The Cyprus Bail-in: Part Two – Impact and Corruption

In part one of this series I laid out a complete timeline for the recent bailout\bail-in that occurred in Cyprus.

In this post I want to look at the real-world impact of these events on regular depositors and small businesses in Cyprus.  I will then dig into the loopholes that were intentionally left open to allow the large investors and economic elite to quietly remove their exposed deposits at the same time Cypriots were faced with draconian capital controls.

Finally I’ll dig into a leaked report from the firm commissioned by the Cypriot Central Bank in the summer of 2012 to investigate how the Bank of Cyprus wound up holding such a high percentage of risky Greek bonds.  This document is unbelievably damning to senior officials at the Bank of Cyprus.  I’ll show sections from the document detailing how:

  1. The Bank of Cyprus intentionally mislead regulators with respect to its Greek bond exposure.
  2. Senior officials (including the former CEO) destroyed emails and other electronic information after a preservation notice was issued by the investigative team.
  3. These same senior officials, and the Bank of Cyprus in general, did not cooperate with the investigation and actively covered-up various aspects of their activities regarding the Greek bond purchases.

Impact on Regular Depositors

As my previous post detailed, as it stands today, depositors with more than €100,000 in deposits stand to lose a total of about 70% of the value of those deposits.  It could wind up being as high as 80% or even more depending on what happens to the Bank of Cyprus share price (since most of these confiscated funds get converted to shares in the Bank of Cyprus).  But, a good estimate right now is probably 70% gone.

But let’s put this into a real world example.  Imagine that you’re in your 60’s and have just retired or are about to retire.  You worked hard for 40+ years putting money away when you could and managed to build a nest-egg of €500,000.  A modest sum, but enough to support you in retirement.  Being risk adverse you have all that money in a savings account at a large bank – what could be safer?

Now imagine that you wake up one morning and discover that of your €500,000, only €220,000 remains (€100,000 + (€400,000 * 30%)).  This is exactly what happened to an entire middle class in Cyprus.  Apart from the obvious rage you would feel, one thing would be clear – you can’t live another 20 years on €220,000.  Assuming you were able, you need to get back into the workforce ASAP or you’ll live out your twilight years in abject poverty.

But can you even find work?  Before the crisis hit Cyprus already had over 14% official unemployment (and this doesn’t include the workers who have gotten discouraged and simply stopped trying to find work).  There was already a glut of young, able-bodied workers looking for any work they could get.

Impact on Small and Medium Size Businesses

But the situation gets much worse for our hypothetical retiree.

I would expect shockingly higher unemployment numbers out of Cyprus over the next few months.  The reality is that many of the impacted accounts were corporate accounts holding payroll, accounts payable, and other business assets.  As a result, many of these businesses will clearly be forced into bankruptcy or, at the least, massive layoffs.

This genocide of the entire small\medium business segment in Cyprus and its horrifying implications has been largely unreported.  Think about the consequences of this.  Not only is there the immediate implication of higher unemployment but with all these layoffs and business closures, total GDP will plummet and this will cause a corresponding drop in tax revenue.  Thus, like Ireland, Portugal, and Spain before it, Cyprus gets caught in the vicious cycle of austerity leading to economic contraction leading to lower tax revenue requiring more austerity.  And all the while our hypothetical retiree is left without enough savings to live out his retirement and is unable to find work as unemployment explodes.

Here’s a great example of the real impact on a small business in Cyprus.  This was originally posted in the Bitcoin forums and went viral:

My bank account’s got robbed by European Commission. Over 700k is lost.


The most of circulating assets on our business Current Account are blocked. Over 700k of expropriated money will be used to repay country’s debt. Probably we will get back about 20% of this amount in 6-7 years. I’m not Russian oligarch, but just European medium size IT business. Thousands of other companies around Cyprus have the same situation. The business is definitely ruined, all Cypriot workers to be fired. We are moving to small Caribbean country where authorities have more respect to people’s assets. Also we are thinking about using Bitcoin to pay wages and for payments between our partners. Special thanks to: – Jeroen Dijsselbloem – Angela Merkel – Manuel Barroso – the rest of officials of “European Commission”.
Original Post:

 It Pays to Known People in High Places

Of course, while most people knew a bailout was coming, no one expected a bail-in and confiscation of depositor funds right?

Well, not so fast.

Leaked bank documents show that a business belonging to family members of Cyprus President Nicos Anastasiades moved upwards of €21 million out of Laiki bank in the week leading up to the bailout. The President and his family are claiming these to be standard business transactions.  For now these are just allegations so we need to be cautious about jumping to conclusions.  But these transactions are highly suspicious to put it mildly.  A national investigation headed by two retired Supreme Court justices has been started to look into the matter.  It will be interesting to see if anything turns up or this simply becomes a whitewash.

International Banking Anyone?

