The downfall of FBME Bank

The Downfall of FBME Bank - Legal Floris These are difficult times for the Federal Bank of the Middle East (FBME) and their bank account holders (a couple of thousand people). FBME has two branches: one in Nicosia, Cyprus and one in Dar es Salaam, Tanzania. In July 2014 the central banks of Cyprus and Tanzania have assumed control of the bank and placed the bank under resolution. This has led to the suspension of all commercial activities and the closing of several business units. Also, all payments have to be authorized by the appointed administrators.

This drastic move was the response to the findings of an in-depth investigation by the Financial Crimes Enforcement Network (FinCEN), which is an agency of the US Treasury.

According to a statement on 17 July 2014 by Jennifer Shasky Calvery, the director of FinCEN, FBME has a weak anti-money laundering policy which serves as a strong attraction to shady business men and untraceable money streams. According to Shasky the business model of FBME has proven to be very successful.

The conclusion of the FinCEN report was: “FBME is used by its customers to facilitate money laundering, terrorist financing, transnational organized crime, fraud, sanctions evasions and other illicit activity internationally and through the US financial system”.

Because of the FinCEN report international banks terminated their cooperation with FBME. Therefore it is no longer possible to transfer money from FBME to any bank accounts with other banks.

As a result of this move by the central banks of Cyprus and Tanzania, its income drastically decreased and withdrawals drastically increased. On the other hand, operational costs remained the same. You don’t have to be a rocket scientist to understand liquidity problems result when there’s more money going out than coming in.

At the time of this writing (end of March 2015) the bank has been under external administration for eight months. During that time clients, employees and other stakeholders have been left in the dark about what’s going to happen. Debit and credit cards have been blocked, online banking has been closed and customer service is understaffed and uninformed about the latest developments.

The Cyprus central bank has specified a few conditions under which clients with a ‘Euro account’ can withdraw small amounts from their bank account. Those account holders can write a cheque to themselves. This cheque can only be deposited in an account with another bank in Cyprus. That bank account must be in the same name as the FBME bank account from which the withdrawal is made. The daily maximum amount which can be transferred this way had steadily been decreased. As of 4 March 2015, the daily limit is 200 euros.

History and backgroundLegal Floris - The downfall of FBME Bank

FBME was founded in Cyprus in 1982 as a subsidiary of the Federal Bank of Lebanon SAL. Both banks are the private property of the brothers Ayoub-Farid M. Saab and Fadi M. Saab.

In 1986 FBME changed their registered office address to the Cayman Islands. The banking operations were moved from Cyprus to the Cayman Islands branch, which partially moved the bank licensing requirements to the Cayman Islands.

In 2003, seven years later, there was another move. FBME had trouble meeting the capital requirements set by the Cayman Islands Monetary Authority. This problem was instantly solved by the takeover of the local Delphis Bank in Tanzania, which mad it possible for FBME to move to Tanzania. At the same time the Cyprus branch became a branch of the newly founded FBME Tanzania Ltd. The name Federal Bank of the Middle East Ltd. was formally changed to FBME Ltd.

As of 2003 the main office of FBME is located in Dar es Salaam, Tanzania. Its assets being about two billion US Dollar, FBME Ltd. is considered the largest bank of Tanzania. While its head office is in Tanzania, 90% of its operational tasks take place in Cyprus. Although FBME has a significant and stable position in Cyprus, it has always taken the position that it does not compete in the local banking market. FBME has no retail counters and only very few Cypriot customers. As such, FBME operates in the market for offshore banking and provides services to ‘high net worth individuals’, tax planners and offshore businesses.

Banks with activities in the European Union have to participate in the ‘Deposit Guarantee Scheme’ (DGS). The DGS protects account holders in the case of bank failure. Individual banks have to contribute funds to the DGS equal to at least 0.8% of the total deposits of all account holders. The exact percentage required depends on the risk profile of the individual bank, and can be higher than 0.8%. In the case of FBME the risk profile is high because, among other reasons, many of its account holders have a vast amount of money deposited. This leads to a higher risk than a larger number of account holders with smaller deposits.

