FBME Bank Shut Out of US Financial System for “illicit finance business from the darkest corners of the criminal underworld”!
Posted by William Byrnes on July 18, 2014
On July 15, 2014 FBME Bank, a $2 billion asset size Tanzanian institution that conducts 90% of its business and holds 90% of its assets in Cyprus, has been named by FINCEN as a foreign financial institution of “primary money laundering concern” pursuant to Section 311 of the USA PATRIOT Act. FINCEN proposes to prohibit US financial institutions from opening or maintaining correspondent accounts for or on behalf of FBME, effectively shutting FBME out of the US financial system.
What is FBME Bank?
FBME was established in 1982 in Cyprus as the Federal Bank of the Middle East, Ltd., a subsidiary of the private Lebanese bank, Federal Bank of Lebanon. Both FBME and the Federal Bank of Lebanon are owned by Ayoub-Farid M. Saab and Fadi M. Saab.
Who Regulates FBME Bank?
FBME, via its Cypriot branches, are licensed and regulated by the Cyprus Central Bank. According to a Wall Street Journal report of March 4, 2013, FBME acquired €240 million of Cypriot government junk bonds at the height of the 2011 Cypriot financial crisis, representing 13% of FBME’s balance sheet. In 2012, on the day of Parliament’s announcement of the Cyprus financial system bailout WJS noted, FBME coincidently moved its headquarters to Cyprus and applied for a full banking license that would allow it EU wide distribution.
18 months later, in November 2013, the Cyprus Central Bank stated that FBME may be subject to sanctions and a fine of up to €240 million for alleged violations of Cypriot capital controls put in place with the bailout. But FINCEN pointed out that in just the year from April 2013 through April 2014, FBME conducted at least $387 million in wire transfers through the U.S. financial system that exhibited indicators of high-risk money laundering typologies, including widespread shell company activity, short-term “surge” wire activity, structuring, and high-risk business customers. FBME was involved in at least 4,500 suspicious wire transfers through U.S. correspondent accounts that totaled at least $875 million between November 2006 and March 2013.
What Money Laundering Is FBME Allegedly Involved With ?
FINCEN alleges:
- In 2008, an FBME customer received a deposit of hundreds of thousands of dollars from a financier for Lebanese Hezbollah.
- As of 2008, a financial advisor for a major transnational organized crime figure who banked entirely at FBME in Cyprus maintained a relationship with the owners of FBME.
- FBME facilitated transactions for entities that perpetrate fraud and cybercrime against victims from around the world, including in the United States. For example, in 2009, FBME facilitated the transfer of over $100,000 to an FBME account involved in a High Yield Investment Program (“HYIP”) fraud against a U.S. person.
- In September 5 2010, FBME facilitated the unauthorized transfer of over $100,000 to an FBME account from a Michigan-based company that was the victim of a phishing attack.
- Since at least early 2011, the head of an international narcotics trafficking and money laundering network has used shell companies’ accounts at FBME to engage in financial activity.
- Several FBME accounts have been the recipients of the proceeds of cybercriminal activity against U.S. victims. For example, in October 2012, an FBME account holder operating as a shell company was the intended beneficiary of over $600,000 in wire transfers generated from a fraud scheme, the majority of which came from a victim in California.
- FBME facilitates U.S. sanctions evasion through its extensive customer base of shell companies. For example, at least one FBME customer is a front company for a U.S.-sanctioned Syrian entity, the Scientific Studies and Research Center (“SSRC”), which has been designated as a proliferator of weapons of mass destruction
What actions are the Cyprus Central Bank taking in regard to these transactions, and in general as regards the allegations of wide spread money laundering by FBME? For a detailed look at Cyprus AML controls, see Special Assessment of the Effectiveness of Customer Due Diligence Measures in the Banking Sector in Cyprus of April 24, 2013.
Update of July 19: Yesterday, the Cypriot Central Bank took control of FMBE’s Cypriot branch operations. FMBE, denying the FINCEN allegations, responded as follows:
FBME Bank commissioned a detailed assessment by the German office of a leading international accountancy firm into its operations and practices, which found that the Bank’s services are indeed in compliance with applicable AML rules of the Central Bank of Cyprus and the European Union.
FBME Bank welcomes the involvement of its regulator, is cooperating fully with it and reiterates its absolute continued commitment to full compliance with applicable laws and regulations.
