Options for the future (from Legal)
The chance that FBME will open her doors again and continue all her activities as if nothing happened is slim. Customers who were badly informed for many months, and no longer have control over their money, will likely take their money to bank elsewhere if given the chance.
Although the short term liquidity risk of FBME was 104% in July 2014, this is irrelevant while it remains unclear how much of this security should be seen as risk capital. In addition, the bank's equity capital is diminishing fast. Large numbers of clients with euro accounts are writing daily cheques and withdrawing their money. The salaries of more than 200 employees still working for the bank need to be paid, office costs are increasing and office rent still has to be as always. On the other hand, there is little income to pay for these costs. This is a serious problem, even though it is downplayed by FBME.
There is no clear answer to the question of whether offshore companies can apply for reimbursement by the deposit guarantee fund. Another issue, is that FBME may be held (partly) responsible for any bankruptcy. No insurance covers damage in case the insured is responsible for the damage himself. Therefore, it is not certain that bank account holders will be reimbursed, or even partially reimbursed, in case they lose money due to FBME bankruptcy.
Generally speaking there are six options for the future of FBME:
A continuation of all activities
The least likely scenario, although not impossible, is that the bank opens her doors again as if nothing happened without any form of further damage. Of course, this will result in many customers withdrawing all their money and closing their accounts. This will have consequences for the liquidity and solvability of the bank and may lead to a bank run and bankruptcy. If FBME is permitted to reopen and continue its activities, a new business model might be a solution which could prevent further damage.
Bankruptcy
The current situation is especially unpleasant for the bank's customers and employees. The bank is unable to fulfil her contractual obligations. That this is caused by the actions of third parties is irrelevant. Both customers and employees of FBME can submit a request for bankruptcy. The chance that bank employees make such a request is tiny, as they would lose their jobs and financial security in case of bankruptcy. For the large group of legitimate clients the situation is different. Especially for those not in a high risk group or not having a risk profile defined by FinCEN.
The bank can also go bankrupt for direct legal reasons, in case it can no longer meet its payment obligations. Because of the high expenses and continuous withdrawals of large amounts of euros, while the bank has little income, payment problems are to be expected at some point. The Central Bank is obligated to intervene in case the liquidity or solvability risks become too large.
Sale or acquisition
The Central Bank of Cyprus has attempted to sell the business unit FBME Card Services. This forced partial sale of the bank was stopped by the ICC. It is possible that another more suitable buyer can be found, though such a sales process will be complex.
Sale of FBME Card Services, or any other part of the bank, does not solve the core problem of the bank though, which brought the bank in this precarious situation in the first place. The question is how correspondent banks and governments will react when suspicious clients are simply transferred to another financial firm.
Bank run
The most dangerous scenario is a bank run. A bank run happens when account holders massively decide to withdraw their money creating liquidity problems for the bank. At some point, the bank will no longer be able to meet its obligations and bankruptcy will be requested by the Central Bank or the bank itself.
A bank run typically first results in a suspension of payments, and then a bankruptcy. This means that many account holders will have to wait a long time before they can get their money, or a reimbursement, if any. The biggest problem is the period between the declaration of bankruptcy and reimbursement. This can take a long time, because the curator has to investigate the background of the bankruptcy. For example, in the case of the Icelandic Bank Icesave it took several years before clients got their savings back.
The Deposit Guarantee Scheme of the European banks reimburses a maximum amount of 100,000 euros. For the majority of FBME account holders this is only a partial guarantee. Also, it is not certain that every account holder will qualify for this deposit insurance. Those in charge will want to prevent a situation where a European insurance fund can be used to protect criminal funds.
Nationalisation
In Europe, a popular cure for troubled banks is nationalisation, whereby a government takes over all shares in a bank. Formally, in the case of FBME, this would have to mean nationalisation of the head office in Tanzania. The question is, whether this is possible within the laws and regulations of Tanzania. So little information is available about this question, that it is almost impossible to judge whether this is a realistic scenario. A nationalisation in Cyprus is also difficult, as ownership relations will reverse in that case (the Tanzania branch becoming the subsidiary instead of the Cyprus branch). This would create problems with regard to the stricter regulations for banks registered in Cyprus compared to Tanzania.
Bank closure
More and more observers, in particular within the Central Banks, are arguing for retraction of the bank license of FBME. That idea does have certain advantages. It would create a situation where the Central Banks, together with the administrator, and possibly a curator, could reimburse legitimate account holders. They could apply to the Deposit Guarantee Scheme, making a first reimbursement payment to account holders possible within twenty days after official bank closure.
The six above mentioned options do not take one important item into account: It is by no means certain that client will gain access to their deposits in case of a new owner, bankruptcy or in case the bank reopens and continues as before. For the freezing of all bank accounts has two reasons. First, to prevent a bank run. And second, to be able to investigate suspicious money streams.
Legitimate customers
The FinCEN report clearly mentions a large number of unusual transactions. This indicates that there are fraudulent users of FBME's banking services. But what about the rest? Surely, there must be clients who have nothing to do with criminal money, money laundering or terrorist financing? These legitimate clients have been waiting for good news for months. And have been met mostly by deafening silence.
Legitimate clients can protect themselves against future damage by immediately starting by refuting the accusations presented in the FinCEN report. Using hard facts, hard figures, audit reports, an impeccable bookkeeping and a detailed company profile individual clients can prove that they are legitimate and have a right to full payment of damages. Every individual client is well advised to create such a thorough report for himself and his business. This can be used as evidence for the European Deposit Guarantee, or possibly at a later stage, for a court case.