The Central Bank of Cyprus, which oversees the Cypriot banks and branches of foreign banks in Cyprus, has given FBME a warning twice. In 2008 the bank was fined for limited screening and ‘due diligence’ of new customers and for not conforming to laws and regulations meant to combat money laundering. In 2013 there was another transgression. FBME undertook actions which made evasion of Central Bank supervision easier. Because of the combination of a violation of capital controls and a high risk profile, the Central Bank of Cyprus decided to impose a fine of up to 240 million euros for alleged violation of ‘capital controls’.

After FBME was put under administration of the Central Bank in 2014, the fine imposed in 2013 was collected. Because the fine was still being appealed by FBME, this transaction was declared invalid in February 2015 by the court of arbitrations of the International Chamber of Commerce (ICC). ICC is investigating the matter at the request of both FBME Ltd. and the Central Bank of Cyprus.

Customers and services

Most consumers not within the target clients of FBME probably are not familiar with the bank. This indicates that the bank takes her positioning within the market very seriously, by only targeting her marketing toward potential clients. Most clients of FBME are offshore businesses and high net worth individuals who are introduced to the bank via a vast network of intermediaries.

The bank has a diverse and mostly international clientele. Most of its customers run a legitimate company. FBME has always been a very interesting business partner to companies founded or located in fiscally friendly jurisdictions and making use of sophisticated tax planning. The products offered are geared to the needs of this specific group. An additional advantage is that its many years of experience in this area of activities give FBME an edge which few competitors can equal.

In order to facilitate its international clients effectively FBME offers: ‘International Payment Services, Swift Account Services, Credit Facilities, Trade Finance, FOREX Trading Facilities, Investment Services, E- banking and International Card Services Solutions’.

FBME is internationally renowned for its anonymous credit cards and original ‘back-to-back loans’ whereby money is loaned back to clients in order to generate tax deductions in the country of residence.

The FinCEN reportLegal Floris - FinCEN FBME Bank Cyprus

Although FBME was able to operate without any problems for a long time, and they seemed to be getting away with their perhaps dubious methods, this ended abruptly on 15 July 2014. On that day FinCEN published the results of a months long investigation into FBME and her money transactions with banks in the United States. The report was devastating. FinCEN was able to find more than 4500 unusual transactions totalling at least 875 million dollars.

The ‘Notice of Finding’, a summary of the total report, demonstrates the thoroughness of the investigation of FBME at its money flows. Several examples are mentioned whereby FBME accounts were used to defraud American companies and individuals. For example, FBME was used by scammers to steal more than 100,000 US Dollars from a company in Michigan with a ‘phishing attack’. The bank was also used for a non existing fraudulent High Yield Investment Program whose purveyor was convicted for fraud and money laundering by an Ohio court in July 2012.

Looking only at the single year between April 2013 and April 2014 more than 387 million USD worth of unusual transactions were found involving a transfer from FBME to a US bank. These transfers should have been flagged as having a high risk by the originating bank. High risk flagging is warranted in case of reasonable grounds of suspicion of money laundering or possible financing of terrorist activities.

The FinCEN report had immediate and severe repercussions. The American Bankers Association supported the conclusions of FinCEN and called for effective measures. Correspondent banks cancelled their cooperation with FBME and all deposits of FBME with US banks were froze. The Central Banks of Cyprus and Tanzania are dumbfounded and decide to put the bank under their management. In Cyprus Dinos Christofides is given the role as administrator while in Tanzania this role is fulfilled by Lawrence Mafuru.

The ‘closing’ of the bankThe Downfall of FBME Bank Cyprus

Both Central Banks decided to freeze all money transfers to and from FBME pending their own investigation. This was done to prevent account holders, including potentially fraudulent customers, from massively withdrawing all their money. A bank run was prevented by putting the bank under Central Bank administration and by severely limiting options to withdraw money from accounts.

FBME Ltd. seems to have taken a reserved somewhat passive stance. The accusations are serious, and the consequences cannot be overseen. When one is treated unjustly, then it is easy to take the case to court in Cyprus and even in Tanzania. Given that FBME Ltd. denies the accusations presented in the FinCEN report, it is noteworthy they have not (yet) done so.

