By Elias Hazou
THE CENTRAL Bank of Cyprus (CBC) has threatened the local branch of a foreign bank with sanctions and possibly a massive fine of as much as €240m, for alleged violations of capital controls in place since March.
Such a hefty fine could cause a “financial disturbance” and even instability to the banking system which the controls were supposed to protect from a general flight of capital earlier this year.
FBME Bank, a branch of the Federal Bank of the Middle East, with headquarters in Tanzania, is being accused by the regulator of failing to comply with restrictions in transactions under the Emergency Law and the related decrees passed after the Eurogroup decisions.
But in a letter seen by the Mail, the bank counters that the alleged violations of capital restrictions had the regulator’s tacit consent all along – until now.
Dated November 18, the letter is addressed by FBME Bank chairman Ayoub-Farid M Saab to CBC governor Panicos Demetriades.
Saab points out in the letter that FBME “has, from the outset, notified the CBC of payments made above the thresholds stated in the Decrees.”
“Practically all notifiable payment transfers were notified to the CBC on the same or the following day… During this period CBC stood back and took no action for a total period of over seven months. The Bank was entitled in these circumstances to assume that there was no objection to the transfers.”
Saab added that “in view of the threats made in the Letter of 4th November 2013 this Bank does not believe it has been right or legally proper for the CBC to stand by while a penalty liability has been accumulated.”
“Such an action if taken by the Central Bank of Cyprus would create exactly the sort of financial disturbance, if not instability, which the law proclaims it was put in place to avoid,” the letter warned.
FBME goes on to point out that it is not in direct competition with local retail banks: “It does not issue cheques and has no retail counters. Its local customers are, in the main, staff, contractors and professionals providing services to the Bank.”
The bank moreover argues that the bulk of the alleged capital transfer violations took place after the introduction of the first Foreign Banks decree.
Following the Emergency Law passed this year, a series of decrees introduced gradual relaxations for foreign banks, on such activities as opening new accounts and new fixed term deposit accounts created from cash funds.
A list of foreign banks eligible for these relaxations was drawn up and FBME was not included.
FBME claims that, though it was fully qualified to be entered into the catalogue, it was prevented from doing so by the CBC while the bank maintained litigation against the government.
The litigation referred to an application before the Supreme Court, where FBME is challenging as unlawful the capital restrictions imposed by local banking authorities.
Sources at the central bank confirmed the dispute with FBME, adding that the capital transfers under scrutiny amount to some €120m.
The sources, who wished to remain anonymous, said the relevant law empowers the CBC governor to impose a fine on the bank up to double the amount in question – which could mean €240m.
The decision on whether to impose sanctions, and the extent of the sanctions, is at the sole discretion of the CBC governor, the same sources said.
They also claimed that the matter of the bank’s compliance with capital restrictions was raised by the CBC board, which “put pressure” on the governor to take action.
An international commercial bank, FBME Bank was founded in 1952 in Lebanon, as the Federal Bank of Lebanon SAL. In 1982 Federal Bank of the Middle East was established in Cyprus as a subsidiary of the Federal Bank of Lebanon SAL. In 1986 Federal Bank of the Middle East changed its country of incorporation to the Cayman Islands and its banking presence in Cyprus was transformed to that of a branch of the Cayman Islands entity. Since 1993 it has maintained a Representative Office in Moscow.
In 2003, as part of its strategic planning, Federal Bank of the Middle East terminated its banking presence in the Cayman Islands and established its parent company and operational headquarters in Tanzania. At the same time its Cyprus operations became a branch of Federal Bank of the Middle East, Tanzania.
FBME Bank currently operates two branches, one in Nicosia and one in Limassol.