FBME Bank continues to comply with European Capital Adequacy and Liquidity Standards and other healthy balance sheet ratios.
This academic looks forward to FBME making available the detailed assessment of the leading international accountancy firm that FBME’s side of the story may be known.
What Did FINCEN Announce About FBME?
Director Jennifer Shasky Calvery stated in FINCEN’s July 17, 2014 announcement:
“FBME promotes itself on the basis of its weak Anti-Money Laundering (AML) controls in order to attract illicit finance business from the darkest corners of the criminal underworld.” … “Unfortunately, this business plan has been far too successful. But today’s action, effectively shutting FBME off from the U.S. financial system, is a necessary step to disrupt the bank’s efforts and send the message that the United States will not stand by while financial institutions help those who intend to harm or threaten Americans.”
In its Notice of Finding, FINCEN stated “FBME is used by its customers to facilitate money laundering, terrorist financing, transnational organized crime, fraud, sanctions evasion, and other illicit activity internationally and through the U.S. financial system.”
FINCEN Proposes Shutting FBME Out of US Financial System
In its Notice of Proposed Rulemaking, FINCEN states that it intends to impose the fifth, special measure allowed by Section 311 of the USA PATRIOT Act (“Section 311”). FINCEN’s Director has the authority, upon finding that reasonable grounds exist for concluding that a foreign jurisdiction, institution, class of transaction, or type of account is of “primary money laundering concern,” to require domestic financial institutions and financial agencies to take certain “special measures” to address the primary money laundering concern.
The fifth special measure would prohibit covered financial institutions from opening or maintaining correspondent accounts for or on behalf of FBME Currently, only one U.S. covered financial institution maintains an account for FBME. FINCEN’s fifth measure entails as follows:
Covered financial institutions also would be required to take reasonable steps to apply special due diligence .. to all of their correspondent accounts to help ensure that no such account is being used to provide services to FBME. For direct correspondent relationships, this would involve a minimal burden in transmitting a one-time notice to certain foreign correspondent account holders concerning the prohibition on processing transactions involving FBME through the U.S. correspondent account.
U.S. financial institutions generally apply some level of screening and, when required, conduct some level of reporting of their transactions and accounts, often through the use of commercially-available software such as that used for compliance with the economic sanctions programs administered by the Office of Foreign Assets Control (“OFAC”) of the Department of the Treasury and to detect potential suspicious activity. To ensure that U.S. financial institutions are not being used unwittingly to process payments for or on behalf of FBME, directly or indirectly, some additional burden will be incurred by U.S. financial institutions to be vigilant in their suspicious activity monitoring procedures. …
A covered financial institution may satisfy the notification requirement by transmitting the following notice to its foreign correspondent account holders that it knows or has reason to know provide services to FBME:
Notice: Pursuant to U.S. regulations issued under Section 311 of the USA PATRIOT Act, see 31 CFR 1010.661, we are prohibited from establishing, maintaining, administering, or managing a correspondent account for or on behalf of FBME Bank Ltd. The regulations also require us to notify you that you may not provide FBME Bank Ltd. or any of its subsidiaries with access to the correspondent account you hold at our financial institution. If we become aware that the correspondent account you hold at our financial institution has processed any transactions involving FBME Bank Ltd. or any of its subsidiaries, we will be required to take appropriate steps to prevent such access, including terminating your account.
The special due diligence would also include implementing risk-based procedures designed to identify any use of correspondent accounts to process transactions involving FBME. A covered financial institution would be expected to apply an appropriate screening mechanism to identify a funds transfer order that on its face listed FBME as the financial institution of the originator or beneficiary, or otherwise referenced FBME in a manner detectable under the financial institution’s normal screening mechanisms. An appropriate screening mechanism could be the mechanism used by a covered financial institution to comply with various legal requirements, such as the commercially available software programs used to comply with the economic sanctions programs administered by OFAC.