But there’s more than one way to skin a cat.  In a simply unbelievable act of corruption, international branches of Laiki and Bank of Cyprus remained upon throughout the crisis and imposition of capital controls.  That’s right.  At the height of the crisis, with Cypriots unable to cash cheques or withdraw more than €100, you could walk into the London branch office of Laiki and withdraw without restriction.  Same goes for Bank of Cyprus which conveniently had a subsidiary bank in Russia (in addition to it’s London branch) and which also did not impose any withdraw limits.

So, international investors swarmed through this loophole pulling out all their exposed funds and leaving the ordinary Cypriots to face the music.  That’s why the percentage of funds to be confiscated kept on rising as the crisis progressed – all the big players were pulling their money out through the backdoor which was conveniently left wide open for them.  Remaining depositors then had to make up the shortfall to raise the €4 billion required by the Troika for the bailout deal to go through.

The question becomes: Was this done intentional or by incompetence.  I find it simply impossible to conclude that this was a mistake given:

  1. This would have been completely obvious to those running the banks.  Would the president of Laiki really be so stupid as to forget that he had an international branch in London?
  2. This vulnerability was left in place for more than a week.  Clearly these banks, under tremendous pressure and scrutiny would have noticed the daily outflow of supposedly frozen bank deposits – yet they did nothing to stop it.

So, one in forced to conclude that this was done intentionally to allow large investors, and specifically the Russian oligarchs/mafia, who were some of the largest depositors in Laiki bank, to get their money out.  After all, if you’re the president of Laiki would you rather have to explain your actions to the Cypriot people or to pissed off Russian mobsters?

Some Depositors are More Equal Than Others

But the corruption gets even more in-your-face.  Shortly after the bailout terms of March 25th, 2013 were agreed to, the Bank Of Cyprus issued a press release to clarify some of the terms of the agreement.  In that statement was the following nugget:

Moreover, the following points are clarified:

· All insured deposits (individuals and legal entities) up to €100.000 have, as of 26 March 2013, been transferred from Laiki Bank to the Bank of Cyprus. In addition, the entire amount of deposits belonging to financial institutions, the Government, municipalities, municipal councils and other public entities, insurance companies, charities, schools, educational institutions, and deposits belonging to JCC Payment Systems Ltd have been transferred to the Bank of Cyprus.

Read that carefully.  Deposits belonging to financial institutions (banks), governments, etc. got exempted.  This of course includes the bandits at the ECB (who also famously exempted themselves from taking any losses during the Greek bondholder ‘haircuts’).  What the heck makes them so special?  Why do they keep getting prioritized ahead of other depositors?

Since that statement was released, the Central Bank of Cyprus has decided to strike insurance companies, private schools and charities from the list of the exempted “so as to lighten the burden on affected (large) depositors in the Bank of Cyprus“.  Great sentiment – but why just remove all the exemptions if they are really so concerned about reducing the burden?

Records?  What Records?

Even before the crisis blew sky high in March, there was an investigation launched last August (2012) by the Cypriot Central Bank to determine exactly how the two banks wound up holding such a large amount of risky Greek bonds.  There are very specific rules for how much of a bank’s capitalization can be allocated in risky assets.  Bank holdings are supposed to be disclosed to regulators periodically so the regulators can ensure banks are sufficiently capitalized.  The mandate for the investigation was to determine whether the Bank of Cyprus was properly reporting its holdings to regulators.  Or, was the Bank of Cyprus playing fast and loose with the rules to squeeze out extra profits from the high yield Greek bonds (which would lead to larger bonuses for the bank executives).

To complete the investigation an independent firm (Alvarez and Marsal) was hired.  As it turns out, a copy of their final report to the Cypriot Central bank got leaked and boy, is it a doozy.  This report is unbelievably damning to the Bank of Cyprus and documents a pattern of market manipulation, misreporting of Greek bond holdings (including outright lying to their own board of directors about Greek bond exposure), and, most damning of all, evidence of key data being systematically deleted to prevent it from falling into the hands of investigators.  The full report can be found here – I would encourage everyone interested in a detailed look at exactly what went on inside the Bank of Cyprus to read it.

By way of summary, here is a smattering of some of the more shocking revelations included in the document:

1.3 Co-operation provided by the Bank of Cyprus

1.3.1 Although BOC has generally complied with the documentation requests provided to them,

there have been a number of unnecessary delays and general frustrations during the course of the investigation of the Bank. These have resulted from the slow documentary responses of the Bank, the constant need to double check the information that has been provided and the need to chase the Bank for key missing documentation.

1.3.2 By way of example, the way that BOC acted in respect of the provision of electronic data to the investigation team not only resulted in unnecessary delays of over one month, but there is also evidence to demonstrate that during these delays people within the Bank were able to delete data and have attempted to ensure the deleted data could not be retrieved by the Investigation team. This is demonstrated in the chronology set out in Appendix A to this report.

