactions and taken to a next level. Customers of the bank could use their ATM cards to withdraw funds worldwide.
- Introducers & staff
Potential customers of the bank were often introduced by intermediaries, accountants, lawyers or other professionals. Mostly, a substantial part of the application process and customer due diligence was carried out by these third parties. Because of the involvement of the introducer, who could verify the identity of the beneficiary of the account, bank accounts were opened remotely. There was no need for the customer to visit the bank offices in Cyprus or Tanzania to activate the bank account.
The center of activities of the bank was in Cyprus. The technical infrastructure in Cyprus and the traditional organization determined the geographical location for the main activities of the bank. Since the rules for banks with a branch license differ from the potential a bank with a main license has, FBME was restricted in its operations.
Although the first scratches became visible in 2002, there was invariable confidence in the bank by its staff and introducers. Even today, when the US Court and Judge Cooper, acting as United States District Judge for the District of Columbia, ruled against FBME on all counts, many of the people involved still believe FBME did not do anything wrong and indicate a witch hunt by the authorities on dubious grounds.
- Funding & matching
Banks need capital and although FBME was not allowed by their license to engage in fractional reserve lending, the bank needed capital to constantly enforce its capital ratio, liquidity and solvability positions.
Funding and matching is a process to measure the direction and extent of an asset-liability mismatch through the funding or maturity gap. Like many banks, FBME also offered, via one of its subsidiaries; Saab Financial (Bermuda) Limited, private placement programs with the purpose to reduce capital risks and the creation of additional profit. The Cyprus branch of the bank introduced customers to Saab Financial (Bermuda) Limited. Saab Financial (Bermuda) Limited invested the funds in various opportunities and held an account with the Cyprus branch of FBME.
Customers of the bank who participate in Saab’s investment programs, experience a difficult situation. Saab Financial (Bermuda) Limited holds an account in Cyprus on behalf of the investment company. The beneficiaries of this account, the same as FBME Bank, believe per a statement on their PR platform, that the bank can resume its orderly operations one day. Therefore, Saab Financial (Bermuda) Limited probably does not file a claim for its account with the Cyprus Deposit Guarantee Scheme.
Private placement programs offer an interesting return on investment but the risk is accordingly. In case of liquidation or bankruptcy, holders of such investment notes are often subordinated. There are at least two tangible challenges for FBME customers who made investments in Saab Financial’s private placement programs that, presumably, funded the banks operations. First, the bank lost its license to operate in Cyprus. Second, investment strategies of Saab Financial (Bermuda) Limited are not public. It is not always clear for investors what they participate in. If the private placement program was used to fund the banks’ liquidity, investors have a serious problem since the banks’ customers and other creditors probably get a priority position over private placement investors during liquidation or even bankruptcy of the bank.
- The inducement
The Financial Crimes Enforcement Network (FinCEN), a division of the US Treasury department, disclosed its examination of the internal procedures and some specific cases at FBME Bank in an official Notice of Finding on the 15th of July 2014. This Notice resulted in widespread commotion. The central bank in Cyprus, later followed by Tanzania, placed the bank under resolution and appointed administrators to manage the bank. Accounts were blocked and customers had no access anymore to the internet banking facilities and their cards.
In this Notice of Finding, FinCEN concluded that ‘FBME had facilitated a substantial volume of money laundering through the bank for many years’ and that it had maintained weak anti-money laundering controls. Specific findings in the Notice include:
- The head of an international narcotics trafficking and money laundering network has used shell companies accounts at FBME to engage in financial activity.
- An FBME customer received a deposit of hundreds of thousands of dollars from a financier for Lebanese Hezbollah.
- A financial advisor for a major transnational organized crime figure banked entirely at FBME in Cyprus and maintained a relationship with the owners of FBME.
- At least one FBME customer is a front company for a US sanctioned Syrian entity, which has been designated as a proliferator of weapons of mass destruction. Other relevant findings are disclosed in our article ‘Formal accusations against FBME Bank Ltd.’ that is available on this website.
The Notice of Finding by FinCEN is followed by the Final Rule. For FBME Bank, this Final Rule took effect on the 28th of August 2015. It was designed to prevent FBME from continuing to do business in the United States or in US dollars.
The Final Rule and the fifth special measure, invoked by FinCEN involves a quasi-adjudicative rulemaking process through which the Agency (FinCEN) may rely on classified information unavailable to the target of the rule. FinCEN therefore was allowed not to share all its specific findings with the plaintiffs.
