FBME Bank Ltd., a rogue European lender now closed by authorities, sat at the center of a vast network of global criminality and financial malfeasance that included transferring money from companies involved in a high-profile tax fraud in Russia to a group of firms linked to Syrian President Bashar Al-Assad's chemical weapons program, confidential documents obtained by S&P Global Market Intelligence show.
FBME serves as a case study for regulators, compliance officers and other financial professionals, representing an extraordinary example of how lax controls can attract questionable customers and enable illegal practices.
FBME's headquarters were in Tanzania but it conducted most of its operations through a branch in Cyprus. The U.S. Department of the Treasury's Financial Crimes Enforcement Network, or FinCEN, in 2014 labeled the bank a "primary money laundering concern," leading to FBME losing its operating license in Cyprus in December 2015 and in Tanzania in May 2017.
The FinCEN designation effectively banned the company from using U.S. dollars and caused more than 50 other banks to stop transacting with it to avoid regulatory breaches, since the U.S. has legal jurisdiction over all dollar transactions, regardless of where they happen.
FinCEN based its decision to ban FBME from the financial system on what it said was the bank's "willingness to service the global criminal element." The bank's owners appealed the decision in a U.S. court but lost definitively in 2017. They also appealed the intervention of the Central Bank of Cyprus and have sued to stop liquidation proceedings. Additionally, they have taken the Cypriot state to a Paris international arbitration court for damages over how FBME was removed from their possession.
S&P Global Market Intelligence spoke to three sources with direct knowledge of FBME's activities and obtained internal reports from the Central Bank of Cyprus and independent auditors, which together with a 2013 indictment in the U.S. Southern District Court of New York paint a picture of a bank that became a conduit for money laundering, online fraud and the proliferation of banned weapons on a global scale. The revelations were previously reported by CNN and Buzzfeed.
The FBI is among several law enforcement agencies investigating the bank, S&P Global Market Intelligence has confirmed from four independent sources. The FBI and U.S. Department of Justice declined to comment. Although the bank is under criminal investigation, sources say, its owners have not yet been charged with any crimes. Bloomberg News also reported an ongoing criminal investigation into FBME by New York prosecutors.
FinCEN accused the bank of evading money laundering controls and hiding the origin of some transactions. As many as 27% of FBME's customers, including many so-called politically exposed persons, posed a high money laundering risk, said the agency, with hundreds of millions of dollars transacted using shell companies for which the business purpose or beneficial ownership was not clear. Banking professionals define politically exposed persons as those holding political office and those who are in the running for a public function, or their immediate family.
The documents obtained by S&P Global Market Intelligence show a financial link between the perpetrators of the so-called Magnitsky tax fraud in Russia and Syria’s chemical weapons program, which has reportedly led to the deaths of thousands of civilians.
Corrupt state officials embezzled $230 million from the Russian tax office in 2007 by fraudulently taking possession of companies associated with Hermitage Capital, a hedge fund, and making false tax refund requests in their name. Sergei Magnitsky, a lawyer for the hedge fund, was arrested under what were widely denounced as false pretenses while he was investigating the theft on behalf of Hermitage. He died in prison in 2009 amid allegations he had been killed by his guards. Despite the fact that he was dead, the Russian judiciary convicted him of tax fraud and sentenced him to prison, in a legal first for the country.
The fraudsters planned their scheme at a meeting in Cyprus in April 2007, according to the records of the recent Prevezon case brought by Preet Bharara, then the U.S. attorney for the Southern District of New York. Prevezon is a real estate company that was accused of having received and laundered a significant proportion of the $230 million stolen by what Bharara alleged in his indictment was a group of corrupt officials in Russia's government called The Organization. The Bharara indictment said that "on information and belief," the Magnitsky case is "the largest fraud in Russian history.”
U.S. President Donald Trump fired Bharara in March 2017 and replaced him with a prosecutor who settled the case without Prevezon admitting wrongdoing. The lawyer defending Prevezon was Natalia Veselnitskaya, who met Donald Trump Jr., the president's son, in the summer of 2016. Veselnitskaya has reportedly lobbied the U.S. to drop the Magnitsky Act, which was introduced in 2012 to sanction the Russian officials linked to Magnitsky's death.
