The Federal Bank of the middle east (FBME) and the account holders of FBME (who are 10000 above in number) are having very hard times these days. There are two branches of FBME and they are in Nicosia, Cyprus and dar es salaam, Tanzania. The central banks of Cyprus and Tanzania started bank resolution in july 2014. As a result of this all ongoing commercial processes and several businesses were stopped. There were some administrators appointed at FBME and they only had the authority to allow all payments.
All this is the response of in depth findings of investigations by a US treasury agency named as financial crimes enforcement network (FinCEN). In 17-july -14 a statement was given by the director of FinCEN named Jennifer shasky calvery, that the anti-money laundering policy of FBME is weak due to which scam businessmen are getting huge benefit and there are untraceable money streams. The model made by shasky reached to its success.
FinCEN concluded in its report that FBME financially assists terrorists and is involved in money laundering via his customers. FBME also indirectly supports criminal activities, or other illegal internal activities via the US financial system.
As a result of FinCEN report money transfer stopped from or to FBME to other banks internationally. Due to this drastic change the income of FBME went down and the withdrawals increased significantly. The operational expenditures remained the same. As a result, the bank liquidity problems aroused very fast. At the end of March-15 the bank was being operated through external administration for past eight months. This was the time when all the stakeholders and clients became suspicious of the future of this Bank. Every service provided by the bank was stopped i-e Debit cards, credit cards. There was very low customer service support and hence stoppage of online banking.
There was only one way of transfer limited amount of money to other banks and the procedure is to write a check against customer himself and depositing that check in the account of another bank in cyprus with same account title as in FBME. There was also a limit of withdrawal or transfer of money and customer could not be able to transfer more than 200 EUROs.
History and background of the Bank: The origin of FBME starts in 1982 in cyprus when it became a subdivision of Federal Bank of Lebanon. The banks were the property of Ayoub-Farid M. Saab and Fadi M. Saab. Ayoub -Farid M. Saab and Fadi M. Saab were two brothers. FBME changed its registered office address to the cayman Islands in 1982. The banking operations were moved from Cyprus to the Cayman Islands branch, which partially moved the bank licensing requirements to the Cayman Islands. After seven years, in 2003, FBME took over the local Delphis Bank in Tanzania also, so that it could handle the problem of capital requirements. FBME then shifted its head office to Tanzania. And the Cyprus branch became a branch of the newly founded FBME Tanzania Ltd. And the name was changed from Federal Bank of the Middle East Ltd. to FBME Ltd.
Since 2003 Head office of FBME Ltd is in es Salaam, Tanzania This was the time when FBME has a total asset of about two billion USD with its head office in Tanzania and a branch in Cyprus. FBME’s 90% operational tasks to originate from Cyprus . At that time FBME’s position was very strong and very few of local competitors were competing her in this market. FBME had a very few local customers but on the other hand it had big volume of businesses in offshore banking and used to target high grade customers and big offshore businesses.
In European union, the active banks participate in ‘Deposit Guarantee Scheme’ (DGS). Deposit guarantee schemes (DGS) are systems in each member state that reimburse depositors (up to a defined limit) if their bank fails and deposits become unavailable. . The exact required 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, as including other reasons the account holders have very amount deposits in FBME.
The Central Bank of cyprus was the one who used to supervise the local banks in Cyprus and other foreign banks branches inside Cyprus. Central Bank of cyprus gave FBME a warning 2 times already for some unusual transaction activities and not following anti money laundering procedures accurately. FBME was fined in 2008 as it was not following the laws of anti money laundering procedures and secondly new customers were not properly screened out and accounts were opening.
Central bank of cyprus imposed a fine of 240 million Euros over FBME for alleged violation of ‘capital controls and a risky profile. The fine was collected by Central Bank of cyprus in 2013.FBME had this case in court and it was not decided before fine transaction so the fine transaction was declared invalid in February 2013 by court of arbitrations of ICC. ICC was now investigating this matter at the request of both banks.
Customers and services: FBME only targets its marketing towards potential clients i-e high net worth businessmen and offshore companies. Most of the consumers of FBME are not familiar with the bank activities. Most of the FBME clients are high grade international business personals. Most of the bank customers run legitimate companies. FBME targets mostly those businessmen who run their companies in legal ways. Due to this reason FBME got a famous position among this kind of specific group of businessmen. That’s why FBME has only a few competitors.
FBME offers a lot of facilities and services to its internal clients such as , international payment services, swift account facility, and International Card Services Solutions’, FOREX Trading services, Investment facilities , E- banking ,Credit services and Trade Finance etc.
