By Stelios Orphanides
Former Central Bank of Cyprus’s governor Panicos Demetriades said that he was not aware of FBME Bank, the Tanzanian lender which had its licence in Cyprus revoked, being engaged in money laundering and is surprised over related allegations the bank faces which he considers a by-product of domestic “toxic politics” fuelled by the rivalry of larger banks.
“Smaller banks such as FBME, as well as being a source of healthy competition, are inadvertently a threat to the supremacy of larger banks,” Demetriades, an academic who served as governor during the banking crisis of 2013, said in a letter to the U.S. treasury’s Financial Crime Enforcement Network, widely known as FinCEN. “As such, they tend to attract interest by politicians, often for the wrong reasons”.
In 2014, the Central Bank of Cyprus placed FBME under administration, citing a damning report by FinCEN which deemed the bank a “primary money laundering concern” and having links to the Lebanese terror militia Hezbollah. FBME denies the allegation and launched a legal battle against the Central Bank of Cyprus, which revoked the licence of its Cyprus branch last December.
“During my tenure as governor, the AML (anti-money laundering) capabilities of the Central Bank of Cyprus were strengthened considerably, in line with the obligations of the Republic (of Cyprus) under the memorandum of understanding with the European Commission and the International Monetary Fund,” he said. “At no time was I ever presented with any evidence to suggest that any bank in Cyprus engaged in money laundering during that period”.
Demetriades, who resigned as governor in April 2014, said that immediately after assuming office in May 2012, he was informed of the Tanzanian bank’s “informal” interest to convert its Cyprus branch to its headquarters, which was followed by a formal application “which the Central Bank of Cyprus was prepared to consider in the interest of increased competition in the banking sector”.
The former governor said that with many activities in Cyprus, including banking, being an extension of party politics, “certain politicians”, whom he did not name, “were uncomfortable with FBME’s presence in Cyprus” and may have been “overprotective of the biggest domestic banks, although it is those banks’ reckless actions that fuelled an unsustainable property boom and created large contingent liabilities for the sovereign through excessive exposures to Greece and Eastern Europe, including Russia”.
He added that prior to his appointment to the helm of the CBC by communist former president Demetris Christofias, FBME invested “substantial funds” into Cypriot government securities which helped Cyprus “avoid a disorderly default” after it got shut out of markets in May 2011 and during the negotiations with international creditors, which started in June 2012.
Demetriades was the target of harsh criticism over his role as central bank governor during negotiations with creditors, concluded in March 2013, for allowing failed lender Cyprus Popular Bank, also known as Laiki, to tap over €10bn in emergency liquidity from the European Central Bank, even after the bank was considered insolvent. Under Cyprus’s bailout terms, depositors at Laiki lost all their uninsured deposits while those at Bank of Cyprus saw almost half of their deposits in excess of €100,000 converted into equity as part of the bank’s recapitalisation.
In September 2012, after Christofias ignored pleas by representatives of the troika of the European Commission, the European Central Bank, and the International Monetary Fund, to speed up the conclusion of bailout negotiations, reports in international press linked Cyprus to money-laundering. A month later, the Central Bank of Cyprus announced its intention to formally consider FBME’s application for a banking licence as a Cypriot bank, which would allow it to operate in all other European Union member states.
“It is not inconceivable, indeed it is likely, that politicians who were in opposition at the time, interpreted the action as a lifeline to the previous government,” he said. “Therefore, despite FBME continuing to finance the sovereign even after the change in government, certain politicians of the ruling party may have continued to perceive FBME as a hostile bank”.
“I find it extremely difficult to understand the rationale of the Central Bank of Cyprus’s actions in relation to FBME,” he said. “I suspect that the diminished independence of the Central Bank and the toxic politics alluded to above may well have contaminated the decision-making process of the Central Bank of Cyprus, pushing it away from strict banking considerations and into the realm of party and interest group politics. I am also concerned that FinCEN itself may have received misleading or inaccurate information about FBME from Cypriot sources, since a small bank like FBME may be a convenient scapegoat”.