FBME owners Ayoub Farid Saab and Fadi Michel Saab, brothers of Lebanese origin who live in Cyprus, have wholly denied wrongdoing in statements made to S&P Global Market Intelligence through a London-based spokesman, and they have published further rebuttals on their website. The Saab brothers said the allegations described in the documents are false, as are any other suggestions of wrongdoing at FBME.
"No FBME client was found to have transacted with Syria through FBME," their spokesman Tim Maltin said, adding that the Saabs cannot comment on questions relating to the existence of an ongoing criminal investigation. The spokesman accused the Central Bank of Cyprus of fabricating its suspicions against FBME in order to seize the lender for its own profit, and said the media coverage of FBME is aimed at influencing the Paris-based international court to rule against the Saabs in their arbitration claim against the Cypriot state.
A report compiled by consultancy firm EY in late 2014 shows that FBME's clients included companies whose beneficial owners were subject to U.S. sanctions because of their links to the chemical weapons program. These companies received at least $2.2 million from shell firms linked to a number of fraudulent transactions by Russian civil servants, including the Magnitsky case, and passed more than half a billion dollars unencumbered through their FBME accounts.
The title page of the EY report states "FOIA confidential treatment requested by FBME Bank Ltd.," suggesting that FBME's lawyers wanted to prevent the report's release to the public under the U.S. Freedom of Information Act, or FOIA. The EY report was produced at the request of the lawyers representing the Saab brothers and is dated Dec. 5, 2014. S&P Global Market Intelligence has independently confirmed its authenticity with two sources with direct knowledge of its content.
Shell companies and shady cash
Quartell Trading Ltd., a shell company registered in the British Virgin Islands, transferred $2.03 million in January-February 2008 into the FBME account of Balec Ventures, which is also based in the British Virgin Islands and whose director was Issa Al-Zeydi, a Russian-Syrian businessman facing U.S. sanctions for participating in Syria’s chemical weapons program, the EY report says.
Nomirex Trading, another shell firm revealed by U.S. authorities to have received proceeds of the Magnitsky fraud alongside Quartell, sent €234,448 to Balec on Dec. 24, 2007, according to EY. This was on the evening of the same day that The Organization pillaged Russia's tax office and transferred some of the money they stole to Nomirex, the New York indictment reveals.
The Central Bank of Cyprus cited Tredwell Marketing Ltd., another British Virgin Islands-based FBME customer that transacted with Balec, as a possible front for the Scientific Studies and Research Center, echoing FinCEN assertions that the bank had traded with such firms.
The Scientific Studies and Research Center is a Syrian company targeted by U.S. sanctions in 2014 for its involvement in the manufacture of the sarin gas used by the Assad regime to attack the Damascus suburb of Ghouta in August 2013, killing 355 people and leaving 3,245 suffering neurotoxic symptoms, according to aid group Médecins Sans Frontières. Eastern Ghouta was then held by rebel forces. Chemical weapons are banned by the Geneva Convention.
A similar strain of sarin to that used in Ghouta was also used in the April 4, 2017, attack on the town of Khan Sheikhoun, after which the U.S. bombed one of the Syrian regime's airports and later brought new sanctions against Syria in July.
The EY report says Tredwell closed its FBME account in March 2014 and transferred its funds to another FBME account under the name of Armas Marketing Ltd., a Seychelles-based company, after U.S. sanctions kicked in. Ruden Nadra was both the ultimate beneficial owner of Armas and the ex-director of Tredwell at the time of the transfer.
Maribo Group Ltd., which shared the same BVI address as Tredwell and was also an FBME customer, paid $33.62 million to the Russian finance ministry between February and November 2011, on the basis of a contract to buy consumer goods in order to settle Syria's debt to Russia, the report says.
The building in Gubkina Street in Moscow, where multiple shell companies with ties to FBME were registered.