In August 2015, Judge Cooper already stated that ‘based on the present record, the court is not inclined to second guess FinCEN’s exercise of its broad discretion in finding that FBME poses a primary money laundering concern, or its resulting position of the fifth special measure. The court therefore finds that FBME has not established a likelihood of success on the merits of its claim that FinCEN’s ultimate finding is arbitrary and capricious under the APA.’ That conclusion, however, does not relieve the Agency of its obligation to adhere to the APA’s procedural requirements. The APA herein refers to the Administrative Procedure Act.
The court concluded later that ‘FinCEN’s errors were ultimately harmless’; it did not disclose to FBME or the public additional evidence until the comment period had closed and the Final Rule had been issued. If FBME employees tried to conceal information from regulators following FinCEN’s 2014 NOF, it would imply that FBME attempted to stymie FinCEN in this very rulemaking and would be unwilling to work in good faith with US regulators in the future. It will remand, however, for the agency to properly respond to certain comments by FBME.
Although all formal comments from FBME were rejected and summary judgment was granted to FinCEN in September 2016, except to the extent where FinCEN failed to respond to FBME’s significant comments regarding the analysis of the data coming from the Suspicious Activity Reports (SAR), the Final Rule remained ‘to stay’ until the agency furnishes adequate responses to FBME’s significant comments.
- Compliance, KYC and AML
Being considered a ‘primary money laundering concern’ is a heavy statement. It involves the compliance department of the bank and points out weak Know Your Customer (KYC) procedures implemented by the bank. Furthermore, it exposes the lack of weak implementation of Anti Money Laundering inspections.
FBME was known as a bank that was particularly easy to deal with. Things became stricter and even regular customers were asked to complete the Beneficial Owner Profile, also known as ‘Form 706’. Most of the questions on Form 706 relate to ‘Politically Exposed Persons’ (PEP’s). Although this is not confirmed, the trigger to the implementation of the beneficial owner profile probably was a suspicious transfer of 13 million USD in total by an Italian politician in December 2011. Funds were send to Tanzania through FBME Bank in Cyprus. The Guardia di Finanza, the financial unit of the tax police in Rome, scrutinized the transfers as part of an investigation into a Northern Italian political party over a raft of charges of financial irregularities, fraud, embezzlement and money laundering.
As claimed by FinCEN, FBME conducted at least 387 Million USD in wire transfers through the US financial system that exhibited indicators of high-risk money laundering typologies, including widespread shell company activity, short term ‘surge’ wire activity, structuring, and high risk business customers. The original Notice of Finding also states that ‘FBME was involved in at least 4,500 suspicious wire transfers through US correspondent accounts that totaled at least 875 million USD.
One of the administrators indicated that during his appointment as supervisor of the Cyprus branch, he encountered numerous suspicious accounts with appurtenant transactions that no bank should have in its customer base.
- The arbitration tribunal of the ICC
After the bank was placed under resolution, FBME filed, at the International Chamber of Commerce (ICC) in Paris, a request for arbitration against the Central Bank of Cyprus and the Republic. The private procedure is leveraged by FBME Ltd. in an effort to reassure the banks customers. Although the ICC can never appoint a Central Bank to re-open a bank or even return a banking license, it seems that many of the banks customers believe the opposite.
The arbitration procedure discusses responsibility and therefore liability. A verdict is binding and results in a standard predefined fine granted to the liable party. FBME claims 500 Million Euro from the Central Bank of Cyprus.
The verdict of the ICC is private and will not be made public or shared with other stakeholders such as the banks customers. The parties themselves can disclose verdicts and interim conclusions. So far the ICC presented interim verdicts to stop the sale of parts of the bank during the investigative stages in 2014, and access to the banks premises for the banks shareholders.
- July 2014 and beyond
Most actions towards the bank were taken by the central bank of Cyprus, since most of the bank’s activities were managed from Cyprus. One of the first ideas of the central bank to minimize the risk for staff and customers was to sell parts of FBME Bank. This was stopped due to various reasons. First, the bank was placed under resolution for internal issues and not because of the lack of liquidity and solvability. Second, without an order from a judge in court, plain confiscation is not possible. Third, if parts of the bank were in fact involved in suspicious activities, what guarantees does a buyer have refraining him from further prosecution?
In September 2014, the central bank needed to act towards the re-opening or closure of the bank. The FinCEN findings were forceful, and per the court records, FinCEN distrusted FBME on ‘the alleged fact that FBME employees acted to conceal information even after FinCEN issued its Notice of Finding’. The central bank had to allow customers access to, at least, a part of their funds.
The main activity of a Central Bank is to control the nation’s money supply. Central Banks usually have supervisory powers intended to prevent bank runs and to reduce the risk that commercial banks engage in reckless and fraudulent behavior. Therefore, the Central Bank of Cyprus had to act with utmost care.