A read of the above-referenced Appendix A outlines an almost comical sequence of stalling tactics and ham-handed attempts by the Bank of Cyprus to bamboozle investigators into thinking that all requested documents and emails had been produced when, to the contrary, there were blatantly obvious gaps in the data provided.  If anyone wants a tutorial on how not to run a cover-up, read Appendix A.

3.2 Deletion of data

3.2.1 On 21 August 2012, the CBC issued a letter to each of CPB and BOC advising that an Investigation had commenced and that all books, records and documents, physical and electronic, were to be preserved and that all routine document destruction and deletion was to be suspended. On 24 August 2012, the CBC transmitted a similar letter to the employees of the CBC. Copies of each of these letters are attached hereto (Exhibit 2).

3.2.2 The e-mail data provided by the BOC to the Investigation team appears to be incomplete, with certain key custodians having little or no e-mail data during the period of 2009 and 2010. It was only possible in limited instances to determine the reasons for gaps in the electronic data collected. Potential explanations include deliberate deletion of data, poor archiving or inadequate data management by certain individuals. Furthermore, we are unable to confirm whether or not some or all of the absent critical data exists elsewhere.

3.2.3 The Investigation team received written approval from the CBC to obtain and analyse forensic images of the computers of the BOC employees on 8 November 2012. Based on an initial review of this data, our computer forensic technologists have found that the computers of two employees, Mr Andreas Eliades (“Mr Eliades”) and Christakis Patsalides, have had wiping software loaded which is not part of the standard software installations at the BOC. Mass deletion of data appears to have been undertaken on the Patsalides computer on 18 October 2012. It appears that some deletion was undertaken after a data preservation notice was issued to BOC by the CBC on 21 August 2012.

3.2.4 There are no e-mail files, mailboxes or user documents on Mr Eliades’ desktop computer. We have been unable to recover or identify any such documents from the hard drive of this computer, which would suggest that either:
-the computer was not used by Mr. Eliades; or
-the hard drive was formatted and/or wiped by BOC IT after Mr.Eliades left the bank; or
-the hard drive was wiped using data removal / wiping software such as CCleaner installed on the desktop.

And later in the document:

7.7.7 As part of the investigation, Mr Eliades’ computers were requested. A desktop apparently used by Mr Eliades in Greece was imaged in Greece on 15 November 2012 [after the duty to preserve had been issued]. Our computer forensic technologists have confirmed that wiping software installed on the computer had been accessed. No data was found on the laptop, which would suggest that the wiping software was used to delete files or that the laptop was not used by Mr Eliades to store data. Recovery techniques have been used to establish whether any deleted data can be retrieved; however, no user data (emails, documents, etc.) was recovered.

7.7.17 As part of the investigation, the emails for Dr Patsalides were provided to the investigation team. On review of these emails it was noted that the period of fate 2009 and most of 2010 contained significantly fewer emails than other periods, as can be seen from the chart below. We are advised that no back-up was maintained.

7.7.19 Following approval to obtain forensic images of BOC computers, it was found that on 18 October 2012 over 28,000 files (including almost 1,300 documents) were deleted from Dr Patsalides’ desktop using wiping software installed and executed from a portable device (e.g. a memory stick).

Key to this is the identity of the two individuals explicitly named for having wiping software loaded which is not part of the standard software installations“:

  • Christakis Patsalides is the former senior executive in the bank’s treasury department.  He is named in the report as the key figure pushing for the Greek bond purchases.
  • Andreas Eliades is the former CEO of the bank during the period in question.

So, here we have the CEO and another senior bank official caught deleting their email to cover their butts.  And guess what the happened when investigators questioned these guys about their missing records? The former BOC CEO, Mr Eliades, did not participate or assist in the Investigation. This was despite significant effort, including the assistance of the BOC and its external counsel to contact and request a meeting with Mr Eliades. Mr Eliades did not respond to our email requests and calls until the end of the Investigation, on 26 February 2013…

6.1 Disclosure of GGB Portfolio

6.1.1 Based on our findings it would appear that, in some instances, the executive management of the Bank did not keep the Board of Directors adequately informed of significant investment strategies and actions.

6.1.2 On 10 December 2009, Mr Kypri informed the market that BOC had sold €1.7 billion of GGBs; stating

that from the beginning of the year, the Bank had decreased its exposure of GGBs from €1.8 billion to €0.1 billion. Yet on the same day as that announcement, Mr Eliades instructed the Treasury department to purchase GGBs amounting to €400 million, of which €150 million was immediately acquired, without informing the market of this decision.

6.1.3 On 11 December 2009, during the Board meeting Mr Karydas informed the Board that the Bank no longer had any significant exposure to GGBs. At this date, the Bank had started to repurchase GGBs and held €231 million worth of GGBs.