The FinCEN report: FBME had no restrictions or problems by other agencies or banks on its operations and procedures for a very long time, It seemed as if FBME Bank was working with its own ways and making business clients in its own fashion. It was 15 July 2014 when FinCEN shared a drastic report which was based upon its previous one month investigation on FBME regarding its money transactions with US and other banks. The report showed drastic results for FBME showing more than 4500 abnormal and unusual transactions of worth 875 million USD.
One of the example shows the money transaction from FBME to a US bank in between April 2013 and April 2014 which really was an abnormal transaction due to such high amount of transfer. Such kind of high amount of transactions should be marked as unusual. As these kinds of transactions may have a suspicion of money laundering or financing the terrorists or other criminal activities.
This report really brought some unintended and immediate consequences. The American bankers association supported the results of FinCEN report and took immediate action. As a result all deposits of FBME in US banks were frozen. The Central Banks of Cyprus and Tanzania are confounded and they decided to put the bank under their management. As a result, Dinos Christofides was appointed In Cyprus and Lawrence Mafuru was appointed for Tanzania to take charge in this situation.
FBME Bank closure: The two banks of FBME stopped all money transactions until the completion of their own investigation. The bank closing activity was intended to stop withdrawal money by their account holders specially fraud customers. The bank control was given to central bank of Cyprus in order to stop bank run.
The obvious response of FBME was to get reserved and to take the FBME report findings as serious because it could have drastic consequences. In this scenario the accused definitely have to go to court of Cyprus and Tanzania to get justice or to prove her innocence. FBME should have taken fast steps to remove the accusations as soon as possible but no immediate steps were taken.
The central banks gave official reason of closing FBME after 18 July 2014 that to protect the interest of account holders to stop crisis in internal financial markets. FBME took a lot of steps to convince the central banks and to maintain its reputation among its clients but all that went in vain. All employees and account holders are suspicious about this current situation.
How FBME responded: Though legally FBME is not a guilty and it can prove its innocence but in order to do that FBME should take fast action and document their improper transactions as soon as possible in order to prevent the shutdown. Locally and outside the court FBME was denying the accusations but it was looking that FBME is unable to protect itself from FinCEN report findings. As the findings were looking so solid. As It was not yet proven in court, so FBME had to move fast to get rid of these accusations.
One of the possible ways for FBME to inform the stakeholders about their stance was their website which FBME and its mother company created. The information was not having solid grounds and was unable to clear the stakeholders about their innocence. It was extremely necessary to prove her innocence but movement by FBME was very slow and it was not having proper ways to convince all stakeholders.
Due to this unclear situation the shareholders consulted the negotiation committee of international chamber of commerce (ICC) in Paris. The claim is a part of the bigger arbitration procedure concerning this case. ICC will give a legally valid statement for all parties.
ICC issued a temporary court order on 20 February 2015 with two orders. The first one states that the respondent has to prevent from sale and resolution of FBME and transferring its funds to central bank of Cyprus before any court order comes on claimants request for temporary measure. This decision was accepted positively by FBME. Although it could have a lot of interpretations.
The central bank of Cyprus tried to sell FBME card services to JCC Payment Systems and providing opportunity of monopoly to JCC payment systems in Cypriot market but this action was denied because of European anti-trust regulations and competition law as it was unjust by Central Bank of Cyprus. 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.
Both decisions of the arbitrary committee were a moral success for FBME Ltd. And they are separate from the decision to place the bank under Central Bank administration. But the fact could not be denied of involvement of FBME in large scale of unusual transactions. The root cause of this problematic situation is still had big challenges for FBME to face legal and criminal proceedings.
FBME got the services of the international legal firm Hogan Lovells as their legal representative. Ernst & Young was hired to write about the FBME internal organisation. The report made was submitted to in December 2014 to FinCEN by FBMEs legal advisors.
In order to clarify how FBME can make sure of smooth and clear future operations as per regulations of Central Banks and international financial authorities, a meeting was held between Representatives of FBME and FinCEN in Washington DC.
The managers of FBME asked their customers to have an agreement and FBME to remain their customers and not to withdraw their money. This thing will remove the fear that ICC declares bank run. This is a good solution for FBME, but for the current situation the customers are least likely to do that as for the past 9 months FBME was not responding well to their customers and it is most likely that if bank opens, the customers will withdraw all their money.
What Central Banks do: After the FinCEN issued her “notice of finding” the central banks acted as they prevented quick bankruptcy. Similar thing happened with Spanish Banco de Madrid.
Spanish Banco de Madrid requested for suspention of payments and the people withdrewall their savings. FinCEN accused owner Banca Privada d ‘Andorra of money laundering and the result was that the bank emptied in hours. the Central Banks role had a positive effect. Only a limited and harmless bank run happened. 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 this scenario the central banks of Cyprus did well. But this not good for the banks clients as the whole process is taking longer than expected. On the other side the administrators are doing as good as they can.