FBME was excluded from international payment systems like IBAN and SWIFT. Corresponding banks that were needed to make international transfers blocked their nostro accounts on behalf of FBME. The Central Bank feared a run on the bank, allowing both good and bad funds, that initiated the resolution of the bank, to leave the accounts. Simultaneously, the central bank and FinCEN were still working on their concluding findings to present in court.
The Central Bank asked FBME to wire 300 Million Euro to set up a scheme allowing customers with Euro currency on their accounts to withdraw funds by checks. FBME wired 100 Million Euro. Via a complicated strategy, that involved a second bank account in Cyprus for the exact same beneficiary as the account held at FBME bank, checks could be withdrawn daily. A fax had to be submitted daily, checks could be collected and deposited periodically, while keeping the maturity date of checks of 6 months in mind.
In the early days of the scheme it was possible to withdraw 10.000 Euro per day. This daily limit was reduced when the administrator saw he needed a capital injection soon. Until December 2015, it is expected that the deposit to cover the scheme ran down, the scheme was operational.
The Central Bank of Cyprus announced on the 22nd of December 2015 that they revoked the branch license of the bank. Per the EU directives on bank failures, a solution for a bank under external management must be presented within 12 months. Another reason might have been the lack of funds to continue the payment scheme and a possible rejection by FBME to inject new capital.
Four months after the license of the bank was revoked, the domestic Deposit Guarantee Scheme was activated in April 2016. This external insurance guarantee compensates customer deposits for European accounts. The fundament for Deposit Guarantee Schemes is clarified in a European directive, 2014/49/EU and covers up to 100.000 Euro per depositor.
A combination of the lack of a banking license, the activation of the deposit guarantee scheme, a ruling from FinCEN and the gloomy prospects for the bank made a large portion of the FBME staff members redundant. The administrator, Chris Iacovides, ended the contracts of 136 of the bank’s employees.
Employees did not agree to be cut loose and started a strike. Although the bank technically is not a bank anymore after it lost its license to operate in Cyprus, the law applies and must be followed. For over a year and a half staff members were not able to execute their regular duties since most activities were put on hold. Still most the banks employees were loyal to the bank, draining the banks liquidity further.
Staff members claim that they have not been given their statutory notice period before termination of their employment contract. Payment of the proportion of annual leave, 13thmonth salary ratio, bonuses and other accrued benefits were not honored.
Since July 2014 there have been numerous cases, settlements and interim verdicts in court. There was a labor case and several customers went to court to recover their funds. For fund recovery, specific guidelines must be followed and while the bank is under resolution, no claims are assigned. Since a judge can only create a priority position in exceptional circumstances, there is no certainty that these cases are successful. On the contrary, they might cause the plaintiff even more financial damage.
- Administrators as new supervisors of the bank
Immediately after the bank was placed under resolution in July 2014, the Central Banks in Cyprus and Tanzania appointed administrators who became responsible for all the banks activities. The banks management was not allowed to engage in any agreement or transaction on behalf of the bank themselves.
Due to various reasons the central bank had to replace several of the administrators. Over time there was a lot of bad press in relation to the fees these administrators charged. When the second administrator, a London based turnaround specialist with Cypriot roots, was appointed and granted an allowance of 50.000 Euro a month, the shareholders of the bank were astonished.
The administrators were responsible for outgoing payments and had to approve the money streams coming in and going out of the bank. All checks in the before mentioned payment scheme had to be approved by the administrator. Another task of the administrator was to prevent the central bank from having to act as a lender of last resort.
In Tanzania, the central bank also appointed an administrator. Lawrence Mafuru, with a working history in banking and finance related tasks for the Tanzania government, started his position as administrator of FBME Tanzania in July 2014. Mafuru is well connected on the highest levels of the political arena and is a ‘Political Exposed Person’.
The radical differences in mentality between Africa and Europe creates friction. An investigative report where Mafuru is named ‘mister 10%’, based on historical favorable ‘deals’ stakeholders could make with him, is an eyesore for the hundreds of customers of the Tanzania bank. More and more of the bank’s Tanzania customers are afraid to lose their funds, despite the unfortunate PR by Nigel Perry via the FBME Ltd. news platform.
- The current situation
Closing arguments in Cyprus court were finalized in November 2016. The next step is the verdict of the judge. There is no possibility for appeal by either the central bank or FBME. The verdict in Cyprus court is binding. An interesting moment in this saga. It is likely that the judge orders the liquidation of the bank, including the main office in Tanzania as well as the branch in Cyprus.