FBME has been ‘closed’ since 18 July 2014. The official reason given by the Central Banks is to protect the interests of the account holders and to prevent unrest on the internal financial markets. FBME Ltd. has taken several initiatives to protect their reputation and put their clients at ease. So far none of these initiatives was successful enough to convince the Central Banks to relinquish their role as administrator. Although there arguably were a few small successes, employees and account holders are still left in a situation of uncertainly.

The response by FBME Ltd.

Although legally one is innocent until proven guilty, in practice it can be prudent when accused to be proactive and try to establish one’s innocence. The response by FBME is that it does not agree with the accusations and assumptions of the FinCEN report. In fact, in vehemently denies them. According to bank management, they are the victims of a witch hunt. It does seem that FBME is unable to present evidence demonstrating that the FinCEN conclusions are untrue. This is puzzling. If FBME has, as it claims, always taken sufficient measures against improper transactions, they should be able to document that within days.

FBME remains suspiciously quiet, however. One of the few channels used to inform the public is its website. This site was created by FBME Ltd., the management and mother company of FBME. Its purpose is to inform stake holders of recent developments. The available information is typically distorted to the advantage of FBME. Although this is understandable, it leads to a biased image of reality. Absolute truth generally lies somewhere in the middle.

The share holders of FBME Ltd. are claiming of 500 million euros in damages from the Central Bank of Cyprus, through the arbitration committee of the International Chamber of Commerce (ICC) in Paris. This claim is part of the bigger arbitration procedure concerning this case. The independent ICC will pronounce a verdict binding for all parties.

In an interim verdict by the ICC on 20 February 2015 two decisions were made. The text of the first decision is as follows: The Arbitral Tribunal firmly invites the Respondent to refrain from proceeding to the sale or the resolution of FBME Bank and from transferring its funds to the Central Bank of Cyprus before the Arbitral Tribunal has decided on Claimants’ Request for Interim Measure. This decision has been interpreted and communicated as positive by FBME Ltd., although it is actually open to multiple interpretations.

The Central Bank of Cyprus tried to sell the company unit FBME Card Services to JCC Payment Systems. This acquisition would have given JCC Payment Systems a monopoly position in the small Cypriot market. This was not allowed because of European anti-trust regulations and competition law.

The second part of the verdict concerns the way in which the Central Bank of Cyprus tried to freeze the assets of the bank without a court order in order to collect the fine imposed in 2013. This was deemed impermissible by the arbiter, since the verdict was not binding and higher appeal in court was still a reasonable possibility for FBME.

Although both decisions can be seen as a moral victory for FBME Ltd., they are separate from the decision to place the bank under Central Bank administration. The fact remains that the bank was involved in a large number of unusual transactions. This root cause of the current predicament remains a serious problem which may well result in legal, and possibly even criminal, proceedings.

FBME Ltd. has retained the international legal firm Hogan Lovells as their legal council. Ernst & Young, who is also not a small player, was hired to write a forensic report about the internal organisation of FBME. This report was submitted to FinCEN in December 2014.

On 21 January 2015 a meeting took place in Washington DC between representatives of FBME and FinCEN. Purpose of the talks was to clarify how FBME can make sure their future operations conform to the stricter regulations of Central Banks and international financial authorities.

The International Chamber of Commerce will publish her verdict on 28 March 2015. In order to positively influence the verdict FBME managers asked their clients to sign a statement that they would like to remains customers of FBME and planned to leave their money in their accounts. This was meant to allay possible fears by the ICC of a bank run in case the bank is allowed to open its doors again.

Although this is not a bad idea, FBME seems to have forgotten that there has been very little communication with their bank account holders for almost nine months. Clients have run into payment difficulties and companies have lost orders and possibilities for joint ventures. This makes it very likely that customers will massively withdraw their accounts as soon as they are able to. This makes the signing of such a statement a risk for clients, for it is misleading to promise a certain course of action when one already knows one would act differently. Such a misleading statement can result in a form of liability. That’s a risk clients will not want to take, given their damage is large enough as it is.