A covered financial institution would also be required to implement risk-based procedures to identify indirect use of its correspondent accounts, including through methods used to hide the beneficial owner of a transaction. Specifically, FinCEN is concerned that FBME may attempt to disguise its transactions by relying on types of payments and accounts that would not explicitly identify FBME as an involved party. A financial institution may develop a suspicion of such misuse based on other information in its possession, patterns of transactions, or any other method available to it based on its existing systems. Under the proposed rule, a covered financial institution that suspects or has reason to suspect use of a correspondent account to process transactions involving FBME must take all appropriate steps to attempt to verify and prevent such use, …
LexisNexis’ Money Laundering, Asset Forfeiture and Recovery and Compliance: A Global Guide – This eBook with commentary and analysis by hundreds of AML experts from over 100 countries, is designed to provide the compliance officer accurate analyses of the AML/CTF Financial and Legal Intelligence, law and practice in the nations of the world with the most current references and resources. The eBook is organized around five main themes: 1. Money Laundering Risk and Compliance; 2. The Law of Anti-Money Laundering and Compliance; 3. Criminal and Civil Forfeiture; 4. Compliance and 5. International Cooperation. As these unlawful activities can occur in any given country, it is important to identify the international participants who are cooperating to develop methods to obstruct these criminal activities.
William Byrnes' Tax, Wealth, and Risk Intelligence 
MarkNicosia said
The Cyprus financial system crisis and subsequent bail out were in 2013 not 2011 & 2012 as you suggest.
Interesting that, in 8 pages of findings based on half-truths and innuendo, not one mention of Russia or Russians is made. This despite the fact that an estimated 75% of FBME’s business is Russian related. Herein hides the agenda!
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williambyrnes said
The Cyprus financial crisis began in 2011 with the Greek crisis when Greek bondholders were initially asked for a 50% haircut on the face value of bonds. Cypriot banks held these Greek bonds within their portfolios to such an extent that Moody’s downgraded Cypriot debt in the 1st quarter of 2012. Russia also tried to shore up Cypriot banks with a January 2012 loan. In 2012 Parliament also sought to shore up the financial system as part of the Cypriot outreach to the IMF and to the EU. So, commentators state that 2011 is the initial date of the crisis, with the first large loan to shore up the finances in the beginning of 2012.
If you think that FINCEN has a hidden agenda regarding FBME, then write it up here in the comments or elsewhere. I do not see the Russian hidden angle that you mention, other than FINCEN may think that Russian organized crime may stand behind certain of the underlying crimes of the money laundering allegations. A Hezbollah angle – that is at least feasible. But I am not sure that going after banks that transfer funds to Hezbollah qualifies as a “hidden” agenda. Politics and punditry aside, Hezbollah is on the OFAC list.
FINCEN is, of course, laying out its best case in this Section 311 action. FBME may have plausible explanations and defenses. The Cyprus Central Bank took over FBME on Friday (see http://www.centralbank.gov.cy/nqcontent.cfm?a_id=13713) FBME’s owners claim they asked the Cypriot Central Bank to do so in a Lebanese article that I read on this topic. Information will certainly unfold in the coming week. Meanwhile, I am interested to hear FBME’s refutation of the allegations, but to date I have read any other than the general statement it is “running a clean operation”.
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MarkNicosia said
When is a crisis a crisis? The Cypriots, (including the Minister of Finance), did not know they had a crisis until 2013. Arguably, one could trace the debacle back to 2008 in the US.
My point is that the majority of shell companies, (the devil’s work according to FinCEN), in Cyprus generally & FBME in particular, are Russian related. They are legitimate vehicles by which beneficial owners can benefit from the low corporate tax and, more importantly, a legal jurisdiction based on British Law. They are then able to do business in the former Soviet Union whilst protected from the avaricious grasp of Putin & his cronies.
I suggest that Treasury thinks it’s helping the Administration in the sanctions against Putin but is actually helping him.
So, an individual in Lebanon, alleged to be a fundraiser for Hezbollah, (a legitimate political party and govt. coalition partner), decides to buy some second hand cars for import from US. He pays the agent, in US$, to the latter’s a/c which happens to be with FBME. Would there have been the same reaction if the a/c had been with Citibank, HSBC or Deutsche?
I understand that several of the accusations in the Findings were reported by the bank to MOKAS, the Cyprus govt. unit to combat money laundering. MOKAS took ownership of the cases and demonstrated to Treasury how clever they were.
It’s early for a response from FBME as they must still be in shock as they were given no warning and heard about it Friday a.m. Unfortunately, FinCEN and OFAC run roughshod and are playing to a domestic gallery. This action is probably fatal for FBME but who cares? They have all the buzz words: Offshore, Lebanon, Cyprus, Russia.