Early November 2016, at the time of this publication, the deposit guarantee scheme, hereinafter referred to as DGS is open for seven months. Although only 977 of the 6.500 account holders in Cyprus filed their claim thus far, a verifiable amount of 35 Million Euro is paid out to account holders.
The deposit guarantee scheme is an external insurance. Premiums are paid by participants in the scheme. It is mandatory for banks and branches of (foreign) banks to participate in this scheme. Violation results in the suspension of the license by the central bank. FBME paid premiums on the deposits in Cyprus. Although most of the Tanzania accounts were managed from Cyprus, FBME failed to pay premiums for these accounts, excluding them from DGS insurance coverage.
It is noteworthy to mention that, due to the structure of the DGS, specific industries and markets are excluded from insurance coverage. Additionally, the DGS has its roots in the European directives on bank failures and therefore the European single market applies for pay-out of insured funds. There are however some practical challenges to receive funds outside of Cyprus; although there are no legal grounds to block a transfer to another European bank, there are banks that reject account opening for FBME customers and banks that are dependent on the same corresponding banks as FBME Bank used for international banking. When a bank needs to use the same correspondent banks as FBME used to receive compensation for their blocked FBME account, the transfer can’t go through.
International banking is complicated. A cross-country bank transfer does not happen direct. To make a bank transfer, banks need to have a direct relationship with each other. When banks do not have such relationship, they need an intermediary. This intermediary is called a ‘corresponding bank’. Corresponding banks are, in general, big in size, operate global and have many connections with other banks.
FBME Bank was, in comparison with other global financial institutions, a relatively small bank. Therefore, the bank needed correspondent banks for all cross-border transactions of its customers. After the central banks placed FBME Bank under resolution, the accounts held at FBME’s correspondent banks were blocked. Funds on these accounts were frozen and a substantial part of the liquidity of FBME Bank is still blocked waiting for a court order, able to release the funds and return them to the central banks.
- The DGS application process
Customers of FBME Bank can file their claim with the central bank of Cyprus, as administrator of the DGS. Before a claim can be filed successfully, the identity of the customer must be officially verified. Additionally, when the customer is a business entity, the company’s history and status is determined and matched with the customer files at FBME Bank.
Customers of the bank, with an account in Cyprus, must visit FBME Bank in Nicosia in person for verification purposes. Once cleared, the customer receives a DGS cover sheet completed by FBME Bank with a bundled set of certified documents and the signed and completed statement of particulars, that the customer needs to present to the central bank of Cyprus in person.
After the claim is filed with the central bank, it takes on average 7 to 20 days before payment of the insured balance, with a maximum of 100.000 Euro, is paid out by the guarantee fund to a second account of the customer within the European Economic Area. The DGS is an external insurance guarantee and therefore the liquidity of FBME Bank goes up when customers receive insured payments from a third party. This is a beneficial situation for customers with accounts that do not qualify for the DGS, customers with a balance that exceed the maximum coverage of 100.000 Euro and those with accounts in Tanzania.
Not every claim for DGS compensation is granted. There are exclusions based on activities and industries and there are rejections based on the ESA 2010 statistical classification. Only accounts where premiums are paid for by FBME can qualify to receive insurance funds. Accounts that were not included by administrative error therefore don’t qualify.
Several applications are further scrutinized and pending due to the status of the account holder. Licensed investment firms cannot receive DGS compensation. To avoid mistakes, companies with names that include terms like ‘investment, holding, finance, leasing, and trust’ or variations, are handpicked and investigated. Part of the investigative process is to exclude that the entity is a licensed investment firm in the broadest sense. Authorities, agents and service providers can be contacted by the Committee of the ‘deposit guarantee and resolution of credit and other institutions Scheme’ to determine the exact status of the company.
Those who travel to Cyprus and see their claim rejected or pending, can request a second opinion executed by the Committee of the ‘deposit guarantee and resolution of credit and other institutions Scheme’. A formal request for a second opinion must follow guidelines as stated in the directives and the law.
There are many customers of the bank with a relatively small balance on their account. Since customers of the bank must file their claim in person, it is not always feasible to travel to Cyprus. The next step to dismantle the bank might be more helpful for this group of customers. The liquidation phase of the bank provides customers, with a valid claim, a pro rata payment when liquidity becomes available. The bank’s assets are dividend in short term and direct accessible liquidity, and long term liquidity. Short term liquidity is insufficient to pay the total account balance, resulting in a splintered payment schedule in tranches.
It is based on the current total asset value of the bank expected that customers don’t see their total account balance returned during the liquidation stage. This creates a mandatory action for Cyprus account holders to file their claim with the DGS before April, when they want to recover a larger portion of their account balance.