The role of the Central Banks

The Central Banks acted soon after FinCEN published her ‘Notice of Finding’. That their actions probably prevented a quick bankruptcy of the bank becomes clear when the Spanish Banco de Madrid closed her doors on 16 March 2015 and requested a suspension of payments. Clients withdrew their savings from the Banco de Madrid after the owner Banca Privada d ‘Andorra was accused by FinCEN, as was FBME before, of being a high risk bank with money laundering as its primary goal. The bank was empty within hours.

In retrospect, the role of the Central Banks has had a positive effect. Only a limited and harmless bank run happened and a winding down of the bank without a bankruptcy is still an option. The damage done if the bank closes will still be significant. However, this damage will be smaller than the damage done in case of bankruptcy.

Although the motives of the Central Banks remain unclear, while the bank is under their administration the option remains to lay a claim to the European Deposit Guarantee. In most cases laying a claim to this guarantee is faster, easier and cheaper if the bank is winded down without a bankruptcy. In case of bankruptcy, the curator first has to make a full report, value and sell all assets and then distribute the proceeds.

Seen from this perspective, the actions of the Central Bank of Cyprus are reasonable. It is very unfortunate for the bank’s clients that the whole process is taking so long. On the other hand, it does suggest that the administrators are trying to do a good job to maximize chances of a good outcome.

Options for the future

The chance that FBME will open her doors again and continue all her activities as if nothing happened is slim. Customers who were badly informed for many months, and no longer have control over their money, will likely take their money to bank elsewhere if given the chance.

Although the short term liquidity risk of FBME was 104% in July 2014, this is irrelevant while it remains unclear how much of this security should be seen as risk capital. In addition, the bank’s equity capital is diminishing fast. Large numbers of clients with euro accounts are writing daily cheques and withdrawing their money. The salaries of more than 200 employees still working for the bank need to be paid, office costs are increasing and office rent still has to be as always. On the other hand, there is little income to pay for these costs. This is a serious problem, even though it is downplayed by FBME.

There is no clear answer to the question of whether offshore companies can apply for reimbursement by the deposit guarantee fund. Another issue, is that FBME may be held (partly) responsible for any bankruptcy. No insurance covers damage in case the insured is responsible for the damage himself. Therefore, it is not certain that bank account holders will be reimbursed, or even partially reimbursed, in case they lose money due to FBME bankruptcy.

Generally speaking there are six options for the future of FBME:

  • A continuation of all activities

The least likely scenario, although not impossible, is that the bank opens her doors again as if nothing happened without any form of further damage. Of course, this will result in many customers withdrawing all their money and closing their accounts. This will have consequences for the liquidity and solvability of the bank and may lead to a bank run and bankruptcy. If FBME is permitted to reopen and continue its activities, a new business model might be a solution which could prevent further damage.

  • Bankruptcy

The current situation is especially unpleasant for the bank’s customers and employees. The bank is unable to fulfil her contractual obligations. That this is caused by the actions of third parties is irrelevant. Both customers and employees of FBME can submit a request for bankruptcy. The chance that bank employees make such a request is tiny, as they would lose their jobs and financial security in case of bankruptcy. For the large group of legitimate clients the situation is different. Especially for those not in a high risk group or not having a risk profile defined by FinCEN.

The bank can also go bankrupt for direct legal reasons, in case it can no longer meet its payment obligations. Because of the high expenses and continuous withdrawals of large amounts of euros, while the bank has little income, payment problems are to be expected at some point. The Central Bank is obligated to intervene in case the liquidity or solvability risks become too large.

  • Sale or acquisition

The Central Bank of Cyprus has attempted to sell the business unit FBME Card Services. This forced partial sale of the bank was stopped by the ICC. It is possible that another more suitable buyer can be found, though such a sales process will be complex.

Sale of FBME Card Services, or any other part of the bank, does not solve the core problem of the bank though, which brought the bank in this precarious situation in the first place. The question is how correspondent banks and governments will react when suspicious clients are simply transferred to another financial firm.

  • Bank run

The most dangerous scenario is a bank run. A bank run happens when account holders massively decide to withdraw their money creating liquidity problems for the bank. At some point, the bank will no longer be able to meet its obligations and bankruptcy will be requested by the Central Bank or the bank itself.