Who is responsible for any damages?
There are a number of issues which may be relevant in any court case, and may help lead to a decision in favour of individual account holders. It is clear that there are many parties to the case. If one takes the position that the bank as a whole should never have received a banking licence, one can try to hold the governments of Tanzania and Cyprus responsible. If one takes the position that all problems are the fault of FBME Ltd. and her operations, then one can try to hold FBME Ltd. responsible. In that case, does one hold the owners or the managers responsible? One could also accuse the intermediary who introduced you to the bank as being careless. Perhaps FinCEN and the US government are responsible for the problems? All of these are possibilities. Possibilities which have to be judged on its merits on a case-by-case basis.
It should be clear by now, that if you are a legitimate FBME account holder, you will have to build your individual case yourself. For, there is no person or institution who is clearly directly responsible. An independent judge will have to determine the facts based on details and circumstances presented by you. On that basis, he will have to decide what your damages are, if any, and who is responsible to reimburse you.
The procedure to be followed lies in the area of civil courts. From this, it follows that you will have to do research yourself in order to make a case that a specific person or organisation is liable to pay you damages. As in any civil case, you as the plaintiff have to prove your case. Therefore, it is advisable to start building a strong case now.
Solutions for FBME clients
After months of uncertainty, the time has come to do something about the situation. There are too many unknowns in the quarrels between FBME, Central Banks, FinCEN and others. FBME are at risk for receiving the short end of the stick. Besides customers, FBME also has suppliers and employees which may be short changed. Whatever happens to FBME, all such parties will try to get their money out first. And this is not good news for account holders, and the percentage of their deposits they will be able to get back.
There are a number of things FBME customers can do themselves:
Financial forensic profiling
The problems surrounding FBME have a reason. By preparing a ‘financial forensic profile' you insure you will not be included in the group of suspicious clients of FBME where all the problems started. Copies of your tax returns in your country of residence can also be helpful. The goal is to prepare a profile which clearly points to your financial dealings being legitimate.
Your profile should also include a business plan and a Resume of all directors. The point is to provide evidence or your business being fully legitimate.
The financial forensic profile can be used in court cases, to get a privileged position among creditors and to demonstrate to Central Banks that you are not among the account holders where the problem originated. You can find more information about financial forensic profiling here.
Clients of FBME Cyprus
Clients of FBME Cyprus can easily satisfy the conditions specified by the bank administrator. If you are a legitimate FBME account holder you need to open a new bank account with another bank in Cyprus with the exact same account name as the FBME account. Then you send a form 131CY by fax to FBME containing a ‘demand draft' for a maximum of 200 euros per day. A demand draft is another word for cheque. The cheque needs to be deposited at the other bank in Cyprus. Depending on your situation, it may not be possible to do this yourself. The maximum amount per day creates additional complications. Fortunately, it is possible to outsource the whole procedure. Click here for an explanation and a free consult by one of our legal advisors.
Court case
The ICC can pronounce a legally binding verdict. The case before the ICC is mostly about FBME's request to gain back control. By hoping for a favourable outcome of that case, you are depending on a third party. But who is to say that ICC's verdict will result in your damages being paid? It is also possible to start court proceedings yourself against one of the many, or perhaps all of the, parties involved.
Unfortunately, not everybody is in a position to start a court case against FBME, the Central Bank or another party involved. The cost is prohibitive, a verdict will likely take a long time and if one of the parties does not agree with the verdict, they can appeal it.
Class action suit
Legal proceedings can be very costly, lengthy and stressful. By starting a class action suit together with other damaged parties, synergy results. Costs can be shared, and the case can become much stronger by bundling various business cases into one pattern. Such a pattern dramatically increases your chances of getting a favourable verdict from an independent judge.
The ‘Organisation for Customer Protection in Bank Failures' was specifically founded to help victims of bank failures resulting form mismanagement or bank runs. The organisation helps its members by providing correct and timely information about various options. It can also start a class action suit on behalf of its members, in order to ensure for them the highest damage payments possible. You can find more information about the organisation here.
The Deposit Guarantee Scheme
The Deposit Guarantee Scheme, which was founded conform the rules of the European Commision, was created to protect bank deposits, maintain consumer confidence in banks and provide a ‘safety net'. The scheme is meant to contribute to a quick winding up of loose ends in case of bank failure.
A bank failure is a situation where bank deposits are no longer available for withdrawal. According to European Union guidelines a bank failure can only be determined by a ‘competent authority' or court proceeding. After a pronouncement of a bank failure, deposits are made available to account holders within twenty days.
As of 2010, the guaranteed amount for bank accounts within the European Union is set to 100,000 euros. In exceptional circumstances, a higher guaranteed amount can be decided upon. This depends on the individual situation of the bank account holder.
The maximum applies to the total deposits of all accounts of an individual account holder with the same bank. Even if the bank operates under different labels, the total deposit amount is determined by summing the deposits of all accounts per individual account holder. Thus, one cannot increase the maximum protection of 100,000 euros by having multiple accounts with the same bank or different branches of the same bank.
Deposit Guarantee Schemes cover deposits of individuals and companies, regardless of company size. Financial institutions and authorities cannot make use of deposit guarantee. According to the exact definition of a holding company, a holding company is a financial institution. Therefore, holding companies are not always entitled to reimbursement by a deposit insurance scheme.
Contact
If you would like more information about recent developments within FBME, or if you are interested in a personal discussion of the possibilities in your individual case, please contact the FBME Bank Account Rescue Mission.
