12 March 2015
This article follows on from that above, Resolution Authority Adrift in a Sea of Troubles.
The Resolution Authority of the Central Bank of Cyprus (CBC) – actually its Board of Directors – and the Resolution Committee – three members of the same Board – appear, remarkably, answerable to no one except each other. They have bungled the Resolution of the Island’s Laiki Bank, causing massive problems across the whole domestic sector and have used a bogus interpretation of a Resolution Decree to expropriate the Cyprus branch of FBME Bank. In the process, they have caused an almost total collapse in confidence in the central bank, squandered opportunities to protect account holders and creditors, and risked compensation payouts of hundreds of millions of euros.
Over the last half-year, this fbmeltd.com website has drawn attention to the actions of the Resolution Authority and its three-person Committee in playing fast and loose with Cypriot and international law, the Guidelines of the Basel Committee on Banking Supervision and best global practice. Here, we summarise those references.
In 17 July 2014 (advised on 18 July in Cyprus) the US Department of the Treasury’s FinCEN bureau announced a Notice of Findings and Notice of Proposed Measures against FBME Bank in respect of alleged anti-money laundering failures. Subsequently, FBME commissioned an independent forensic investigation into its operations which provided answers to FinCEN’s allegations. Discussions with FinCEN on the Notices are continuing in the United States.
As soon as FBME was made aware of the FinCEN allegations, its holding company took immediate steps and on 18 July engaged its long standing legal advisers, Hogan Lovells, to represent its interests with the US Treasury and communicate its commitment to full and unequivocal cooperation. On the same day, FBME Bank sought a meeting with the CBC, inviting them to supervise operations in order to restore confidence, particularly with correspondent banks as to compliance with all anti money laundering regulations.
On 21 July 2014, after just one day in control, the CBC’s Resolution Authority issued a Decree under the powers conferred on it by section 2A of the Resolution of Credit and Other Institutions Law, 2013 – 2014, which placed the branch of FBME Bank Ltd in Cyprus under resolution. The Decree’s purpose was to sell the operations of the branch with the aim of protecting FBME depositors. No sale has yet been made and arguably no depositor protected. There was no consultation with FBME’s owners.
This Resolution Law was designed for insolvent banks or those facing severe liquidity problems, not banks such as FBME which was 104 % liquid at the time. This meant that FBME was financially in a very healthy and strong position, allowing the Bank to repay all depositors without difficulty. By using the inappropriate Resolution Law, the CBC’s Resolution Authority used a bogus interpretation to foist a hostile takeover on the FBME branch.
Number 106 of the Basel Guidelines, which central banks are encouraged to follow, says that ‘… it is the responsibility of the board of directors and senior managers of a bank, not a supervisor, to determine how a bank should solve its problems’. Unaccountably, this was ignored by the Resolution Authority just two working days into the crisis. Its decision was clearly hasty and ill-conceived, but it also suggested other motives at work.
The Resolution Authority appointed an Administrator, Dinos Christofides, to run FBME’s Cyprus branch by diktat. At no time has he attempted to engage with the Bank’s owners and directors and has on many occasions threatened managers and staff with dismissal. He assumed responsibilities beyond his mandate and shirked duties he should have shouldered. Moreover, at the time of his appointment he was in a seriously conflicted position, a situation that is believed to be unresolved.
On taking over FBME’s Cyprus branch in July, the Resolution Authority shut the branch for two days, and then for two days more – as allowed by the Resolution Law. Thereafter, from July 30 the branch was stopped from making any transactions and depositors were barred from having any access to their funds until 2 September. This meant that the branch was effectively closed for another 34 days – which is not in line with the letter or the spirit of the Law.
The Bank’s subsidiary, FBME Card Services, was forced to suspend services on 7 August. This was because it was unable to operate without access to its funds held in FBME Bank – a direct and deliberate result of the decisions of the Resolution Authority and its Administrator. Four days later on 11 August, the subsidiary had to make 72 of its staff redundant. Information from FBME account holders reveals that a number of companies, both inside Cyprus and internationally, have found themselves in a similar boat, closing operations and laying off employees. Surely, this is not what is expected of a Resolution Authority.