A bank run typically first results in a suspension of payments, and then a bankruptcy. This means that many account holders will have to wait a long time before they can get their money, or a reimbursement, if any. The biggest problem is the period between the declaration of bankruptcy and reimbursement. This can take a long time, because the curator has to investigate the background of the bankruptcy. For example, in the case of the Icelandic Bank Icesave it took several years before clients got their savings back.

The Deposit Guarantee Scheme of the European banks reimburses a maximum amount of 100,000 euros. For the majority of FBME account holders this is only a partial guarantee. Also, it is not certain that every account holder will qualify for this deposit insurance. Those in charge will want to prevent a situation where a European insurance fund can be used to protect criminal funds.

  • Nationalisation

In Europe, a popular cure for troubled banks is nationalisation, whereby a government takes over all shares in a bank. Formally, in the case of FBME, this would have to mean nationalisation of the head office in Tanzania. The question is, whether this is possible within the laws and regulations of Tanzania. So little information is available about this question, that it is almost impossible to judge whether this is a realistic scenario. A nationalisation in Cyprus is also difficult, as ownership relations will reverse in that case (the Tanzania branch becoming the subsidiary instead of the Cyprus branch). This would create problems with regard to the stricter regulations for banks registered in Cyprus compared to Tanzania.

  • Bank closure

More and more observers, in particular within the Central Banks, are arguing for retraction of the bank license of FBME. That idea does have certain advantages. It would create a situation where the Central Banks, together with the administrator, and possibly a curator, could reimburse legitimate account holders. They could apply to the Deposit Guarantee Scheme, making a first reimbursement payment to account holders possible within twenty days after official bank closure.

The six above mentioned options do not take one important item into account: It is by no means certain that client will gain access to their deposits in case of a new owner, bankruptcy or in case the bank reopens and continues as before. For the freezing of all bank accounts has two reasons. First, to prevent a bank run. And second, to be able to investigate suspicious money streams.

Legitimate customers

The FinCEN report clearly mentions a large number of unusual transactions. This indicates that there are fraudulent users of FBME’s banking services. But what about the rest? Surely, there must be clients who have nothing to do with criminal money, money laundering or terrorist financing? These legitimate clients have been waiting for good news for months. And have been met mostly by deafening silence.

Legitimate clients can protect themselves against future damage by immediately starting by refuting the accusations presented in the FinCEN report. Using hard facts, hard figures, audit reports, an impeccable bookkeeping and a detailed company profile individual clients can prove that they are legitimate and have a right to full payment of damages. Every individual client is well advised to create such a thorough report for himself and his business. This can be used as evidence for the European Deposit Guarantee, or possibly at a later stage, for a court case.

Who is responsible for any damages?

There are a number of issues which may be relevant in any court case, and may help lead to a decision in favour of individual account holders. It is clear that there are many parties to the case. If one takes the position that the bank as a whole should never have received a banking licence, one can try to hold the governments of Tanzania and Cyprus responsible. If one takes the position that all problems are the fault of FBME Ltd. and her operations, then one can try to hold FBME Ltd. responsible. In that case, does one hold the owners or the managers responsible? One could also accuse the intermediary who introduced you to the bank as being careless. Perhaps FinCEN and the US government are responsible for the problems? All of these are possibilities. Possibilities which have to be judged on its merits on a case-by-case basis.

It should be clear by now, that if you are a legitimate FBME account holder, you will have to build your individual case yourself. For, there is no person or institution who is clearly directly responsible. An independent judge will have to determine the facts based on details and circumstances presented by you. On that basis, he will have to decide what your damages are, if any, and who is responsible to reimburse you.

The procedure to be followed lies in the area of civil courts. From this, it follows that you will have to do research yourself in order to make a case that a specific person or organisation is liable to pay you damages. As in any civil case,  you as the plaintiff have to prove your case. Therefore, it is advisable to start building a strong case now.

Solutions for FBME clients

After months of uncertainty, the time has come to do something about the situation. There are too many unknowns in the quarrels between FBME, Central Banks, FinCEN and others. FBME are at risk for receiving the short end of the stick. Besides customers, FBME also has suppliers and employees which may be short changed. Whatever happens to FBME, all such parties will try to get their money out first. And this is not good news for account holders, and the percentage of their deposits they will be able to get back.

