Where did it go wrong with FBME

These are difficult times for the Federal Bank of the Middle East (FBME) and their bank account holders (a couple of thousands of the people). In July 2014 the central banks of Cyprus and the Tanzania have assumed control of the bank and placed the bank under resolution. Therefore it is no longer possible to transfer money from FBME to any bank accounts with other banks.

The Cyprus central bank has specified a few conditions under which clients with a ‘Euro account’ can withdraw small amounts from their bank account. That bank account must be in the same name as the FBME bank account from which the withdrawal is made.

History and background FBME was founded in Cyprus in 1982 as a subsidiary of the Federal Bank of Lebanon SAL. The Central Bank of Cyprus, which oversees the Cypriot banks and the branches of foreign banks in Cyprus, has given FBME a warning twice.

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.  Customers and services most of the consumers not within the target clients of FBME probably are not familiar with the bank.

Customers and services: 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’.

On that day FinCEN published the results of a month’s long investigation into FBME and her money transactions with banks in the United States.

The FinCEN report – Looking only at the single year between April 2013 and the April 2014 more than 387 million USD worth of unusual transactions were found involving a transfer from FBME to a US bank.

Correspondent banks cancelled their cooperation with FBME and all the deposits of FBME with US banks were froze.

The ‘closing’ of the bank – Both of Central Banks decided to freeze all the money transfers to and from FBME pending their own investigation. A bank run was prevented by putting the bank under Central Bank administration and by severely limiting options to withdraw money from accounts.

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.

The response by FBME Ltd. – The Central Bank of Cyprus tried to sell the company unit FBME Card Services to JCC Payment Systems. 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.

Although both of the 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. 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 a very little type of the communication with their bank account holders for almost nine months. 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.

Options for the future – While 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. 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.

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

  • Sale or acquisition The Central Bank of Cyprus has attempted to sell the business unit FBME Card Services.
  • 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.
  • 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.
  • Nationalisation in Europe, a popular cure for troubled banks is nationalisation, whereby a government takes over all shares in a bank.
  • Bank closure more and more observers, in particular within the Central Banks, are arguing for retraction of the bank license of FBME.

The six above mentioned options do not take one of the important item into an account: It is by no means certain that the client will gain access to their deposits in case of a new owner, bankruptcy or in case the bank reopens and continues as before. 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.

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.

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