From the early days of the active DGS, many irregularities were discovered in the administration of the bank. Several customers were, when FBME was still fully operational, never asked for an update of their most recent passport or even a yearly certificate of good standing from, their company showing the legal standing of the company. This creates a fiscal challenge in the home country of the beneficiary of the account and shows a violation of the duty of care by the bank.
- A potential bail-in situation like Laiki Bank
Laiki Bank, also known as Cyprus Popular Bank, was the second largest banking group in Cyprus until it was shuttered in March 2013 and split into two parts. The ‘good’ Cypriot part was merged into Bank of Cyprus (including insured deposits under 100,000 Euro) and the ‘bad’ part or legacy entity holds all the overseas operations as well as uninsured deposits above 100,000 Euro, old shares and bonds. The uninsured depositors were subject to a bail-in and became the new shareholders of the legacy entity.
Indistinctness, uncertainty and a total lack of clarity by those involved, combined with the one-sided information presented by FBME bank fed the public opinion that a similar catastrophe as with Laiki Bank was about to happen. Fortunately, this is far from the truth.
FBME Bank lost its license to operate a branch in Cyprus in December 2015. After the suspension of the banking license, the bank cannot re-open and the liquidation process must start. Additionally, this event made it impossible for the government to trigger a bail-in of the bank where customers are forced to exchange their account balance into stocks of the bank. The bank is not a bank anymore and there is no potential to engage in profitable activities. A bail-in situation is therefore technically ruled out.
- Too big to fail
Stakeholders on the side of FBME Bank and its owners state that the case against the bank is a witch hunt initiated by the authorities. The closure of the bank deemed unnecessary, compared to large financial institutions like BNP Paribas and HSBC who received Billion Dollar fines for money laundering accusations in the past years.
Although it is seemingly unfair that FBME Bank is placed under resolution and eventually lost its license, the actions by FinCEN and the Central Bank of Cyprus are understandable.
The main reason to place the bank under resolution was the risk of a bank run that would inevitably result in challenges for the solvability and short term liquidity of the bank. The result of a bank run is often the begin of a forced bankruptcy procedure, followed by heavy losses for the customers of the bank. Without having executed a formal investigation and accusation resulting in a filing in court, this situation should be, avoided. At the same time, the original accusations by FinCEN were serious enough to trigger further criminal investigations.
The equation with larger banks that were fined is slanting. FBME Bank tried to compare its case with the largest financial institutions in the world. The technical term of such a financial institution is a ‘Systemically Important Financial Institution’(SIFI). The failure of a SIFI can trigger a global financial crisis. It would be disastrous to the greater economic system and must therefore be supported by governments when they face potential failure. Comparing FBME Bank with a SIFI is out of proportion. There is another reason for which there is a difference between FBME Bank and other banks that were accused of money laundering.
FBME operated as a relatively small bank in a specific niche market. This market totaled half of its activities. The lack of diversification and focus on the group of offshore businesses and high net worth individuals potentially terminated its future.
The rigorous accusations against FBME are strong. US Court stated in 2015 that the court is not inclined to second guess FinCEN’s exercise of its broad discretion in finding that FBME poses a primary money laundering concern, or its resulting imposition of the fifth special measure. The court therefore concludes? that FBME has not established a likelihood of success on the merits of its claim that FinCEN’s ultimate finding is arbitrary and capricious under the Administrative Procedure Act.
- Depositor risks
In the early days of the resolution, it was believed that the bank was very liquid. Creative bookkeeping showed liquidity percentages that exceeded the outstanding liabilities. An interesting fact but utopia for most banks in the world. Further investigation of the claimed liquidity showed a difference in short term and long term liquidity. Additionally, since the closure of the bank there has been a decrease of the value of the bank due to the check scheme where the banks customers withdrew millions of their deposits. Also, the ongoing salary payments and operational costs for the bank, and later the severance pay and other emoluments for the banks redundant employees had an impact on the liquidity of the bank. It is tedious to see that the stubborn attitude of the bank has a negative impact on the value of customer deposits in Cyprus and Tanzania.
The statements made by Judge Cooper in the United States District Court clearly show that the case between FBME Bank Ltd. and ‘Lew’ is about to end. Judge Cooper is not inclined to second guess FinCEN’s exercise of their claims that FBME poses a primary money laundering concern. Furthermore, the court finds it exceedingly unlikely that FBME could mount a credible challenge on the point where FinCEN failed to disclose supporting documents or information on specific parts of their investigation. Above all, Judge Cooper denied all claims made by FBME but granted their request to receive a formal response and explanation of the analysis of the suspicious activity reports that eventually led to the publication of the Notice of Finding and Final Rule.
