Cyprus is in a race against time to avert the loss of money held by depositors in accounts at the FBME Bank (Cyprus) Ltd which could further damage the reputation of its banking system, sources said.
The bank, a branch of the Tanzanian FBME Bank Ltd that had its licence withdrawn in December, for failing to comply with Cyprus’s anti-money laundering and terrorist financing legislation, has about €1.4bn in deposits held by various corresponding banks around the world. Any delay in getting the funds released could potentially lead to losses, as several of these banks are not adequately capitalised, sources with knowledge of the situation said.
At this stage, the Central Bank of Cyprus (CBC) has an application for the appointment of a liquidator pending at the court in Nicosia with the hearing scheduled for next month. A court ruling is expected before January, sources said.
As Cypriot depositors lost about €8bn in Cyprus’s bail-in in the 2013 banking crisis, additional depositor losses could further tarnish the reputation of the Cypriot banking system.
“One of the reasons the Central Bank of Cyprus is seeking the appointment of a liquidator is the lack of cooperation with authorities in Tanzania,” a source said. “As a result, a huge amount of funds has remained blocked in the German banking system and cannot be repatriated”.
While Deutsche Bank, Germany’s largest lender which saw the value of its share plummet in recent days over fears it would require a rescue holds “only a few hundred thousand euros” of FBME funds, “several hundreds of millions of euro” of FBME money remain currently frozen at another bank in Germany, a source said. Fears of the failure of a systemic bank made the need to speed up procedures an imperative, the source added. Deutsche Bank has been slapped with a fine of up to $14 billion by US authorities for misspelling mortgage-backed securities.
One of the sources said that the difficulties institutions in Cyprus are facing could be linked to reports in the Tanzanian press claiming Benno Ndulu, governor of the Bank of Tanzania and Lawrence Mafuru, the statutary manager Ndulu appointed at FBME Bank Ltd in Tanzania, were threatened with imprisonment.
The two men have been asked by a court in Tanzania to explain how a decree for the payment of 92m Tanzanian shillings to Coast Textiles Ltd can be implemented.
A person close to the shareholders of FBME said that the bank was aware of the report. “We knew about this,” the FMBE source said. “It is an old story that refers to the original bank in Tanzania, Delphi Bank, before the date at which Delphi was purchased by FBME Bank”.
FBME sold property belonging to Coast Textiles to a third party for the repayment of a $600,000 draft facility in 1997 which never arrived in the textile company’s bank account, the Tanzania Daily News reported a week ago.
“No matter whether anyone lands in prison, one of the reasons that the central bank wants to have a liquidator appointed is to return money to the depositors,” a source said.
Floris Alexander, a Limassol-based legal advisor who helps FBME depositors apply to have their funds returned after the central bank initiated the depositor guarantee scheme in April, said that a decision by a Cypriot court to appoint a liquidator at the bank, will make corresponding banks abroad more willing to cooperate with Cypriot authorities.
“Correspondent banks are currently in a difficult situation as they may get questions as part of a criminal investigation ordered by their national governments about the source of FBME funds they have on their accounts,” he said in an interview “They don’t want to be dragged in to such a situation”.
The U.S. Financial Crime Enforcement Network, a division of the US Treasury, described two years ago FBME as “a primary money laundering concern” with ties to Hezbollah and ordered U.S. banks to refrain from opening or maintaining correspondent accounts with it. The bank denies the allegations and contested FinCEN’s decision at the court. FBME also filed a law-suit against the Republic of Cyprus at an arbitration court in Paris seeking €500m in damages.
“If a court gives a clearance with the issue of a ruling that clears them from the source of funds, this will make it easier for corresponding banks to release the funds,” Alexander continued. “So unless there is a clearance and liquidation order, they cannot be sure that there will be no criminal investigation”.