The Resolution Authority refused to communicate its reasons for having acted as it did or to provide any plan as to its future intentions, again in flagrant contradiction of the Basel Guidelines or international practice. This lack of transparency, which is widely condemned in Cyprus, caused FBME Limited to launch this fbmeltd.com website as a way of meeting the needs for information. More than 60,000 individual computers have been used regularly to seek updates. On 5 September the website was the target of a massive denial of service attack, which took it down. Within 48 hours it was put back up on a location outside Cyprus.
There has been much international disquiet. On 19 August, Fitch Ratings issued a report expressing concern at the use of Resolution measures against the branch of a foreign bank. The CBC and its Resolution Authority made no attempt to coordinate activity with the Home Supervisor of FBME’s headquarters, the Bank of Tanzania (BoT), despite very strong recommendation set out in the Basel Guidelines.
The Administrator appointed by the Resolution Authority announced on1 September that from the next day he would allow limited transactions to start. This involved a tortuous process whereby FBME depositors had to present themselves in person in Cyprus to get access to their accounts. He has never explained this nor why 300 accounts remained frozen, despite rules saying that depositors in the same asset class should be treated in the same way. The blocked accounts were unfrozen on 6 November, again without explanation.
With the approval of the Resolution Authority, the Administrator continued making decisions that caused obvious harm to FBME Bank and its customers. Remarkably, at the time of his appointment the Administrator wrote that one of his aims was to protect the interests of depositors! We wonder how he would now explain this in the light of his subsequent actions.
Questions began to be asked about the Resolution Authority in forums both here and abroad. The Cyprus House of Representatives began to investigate the matter and scheduled a hearing in Parliament for 17 February. This was postponed at the intervention of the Attorney General of Cyprus, though it was made clear that officials will be “… still called to account for their actions, inactions or omissions”.
Arbitration at the ICC in Paris under the Lebanon/Cyprus Treaty for the protection of co-investment began on 28 October. Its first instruction was to put a halt to all measures introduced by the Resolution Authority to commandeer FBME funds for its own accounts, or to change the status of the branch in any way through sale or closure.
Then on 31 October, it was revealed that Chrystalla Geordhadji, the Governor of the CBC, had engaged in breath-taking activity regarding her personal employment contract and a conflict of interest in the legal case against the former Laiki chairman, Andreas Vgenopoulos. She is currently being investigated by the Auditor General in respect to the latter issue.
In questioning her behaviour and expertise, one MP asked why she and the Resolution Authority had been allowed to mishandle the FBME situation so badly that it might lead to cost the Republic hundreds of millions of euros in compensation.
Faced with the lack of transparency in the Resolution Authority, the ultimate owners of FBME announced on 2 November that they intended to hold senior CBC officials personally responsible for damage caused to the Bank and its subsidiary. This website has consistently deplored the situation created by the Resolution Authority through its ineptness, and its lack of consideration for law and international practice, and its unwillingness to explain what is behind its actions or how it expects this matter to be resolved. They dug themselves into a hole in July 2014. In trying to get out since then, they have just kept on digging, in the process getting themselves and the people of Cyprus into an ever deeper mess.
On five separate occasions between June and November the Resolution Authority sent in teams of CBC staff and PwC accountants to investigate FBME’s Cyprus branch. At no time have results been shared with FBME or made public.
Responding to criticisms from one of its own board members, the CBC announced its intention to commission a major study of operations with a view to bringing in “restructuring and modernisation”. Hopefully, this will include the workings of the Resolution Authority and its Committee, and measures to supervise its activities.
The CBC board member in question, Stavros Zenios, specifically expressed his frustration with senior management in the CBC who appear to be most resistant to change. He pointed to the reports of international observers which have highlighted serious weaknesses that contributed to the collapse of the domestic Cypriot banking sector in 2013, writing that they could lead to another catastrophe. A Resolution Authority answerable to no one but itself seems to be at the heart of the problem.
The lack of expertise and experience is stark. The Governor, who was just a few months in the job when the Resolution Decree was issued against FBME, had never worked in either a central bank or a bank before. The two Executive Directors who make up the Resolution Committee with the Governor, are economists and academics, and similarly have little relevant experience. It is the blind leading the blind.
That they have been allowed to engage in activity exposing the Republic to massive losses and for scores of people to lose their livelihoods and savings, is nothing less than a national scandal. Speedy action is required for this particular wound to be cauterised.