- Responsibility and liability
Until the judges in Paris, Washington DC and Nicosia present their final verdicts it is uncertain who is responsible for the current situation. Responsibility is a strong and legal statement. It results in liability and opens the doors for individual claims towards the polluter. The Central Bank of Cyprus, US Treasury, the FBME group of companies and the shareholders, all have liability insurance policies. Premiums have already been paid for these insurances, the only question is the scope of personal conduct to avoid the insured event.
The claim of liability on your behalf can only be filed after the liquidation phase or even bankruptcy procedures are completed. The insurer cannot calculate exact damages when there is still a possibility that funds can come from a different source.
Judges in Europe, where claims of liability are probably filed, have not been very keen to assign indirect or non-related damages in the past. It is therefore expected that customers of the bank can claim the monthly CAD costs for the accounts, a portion of their travel costs and the fees paid to their legal advisor. Although it is premature at this stage to start any procedures to claim additional damages, it is convenient to know that there are possibilities in the future.
- Risk for the Cyprus taxpayer
Fear was spread out by third parties that actions taken by the Central Bank of Cyprus could result in risk for the Cyprus tax payer. There is always risk involved when actions are taken before courts issue a binding verdict, but in the case of FBME Bank there is no tangible evidence that Cyprus tax payers are influenced by the actions taken by the Central Bank.
The bank was placed under resolution to prevent a bank run. This is exactly what a Central Bank should do to protect customer interests. The banks license was revoked almost a year and a half after the resolution was affected. In an official statement, the Central Bank explained that FBME Bank for reasons relating to its financial condition does not appear for the time being able to repay deposits to its clients and deems that FBME Bank Ltd – Cyprus Branch will not be able to do so in future.
The case in Paris at the arbitrage tribunal of the ICC however needs special attention. It is unlikely, but when the ICC rules in favor of FBME, an unconditional claim of 500 Million Euro is rewarded. Although the Central Bank is insured for such events, FBME spokesmen expect that the insurance is not called but the tax payer must pay if FBME wins the case. An unusual thinking process.
- Court cases, verdicts, administrative rulings, fines and further evidence
Numerous storylines finally come together. In Cyprus court, the Central Bank asked the judge to approve the liquidation of the bank. This case is not interdependent with the cases in the USA (FBME vs Lew) and at the ICC Tribunal in Paris (FBME vs CBC).
US Court: FBME Bank Ltd. vs. Lew
The United States District Court for the District of Columbia is appointed to prosecute the case between FBME Bank Ltd. and Jacob Lew. Lew is the Secretary of the Treasury Department. From this capacity, Jacob Lew is responsible for the daily operations at governmental divisions like FinCEN. Christopher R. Cooper is the United States District Judge responsible for the case. Case number 15-cv-01270 CRC was assigned to the civil action. A criminal case that can be the result of the final verdict granted to Lew takes place in criminal court, where a different case number is assigned.
Although FBME could have questioned the initial findings that FinCEN used to motivate the final ruling against the bank, strange enough, it only appealed to the Administrative Procedures Act.
A successful appeal to the initial findings could have eliminated the case FinCEN has against the bank. The appeal to the APA, however, can at best sanction FinCEN or request FinCEN to provide more information on the examination of the relevant data and to articulate a satisfactory explanation for its action including a rational connection between the facts found and the choice made. It is astonishing that FBME did not question the initial findings in court, despite they went against a futility unable to nullify the actions taken by FinCEN, the Central Bank of Cyprus, the Bank of Tanzania and corresponding banks.
Judge Cooper reviewed both the public and nonpublic materials upon which FinCEN relied in issuing the Notice of Finding and Final Rule, as well as the submissions and arguments of the parties. Based on the present record, the court is not inclined to second guess FinCEN’s exercise of its broad discretion in finding that FBME poses a primary money laundering concern, or its resulting imposition of the fifth special measure. The court therefore finds that FBME has not established a likelihood of success on the merits of its claim that FinCEN’s ultimate finding is arbitrary and capricious under the APA.
Until now, Judge Cooper and US Court made several statements. Mentioned before, US Court is not willing to second-guess FinCEN’s findings. The imposition of the fifth special measure is not questioned. The court concluded that FinCEN’s errors were ultimately harmless. In his summary judgment, Cooper ordered that summary judgment is granted to Lew et al, except to the extent where FinCEN must respond to questions asked by FBME regarding the analysis of data from the Suspicious Activity Reports. Even if FinCEN outlines in detail that their error not to disclose supporting documents or information was well-grounded, FBME must show that the error was prejudicial by indicating with reasonable specificity how it might have responded if given the opportunity. The closest FBME has come to indicating how it would have responded to this evidence is to explain that it would have conducted an internal investigation to decipher what incident or incidents FinCEN may have been referencing and then try to rebut FinCEN’s interpretation. It has not, as far as the court is aware, undertaken any investigation or suggested what its response might be. The court also finds it unlikely that FBME could mount a credible challenge on this point. Having reviewed the entire record, including the classified and unclassified portions, the court is persuaded that FinCEN has strong enough support for its factual assertion in this regard that any comment from FBME would not make a difference. FinCEN had a more-than-sufficient basis, apart from this new allegation of facts, to conclude it could not ‘reasonably rely on a proposed resolution that depends on FBME’s candid provision of complete, credible and accurate information.