There are a number of things FBME customers can do themselves:

  • Financial forensic profiling

The problems surrounding FBME have a reason. By preparing a ‘financial forensic profile’ you insure you will not be included in the group of suspicious clients of FBME where all the problems started. Copies of your tax returns in your country of residence can also be helpful. The goal is to prepare a profile which clearly points to your financial dealings being legitimate.

Your profile should also include a business plan and a Resume of all directors. The point is to provide evidence or your business being fully legitimate.

The financial forensic profile can be used in court cases, to get a privileged position among creditors and to demonstrate to Central Banks that you are not among the account holders where the problem originated. You can find more information about financial forensic profiling here.

  • Clients of FBME Cyprus

Clients of FBME Cyprus can easily satisfy the conditions specified by the bank administrator. If you are a legitimate FBME account holder you need to open a new bank account with another bank in Cyprus with the exact same account name as the FBME account. Then you send a form 131CY by fax to FBME containing a ‘demand draft’ for a maximum of 200 euros per day. A demand draft is another word for cheque. The cheque needs to be deposited at the other bank in Cyprus. Depending on your situation, it may not be possible to do this yourself. The maximum amount per day creates additional complications. Fortunately, it is possible to outsource the whole procedure. Click here for an explanation and a free consult by one of our legal advisors.

  • Court case

The ICC can pronounce a legally binding verdict. The case before the ICC is mostly about FBME’s request to gain back control. By hoping for a favourable outcome of that case, you are depending on a third party. But who is to say that ICC’s verdict will result in your damages being paid? It is also possible to start court proceedings yourself against one of the many, or perhaps all of the, parties involved.

Unfortunately, not everybody is in a position to start a court case against FBME, the Central Bank or another party involved. The cost is prohibitive, a verdict will likely take a long time and if one of the parties does not agree with the verdict, they can appeal it.

  • Class action suit

Legal proceedings can be very costly, lengthy and stressful. By starting a class action suit together with other damaged parties, synergy results. Costs can be shared, and the case can become much stronger by bundling various business cases into one pattern. Such a pattern dramatically increases your chances of getting a favourable verdict from an independent judge.

The ‘Organisation for Customer Protection in Bank Failures’ was specifically founded to help victims of bank failures resulting form mismanagement or bank runs. The organisation helps its members by providing correct and timely information about various options. It can also start a class action suit on behalf of its members, in order to ensure for them the highest damage payments possible. You can find more information about the organisation here.

  • The Deposit Guarantee Scheme

The Deposit Guarantee Scheme, which was founded conform the rules of the European Commision, was created to protect bank deposits, maintain consumer confidence in banks and provide a ‘safety net’. The scheme is meant to contribute to a quick winding up of loose ends in case of bank failure.

A bank failure is a situation where bank deposits are no longer available for withdrawal. According to European Union guidelines a bank failure can only be determined by a ‘competent authority’ or court proceeding. After a pronouncement of a bank failure, deposits are made available to account holders within twenty days.

As of 2010, the guaranteed amount for bank accounts within the European Union is set to 100,000 euros. In exceptional circumstances, a higher guaranteed amount can be decided upon. This depends on the individual situation of the bank account holder.

The maximum applies to the total deposits of all accounts of an individual account holder with the same bank. Even if the bank operates under different labels, the total deposit amount is determined by summing the deposits of all accounts per individual account holder. Thus, one cannot increase the maximum protection of 100,000 euros by having multiple accounts with the same bank or different branches of the same bank.

Deposit Guarantee Schemes cover deposits of individuals and companies, regardless of company size. Financial institutions and authorities cannot make use of deposit guarantee. According to the exact definition of a holding company, a holding company is a financial institution. Therefore, holding companies are not always entitled to reimbursement by a deposit insurance scheme.

Contact

If you would like more information about recent developments within FBME, or if you are interested in a personal discussion of the possibilities in your individual case, please contact the FBME Bank Account Rescue Mission.

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