Options for the future: The chances for FBME to re-continue its services and all its activities were very low. The customers developed a very bad image about FBME and if the customers are given a chance to withdraw their money they will withdraw all their money from the bank as the customers were not taken in confidence for so many months and they had no control over their money.
The short-term resolution chances of FBME were 104% in july 2014. The stakeholder’s equity was decreasing fast. Salaries of 200 employees were not being paid; A lot of clients are withdrawing money. Office expenditures were rising and office needs to be paid as well. The income of FBME is negligible, that’s why it is drastic for FBME.
The offshore company’s money reimbursement by FBME was also not clearly defined. If FBME is proved in any kind of bankruptcy, then account holders would not be able to reimburse completely or partially. No insurance claims would be covered if FBME herself becomes responsible for bankruptcy. That will create real problems for clients and hence bank owners.
FBME Bank in the future:
A continuation of all activities: The lowest percentage for the future of FBME is that it will reopen with no further damage to FBME. Even in this scenario the customers will withdraw all their money and close their accounts with FBME. This option may start liquidation process or solvability of the bank and consequently either bank run or bankruptcy. In case FBME reopens and continue its activities, FBME has to develop a new business model to prevent further damage.
Bankruptcy: The current situation of FBME is not good for employees and its customers. The bank is not providing its contractual obligations. Customers and employees can also put a request for bankruptcy. And bankruptcy would be drastic for FBME. The chances for employees to submit this kind of request are little and this situation is different on the other hand for FBME’s large scale customers, the customers can put that kind of request.
The bank can also be held bankrupt in case it does not give payments to the required ones. As the expenses and withdrawals are high and while the income of bank is very low. It will become impossible for FBME to maintain a balance. This is the case in which the central bank may intervene .
Sale or acquisition: ICC stopped the Sale of FBME card service or partial sale by central bank of Cyprus, There are chances of selling card services to another suitable buyer but that is also not so easy. Even the partial sale of the bank or sale of FBME Card Services will not resolve the main issue of the bank. So this option was also weak.
Bank run: The more drastic situation could be bank run. It occurs when there comes sudden and heavy cash withdrawal, and the bank finds drastic problems in liquidity process. When bank is unable to provides payment obligations, the central bank may request bankruptcy.
First there comes suspension of payments and due to the suspension of payments, bankruptcy may occur, this means account holders must wait a long time before getting their money or reimbursement. Customers wait for unusually long time before reimbursement of money. As an example, in Icelandic Bank Ice save it took several years before clients got their savings back
In European banks the deposit guarantee scheme returns maximum of 0.1 million Euros. For the majority of FBME account holders this is a partial guarantee. There is no guarantee that every account holder qualifies or not for this deposit.
Nationalization: Bank nationalization is the best option for troubled banks in Europe, In this case government takes all the shares of the bank. In case of FBME nationalisation would mean that Government of Tanzania takes all the shares of bank but the main problem is whether the government of Tanzania has a rule and regulation in this regard or not.
It is also difficult to judge whether nationalization in Tanzania is possible or not Same difficulty of nationalization will be found in Cyprus as well. In case of nationalization in Cyprus the Tanzania branch will become the subsidiary instead of the Cyprus branch. This would create problems in Cyprus as well.
Bank closure: Most of the people ideas inside the country and the central bank is that bank should be closed by cancelling its license.
This option has certain advantages, in this way central bank and the administrator will be able to reimburse the legal account holders. After twenty days of bank closing, first reimbursement will be able to take place.
Legitimate customers: According to FinCEN report FBME is involved in doing large number of unusual transactions, It means there were illegal money transactions and fraudulent customers, But it is not 100% sure that all users are fraud, there must be legitimate clients also, These clients have a hope to get there investment a soon as possible.
The only way for these clients to save their investment is to put a request against FinCEN report and present solid facts, bookkeeping and audit reports. Each legitimate client should have his solid report prepared already, that can be used as an evidence in future to save themselves.
Who is responsible for any damages: There are a number of issues which may decide in favour of each account holder. Many parties are involved in this particular case. If someone Stands that giving license to FBME was wrong, then governments of Tanzania and Cyprus may become responsible.
In second case if someone presents that all faults are of FBME then FBME will held faulty and in that case shall the presenter make the managers and owners faulty, There could be this idea also that FinCEN and the US government are responsible for the problems. These are all different scenarios which could be dealt one by one in court.
But one thing is clear that for each account holder it is mandatory to present his case own his own. There should be an independent judge to see the real facts and the detailed scenario presented by each customer. He may really decide the actual damages and then responsible for reimbursement
The conclusion is that each account holder has to prepare his case in detail and with very care on his own. The solution to this problem is to go through civil courts. It is highly recommended for each account holder to build a very strong case for himself.