Having carefully considered the court’s opinion and order, FinCEN is in the process of preparing a supplement to the March 2016 Final Rule that it believes will adequately respond to the concerns regarding its analysis of SAR’s data expressed in FBME’s comments and identified in the court’s ruling. Based on the court’s order and the contemplated contents of the supplement, defendants (Lew et al.) do not believe that a further notice and comment period is necessary for this limited remand. Defendants anticipate that the supplement will be finalized by mid-November. At that point the agency will take the necessary steps to publish the supplement in the Federal register, notify the court, and provide any other information as needed.
ICC Arbitrage Tribunal
The International Court of Arbitration is an institution for the resolution of international commercial disputes. The International Court of Arbitration is part of the International Chamber of Commerce. The court comprises more than 100 members from about 90 countries. ICC headquarters is in Paris, France.
In front of the Arbitrage Tribunal FBME Bank and the Central Bank of Cyprus want to find out if the actions taken by the Central Bank that resulted in the resolution of the bank were legitimate. The final verdict of the ICC is binding.
To date, the ICC presented interim verdicts to prevent the sale of a part of the bank and to allow the shareholders of the bank to access the premises. The final verdict that is expected early 2017, discloses liability. The verdict does not order re-opening of the bank or any action by one of the parties. When motion is granted to FBME, the Central Bank must pay compensation to FBME in the amount of 500 Million Euro. In the case motion is granted to the Central Bank, there is no administrative fine agreed but it is likely that the Central Bank files for criminal charges against the bank.
The case in Cyprus court is relevant for customers of the bank in Cyprus and Tanzania. Whereas cases in the USA and Paris discuss responsibilities, Cyprus court is the only magistrate allowed to approve the liquidation or bankruptcy filing for the bank.
In December 2015, after the license of the Cyprus branch of the bank was revoked, the Central Bank of Cyprus filed its request to liquidate FBME Bank. The liquidation request in court includes the entire closure of the branch in Cyprus and the business unit in Tanzania involving the accounts that were managed from Cyprus. There are many indicators that point towards a favorable decision for the customers with accounts in Tanzania. It should not come as a surprise that a liquidation in Cyprus entitles customers with an account at FBME Bank in Tanzania to more security and a much larger percentage of their funds.
A verdict in Cyprus court is binding. Parties cannot go into appeal and the final verdict is expected late 2016 or early 2017. When the judge agrees to liquidate the bank, he will instantly appoint a liquidator. The first task of the liquidator is to investigate the assets and liabilities of the bank to be able to pay out creditors, including the account holders, on a pro rata basis.
One should realize that Africa is unique when it comes to doing business. That is not good or bad, it is just different. It does however mean that traditional legislation does not always apply. In the FBME case this becomes a hurdle not easy to take.
The main office of FBME Bank relied heavily on the branch in Cyprus for its operational activities. Most employees of the bank were in Cyprus and the internal, technical and administrative infrastructure of the branch was more compatible with the customers that held an account in Tanzania.
When Tanzania accounts are managed from Cyprus, it is probable that Cyprus court allows these accounts to be liquidated under the European and Cypriot legal framework. Set aside the fear for a systemic banking crisis and the risk for customer deposits in Tanzania, the residence principle and geographic location of the main activities for the accounts can be favourable for customers with accounts in Tanzania. It would be very logical when these accounts are united with the liquidation of the bank in Cyprus.
- Criticism against the authorities
The story of FBME Bank started as a downfall and became a prolonged struggle. The PR and information platform of the shareholders of the bank shows the viewpoint of an entity that is treated unfairly. It is memorable that nearly all statements involving impartiality from judges in court show an opposite consequence for FBME Ltd.
Even though FinCEN and the Central Bank of Cyprus generally followed the rules during the last two years, some criticasters have comments. It is questionable that governmental bodies have investigative, legislative, executive and judiciary power to prosecute at the same time. Having two extremes, Tanzania and the USA, doesn’t make this easier either.