In total, Balec made U.S. dollar transactions of $507 million using its FBME account between April 2006 and July 2014, the report says. Balec's operating address in Moscow, at Office 31, House 14, Gubkina Street, was shared by 16 other companies that used FBME and ultimately belonged to Issa Al-Zeydi.
The records show that Syrian company VICO Ltd. referred Balec as well as 21 other firms to the bank. VICO listed FBME's own address in Cyprus as its operating base and used multiple FBME-issued credit cards, the document shows.
Money laundering machine
In a confidential report carried out after it took control of FBME, the Central Bank of Cyprus said it suspected FBME of lax money laundering controls, which helped it attract clients wanting to skirt the law: "In 13 cases, rejected customers reapplied to the bank under a different name in order to establish a business relationship, which raises questions as to reasons why those rejected customers insist[ed] on opening an account with them."
The central bank report also drew attention to how some customers were using or planned to use the bank’s address rather than their own when transferring funds internationally. In agreeing to do so, FBME failed to not only "consider or examine the motivations or reasons as to which these customers requested such a service," but also failed to provide other financial institutions involved in payment chains with transparent information, thereby hindering compliance checks.
The report states that it was made to inform the U.S. Department of Justice, the central banks of Cyprus and Tanzania, the European Central Bank, the IMF and the European Commission, in what the lawyers had hoped was an endeavor to clear their name of the FinCEN accusations.
EY declined to comment, saying it does not discuss work for clients. The ECB declined to comment, citing a policy against speaking about individual banks, and none of the other institutions would confirm that they received the report either. The Saab brothers issued a public statement denying all the allegations as "slanderous."
Links to 55 other banks
A source at the Central Bank of Cyprus who requested anonymity because of the sensitivity of the matter said: "FBME commissioned the EY report to rebuff FinCEN but the document largely confirmed the accusations."
"The report might have said it was compiled for the attention of the regulators, including us, but the former shareholders of FBME [the Saab brothers] did not bring it to our attention at all. We found out about it in 2015 from other institutions," said the central bank source. The same source said multiple criminal investigations into FBME were underway, including those by U.S. authorities.
Another source with knowledge of the case confirmed the authenticity of the reports and said international law enforcement organizations including the FBI are investigating the bank's activity with a view to bringing criminal charges.
A former contractor for the bank told S&P Global Market Intelligence that U.S. criminal investigations are ongoing into FBME. Additionally, an email seen by S&P Global Market Intelligence from Deutsche Bank AG's New York office to FBME's compliance team said Deutsche Bank was contacted by U.S. law enforcement to provide information on the Cypriot lender. Deutsche was among the 55 banks that handled payments for FBME via correspondent banking relationships, according to a document leaked from the Central Bank of Cyprus.
"FBME took things over the top. They opened accounts with little KYC [know your customer] information and relied on third parties with a strong conflict of interest to do due diligence and facilitate the account opening process. Introducers charged account opening fees and received kickback fees from the bank," said a Cyprus-based source with direct knowledge of FBME who asked not to be named because of the sensitivity of the case.
"Above all, the bank had very weak anti money laundering controls," the source added.
Citing "evidence that FBME had facilitated transnational, criminal transactions," Judge Christopher Cooper of the U.S. District Court for the District of Columbia noted in a final decision on April 14, 2017, upholding FinCEN's findings that suspicious transfers totaling $875 million were made from November 2006 to March 2013 between FBME and U.S. counterparties.
FBME serves as a case study for EU regulators, showing how the enforcement gaps that still exist in countries across the continent provide openings for illicit operations.
"What is required is a root-and-branch assessment of whether the financial crime fighting apparatus that we have in Europe is fit for purpose. ... The modern-day [financial] system is much faster and more complex, but we are still using a legal framework which is fundamentally based on the way banking was in the 80s and 90s," Tom Keatinge, head of financial crime and security studies at the RUSI think tank in London, said in an interview. "Should we actually be ripping up the whole thing that we have right now and creating a regulatory architecture that reflects the state of the financial industry today? Because the current one doesn't."