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williambyrnes said
It is certainly fair to say that the US crisis precipitated the Greek crisis, which in turn led to the Cypriot crisis. On the other hand, Greek public expenditures and commitments (pension) relative to public revenues were (and still are) unsustainable. The Greek crisis is a crisis of government debt, whereas the US crisis was a crisis of bank debt. So, the US banking crisis, and the very poor management thereof, precipitated the global banking crisis, but I suspect the Greek crisis was coming with or without the US one.
As to disparate treatment, the US penalized BNP Paribas nearly $9 billion for transacting with Iran (see https://profwilliambyrnes.com/2014/06/30/bnp-paribas-sa-pays-8-9-billion-settlement-to-usa-for-violating-sanctions/) and a small California importer, $25,000 for shipping lawn furniture with an Iranian shipping company (see Friday’s story). A Russian connection by itself is not going to draw the ire of FINCEN for a 311 action.
FBME took a conscious decision to transact business with the USA through US correspondent banks and also to transact business with OFAC listed sanctioned organizations. If it did not want to attract FINCEN jurisdiction over its actions, then FBME should not have operated through correspondent banking in the US.
When FBME decides to make public its side of the story, by example publishing its Big 4 AML self-study, then I will write about its perspective of FINCEN’s allegations.
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Jason said
William, this has nothing to do with Money Laundering this is purely a political move on behalf of the US Treasury to block the Russian economy, yet again the US choosing to dictate and impose their beliefs on the rest of the world. Mark is spot on, 75% of FBMEs customers are Russian with the majority of off shore companies (shell companies) held by Russian clients. Take a look at what is currently going on the world and the latest situation with Malaysian airlines, Ukraine, Israel and Gaza to name a few.
The FINCEN are looking at stopping the credit line that helps to fund probably not even 2% of the cost of arms and weapons, they (USA) do not wish to start a war with Russia or indeed dip into Palestine has this is simply a step too far for them so the only way they can TRY and stop this is by cutting off credit and harming the financial sector in Russia.
Lets take a look at this even further.
The report the FINCEN have put out on this matter is nothing short of a small joke, €100.000 on a client in Michigan to name but a few small and petty reasons the wise and wonderful Jenny Shasky has put forward under pressure from the US Government.
The reality is that you could go and uncover the majority of off shore bank accounts around the world and uncover far, far more details in money laundering, lets face it some of the biggest corporates in the world are based in the Caymans and the USA´s neighbours Mexico have the largest drug cartels in the world, where do you think all of this money goes!!! Billions of USD, running through accounts that the FINCEN are fully aware of yet it is of no interest to them has it helps to drive an economy, albeit a black one in the US.
FBME in monetry terms is small fry and it is simply a smoke screen for an hidden political agenda that the US Government are behind, the money that is been mentioned in their reports would not even touch the sides to fund any form of war, it is simply the mighty selecting what they wish in order to disrupt the movement of Russian money.
Again political and nothing to do with bail outs, or laundering…….
Lets go and audit the bank accounts of the 1,000´s of accounts in the Caymans and see who the real money launderers are oh and possibly Mexico City……..nope its too close to home and too benefical for Americans to close these down.
Political not financial.
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williambyrnes said
I take your point that in the global context the amounts cited by FINCEN, at issue. are quite small. And why this relatively small bank, but not another?
I just did a simple Google search, and looked 10 pages deep, and haven’t seen anything new posted by FBME defending itself other than what I have noted. I also note that FBME has 60 days from the date or the announcement before the order goes into effect. As soon as FBME publishes its side of the story, I will post a follow up. (Or by Comment, a reader may do so as well).
The Central Bank of Cyprus (CBC) announces that the Resolution Authority has tonight issued a Decree, under the powers conferred to it by section 2A of the Resolution of Credit and Other Institutions Law, 2013 – 2014, which places the branch of FBME Bank Ltd in Cyprus under resolution. The Decree’s purpose is to sell the operations of the branch with the aim of protecting FBME depositors. (see http://www.centralbank.gov.cy/nqcontent.cfm?a_id=13720)
I also read about an Italian PEP investigation involving the bank: http://allafrica.com/stories/201407220591.html
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MarkNicosia said
Resolution in order to protect depositors? In March 2013, the Central Bank put Cyprus Popular Bank and Bank of Cyprus into Resolution. That didn’t go so well for depositors with more than 100,000 euros, they received haircuts of 100% & 45% respectively.
The reason for the Resolution was to avoid the bankrupt Cyprus government from being responsible for depos <E100k.
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