The separation of powers, sometimes referred to as the ‘Trias Politica’, is on the political agenda again. It however does not have an impact on the closure of FBME Bank. For the future, it can set things in motion, but that’s as far as the scope currently goes.
The Central Bank of Cyprus is criticized for its actions taken towards the bank. Specifically, because very few explanations were given. The Central Bank of Cyprus, like many governmental agencies, often takes the position to share limited and incidental information with traditional media. Also, the website of the Central Bank is not used as a news portal. This vision provides a platform for journalists and one sided propaganda.
In Tanzania, there is a lot of uncertainty towards the actions of the (Central) Bank of Tanzania. The appointed administrator, Lawrence Mafuru, is exposed to several suspicious transactions, where his nickname ‘Mister 10%’ clarifies the extent. Furthermore, as a legacy from Delphis Bank, high court in Dar Es Salaam ordered the governor of the Bank of Tanzania, professor Benno Ndulu and statutory manager Lawrence Mafuru to give accounts how to decree for payments given by FBME in favor to one of its clients. Both Ndulu and Mafuru risk being taken to prison as civil prisoners if they cannot provide the high court with sufficient explanations on the execution of the decree.
- Legal framework
The cross-border dealings of the bank create an almost global and multi judicial case. This results in a challenge for the different courts. In the USA and Paris, responsibility and liability are sorted out. The outcome of each case stands alone and cannot influence the case in Cyprus court. Accounts in Tanzania were managed from Cyprus. Most of the activities of the bank took place in Cyprus. All factors combined show a connectedness that a judge needs to find his way into.
The largest concern for the banks customers and the courts is the Tanzania situation. The fear that money, or at least a part of it, disappears is well-grounded. Another concern is the funds, that are still blocked on the correspondent accounts in Germany at Deutsche Bank and Commerzbank. Even though the risk of a systemic banking crisis is kept quiet and downplayed, a potential collapse of these banks is still possible. The collapse of a correspondent bank vaporizes the funds on the correspondent accounts.
Based on a realistic impact for the wealth of the banks customers, judges are determined to order a verdict that follows the law and protect the customers interest. It is expected that the judge in Cyprus sticks to the legal framework on bank failures that was used by the Central Bank to place the bank under resolution and eventually revoke its license.
The Central Bank of Cyprus requested the judge to approve the liquidation of all the activities of FBME Bank that took place in Cyprus. Since numerous accounts from Tanzania were managed from Cyprus, these accounts are covered under the application in Cyprus court. When the judge issues his final verdict, and orders the liquidation of the bank, it is plausible that Tanzania accounts are covered under the European legal framework and therefore are liquidated in Cyprus.
- Future proceedings
In our previous publication on this subject, ‘the downfall of FBME Bank’, we already disclosed the scenarios and procedures for banks placed under resolution. Since the license of the bank was revoked and the DGS activated, the next step is now to start the liquidation of the bank.
During a liquidation process, the liquidator, who is appointed by court, investigates the assets and liabilities of the bank. Once assets are converted to tangible liquidity, the liquidator starts paying out to creditors. It is expected that the assets of the bank do not match with all outstanding liabilities.
Like in other liquidations, customers of the bank can expect to receive payment of their funds in tranches. Some of the bank’s assets are not tangible and it can take a few years before investments mature or property is sold. Therefore, it is expected that creditors receive their payment in periodic payments over time.
Customers who want their money back are encouraged to act at shortest notice. The official start of liquidation of the bank has a negative impact on the Deposit Guarantee Scheme. A liquidator obviously cannot determine assets and liabilities when an external guarantee scheme is still operational. It is therefore possible that the liquidator, with approval of Cyprus court, closes the DGS before maturity. The closure of the DGS will have a negative impact on the payment to account holders with a balance that exceeds 100.000 Euro and those with accounts in Tanzania. It is therefore important to visit Cyprus at shortest notice to file a claim with the DGS.
For assistance with the filing of, and qualification for, the claim with the DGS, and for further assistance during the liquidation of the bank and the filings of several liability claims in the future, please complete the contact form below.
FBME bank Cyprus fund recovery
Are you a customer of the bank and do you want the funds from your blocked bank account to be returned, contact us today. Legal Floris LLC currently represents over 1.000 customers of FBME Bank, both with accounts in Cyprus as well as in Tanzania.
We don’t work for everyone. FBME Bank was shut down for a reason. If there is a suspicion of money laundering, the DGS and liquidator, can and will not pay. Simultaneously, we reserve the right not to accept you as a customer. We wish to know our clients and must be assured on the source of your funds. If you’re a legitimate customer there is nothing to fear. Therefore, contact us today and let’s start the process for recovery right away.