So, the executives at the Bank of Cyprus were even lying to their own Board of Directors (as well as the regulators) about the amount of exposure to the toxic Greek bonds.  Presumably this was done to safeguard the performance bonuses for the execs.

Bottom Line

The entire middle class of Cyprus has been decimated.  Retirees, or those nearing retirement, will not be able to recover from this unprecedented wealth confiscation.  The Cypriot economy has been ruined.  Expect to see an even worse depression than the hell that is currently unfolding in Greece.

The bankers took huge risks in order to maximize profit and, more to the point, their bonuses.  Then, when things went south, those same bankers walked away leaving the ordinary depositors to foot the bill for their greed.  When people tried to look into what happened the bankers lied and otherwise attempted to cover-up the truth.

As the crisis unfolded, and with ordinary Cypriots under complete financial lock-down, intentional loopholes were left open in the system to allow the uber-rich to get their cash out increasing the burden to be ultimately borne by the little guy.  Then this inequality was further thrown in the face of Cypriots by outright exemptions being granted to special interests including other bankers.

I continue to be amazed that these events unfolded without wide-spread civil disobedience.  What unfolded was nothing less than government sanctioned theft and the wholesale rape of a nation.  At some point, as more and more countries come into the cross-hair’s of these thieves, people are going to need to say enough.  Until people stand-up en-mass and refuse to be victimized, the bandits at the EU, IMF, and central banks around the world are going to continue to rob we, the people, blind.

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8 thoughts on “The Cyprus Bail-in: Part Two – Impact and Corruption

  1. The big question on my mind is how to I protect myself from this kind of thing? (aside from holding gold or portable real asset).

  2. I think you’ve answered your own question. You need to hold assets that are outside the reach of ‘the system’. And, these assets must be reasonably safe from seizure and you must have confidence that they will hold value in an unsettled and possibly inflationary environment.

    Gold and silver are the obvious, time tested assets that meet these requirements. Of course, holding gold and silver is not without risk. Governments can and have outlawed private holdings of gold and there is always the spectre of governments imposing so called windfall taxes to ensure that gold holders don’t escape taxation through inflation.

      • Funny you should mention that. Part 3 (or even parts 3 and 4) of this series is going to focus on exactly that – the use of Cyprus as a template moving forward with some specific analysis on the 2013 Canadian budget clauses. Stay tuned!

    • I recognize that metals are a good bet. There are some challenges with that approach:
      * I’m stuck in government tax shelters. For example: what do I do with my rrsp? Clearing that out will give me a 50% haircut guaranteed.
      * Moving to physical metals is a commitment. It’s the kind of trade you don’t want to do too often. There are storage costs, etc.

      When I asked the original question, what I was thinking about is how there was a back door in Cyprus to get the money out. The first question that comes to my mind is: Will RRSPs be affected?

      Let’s assume the answer is yes. One strategy might be to hold one’s RRSP at an institution that would not likely be affected by the bill. For example, Interactive Brokers. Or perhaps a more obscure smaller broker. Do you have any thoughts along those lines?

  3. Hi Alex,

    The RRSP challenge is a dilemma I was also recently faced with. But, it turns out, it isn’t that bad. Basically there is no ‘penalty’ for early withdraw of RRSPs. But, you do have to pay the taxes on the funds you withdraw (which is fair enough). The only catch is that there is an upfront withholding of up to 30% (depending on how much you withdraw). The withheld funds is not an extra tax – it gets reported on your T4 as taxes paid. And obviously, you’ll be on the hook to pay any additional required at tax time (if you are in a higher tax bracket).

    So, you can walk into the bank, pull $100,000 out of your RRSP and have $70,000 in hand with the 30% being applied as a credit to your next year’s taxes. I think this is pretty reasonable.

    And, to me two things have to factor in here:
    1) The risk of confiscation of those funds as we saw in Cyprus. I don’t think any type of account at any type of financial institution is safe if things get bad enough (and I’m of the opinion that they will).
    2) The risk of increased taxation. The only reason you put money in an RRSP is to defer the taxation until a time in the future when you are in a lower tax bracket. But, if due to economic developments taxes increase in the future this may not be the case (or not the extent you expect).

    Thus, for me personally, I have started the process of pulling out my RRSPs (the recent gold crash served as a buying opportunity for those funds).

    In terms of risks in holding precious metals, you are certainly correct that there are risks. But there are many ways to hold gold and silver. If you want to maintain some liquidity, a great way is to buy stock in gold mining companies. If you want to own physical gold the best bet for most people is to use a vaulting company which will vault your gold for you at a secure location (for a storage fee).

    I’ll probably do a whole post on the RRSP withdraw process since I recently went through it and I think a lot of people are under the impression that there is some extra penalty that they need to pay when that is simply not the case.

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