Cyprus: Everyone Has Lost; The Bank Of Cyprus Has Led The Way

Last Updated: 4 June 2013
Article by Andreas Neocleous

Most Read Contributor in Cyprus, December 2017

A considerable part of Dmitry Rybolovlev's fortune in Cyprus, in the form of deposits at the BoC and an investment of 500 million euro in shares, has been lost. In his interview with Phileleftheros Andreas Neocleous, lawyer and chairman of Andreas Neocleous & Co LLC, sheds light on Mr Rybolovlev's relations with BOC and the history of his involvement since September 2011. He describes Mr Rybolovlev's offer to provide additional share capital of 800 million euro, an opportunity to place BoC on a stable financial footing that was turned down by the bank. At the time Mr Neocleous had warned the then directors of the BoC that this might well have been the final opportunity to increase of the capital base of the bank before the economic crisis worsened. According to Mr Neocleous, "the truth is that not only our Russian clients, but all our clients who have lost a small or large portion of their fortunes, are bitter and disappointed by the situation created by the haircut on deposits".

Your law firm represents Dmitry Rybolovlev, who acquired a large shareholding in BoC in 2010. Evidently, his deposits have been subject to the cuts imposed on the bank; does that mean he could essentially be one of the new shareholders who, together with other foreign investors, will have a role to play in the BoC?

Unfortunately, not only Mr Rybolovlev's family trust, but also its trustees (Mr Rybolovlev and his daughters Katia and Anna) have been significantly affected by the haircut imposed on deposits last March. A significant part of the assets of the international trust has been lost following the decision to restructure the bank, including more than 500 million euro invested in the acquisition of 9.9% of the share capital of the BoC in July 2012.

Could there be renewed interest in the BoC on Mr Rybolovlev's part, especially considering the many millions that have been lost, either through shares or through deposits?

Mr Rybolovlev truly loves Cyprus and is interested in investing in certain industry sectors as well as in large projects to be developed in the island. Whether the trustees of his international trust will invest in the BoC will depend upon the advice they will get from special consultants and experts as well as on their capacity to invest.

One and a half years ago, Mr Rybolovlev sought to increase his share in the BoC. However, the Central Bank and the previous administration of the BoC did not welcome this development and rejected his proposal. Looking back, who do you think benefited or lost from this outcome?

It is true that just over one and a half years ago, in September of 2011 to be precise, Mr Rybolovlev met with the then chairman and vice-chairman of the Board of Directors of the BoC as well as with Mr Andreas Eliades, its managing director, and other members of the BoC's administration, following the intense rumors related to the increase of share capital of the bank. At the time the board was considering increasing the bank's capital by 600 million euro, 400 million of which would be derived from Convertible Enhanced Capital Securities and 200 million from cash.

Mr Rybolovlev and his consultants put forward an alternative proposal, namely to abandon the conversion of Convertible Enhanced Capital Securities, since these were assessed as tier 1 capital anyway, and proceed with real and tangible capital reinforcement with 600 million euro of new money, or even better with 800 million euro.

Mr Rybolovlev advised the bank's directors and management that this would most likely be the last chance for the bank to increase its share capital base, since the crisis was likely to get worse and finding new money would be very difficult, if not impossible. To allay the doubts of some board and management members regarding finding fresh money, Mr Rybolovlev gave a commitment to cover any shortfall by personally underwriting the issue.

When certain members of the board expressed doubt as to whether the Central Bank would grant its permission for the proposed procedure, Mr Rybolovlev assured them that the underwriting process did not require any form of licensing from the Central Bank. It should be noted that Mr Rybolovlev had previously owned a private bank and that he has a great deal of expertise and knowledge of international banking and financial issues.

The chairman of the BoC, Mr Aristodimou, and the chief executive, Mr Eliades, agreed to consider Mr Rybolovlev's proposal and reply within a week. They also agreed to consider a further request from Mr Rybolovlev for the appointment of one or two individuals of Mr Rybolovlev's choice to the 18-member Board of Directors of the bank.

Within a week the BoC gave its response to the two proposals. On the first, the increase of share capital, it informed Mr Rybolovlev that the management of the bank had decided that there was no need to increase capital in the near future. The bank's management acknowledged that the second request regarding the appointment of one or two directors was fair and reasonable but declined to make any appointment on the grounds that the BoC is a democratic organisation and is bound to follow the democratic process. The bank therefore advised Mr Rybolovlev to submit nominations for consideration at the next annual general meeting, which was due to take place in June 2012.

Finally the two members suggested by Mr Rybolovlev, who would have given him representation on the board of directors proportionate to his shareholding, were not even accepted even as nominees.

You asked who I consider the winners and losers are in this affair. I do not believe there are any winners; everybody has lost. However, the BoC led the way by failing to issue new shares early in 2012, and consequently being forced to request state protection and state aid in the summer of 2012. Overall, the whole of Cyprus has lost, since these events played their part in leading to the bail-out and the catastrophic developments of March 2013. Mr Rybolovlev, his daughters and their international trust have also lost considerable amounts of money.

Has the government and the Central Bank discussed with any of the big law firms which represent big Russian and/or Ukrainian clients, the ways through which various issues should be handled?

I am not in a position to know what goes on with other law firms but our firm has been in close contact with the government, the Central Bank and other public organisations. We have suggested various measures and recommended many laws or amending laws (i.e. the Cyprus International Trusts Law, the Cyprus Stamp Duty Law, Societas Europaea and others ). We do our utmost to attract and facilitate investment in Cyprus, both from within Cyprus and from overseas, and to promote Cyprus as a reliable international business centre.

You are in constant contact with Russians. Do you appreciate that Cyprus has lost Russian capital following the recent developments in the financial system? What are the messages you have been receiving from abroad?

Not only our Russian clients, but all our foreign clients who have lost small or large amounts of money are angry and disappointed by the haircut on deposits. We, as Cypriots, share those feelings. But we have never considered leaving the island. I assure you that no respectable and serious foreign investor is thinking of leaving Cyprus. I will substantiate this statement with facts. Just before the Easter holidays I sent an email to more than ten thousand people around the world, but principally in Europe, a mixture of lawyers, accountants, bankers, university professors, entrepreneurs and others. In my email I reminded them of the basic ideas, founding principles and vision which led to the creation of a United Europe, and which were brutally violated by our partners in northern Europe.

I have received, and continue to receive, many answers filled with emotion and understanding. I can honestly assure you that educated people around the world recognise and sympathise with the injustice suffered by Cyprus. They deplore the double standards which have been applied to the detriment of Cyprus and vigorously support us.

The new shareholders will support the BoC but will set specific terms

Once the capital restrictions are removed, do you believe that foreign capital currently in Cyprus will flee the island?

It is inevitable that once the capital restrictions are removed, not only foreign but also Cypriot depositors may wish to transfer their capital from banks in Cyprus. As far as the BoC is concerned, things should develop differently. Following the restructuring, the bank's depositors have also become its shareholders. In this new capacity they would logically have an incentive to support their bank and to help it overcome its current difficulties and re-invent its role. These new shareholders will support their bank, but will surely set specific terms and requirements. First, they will demand full implementation of the highest standards of corporate governance. Secondly, they will require politicians to keep their distance and cease meddling in the affairs of the bank. Equally importantly, politicians must stop undermining the bank, as one specific politician did recently. Once the restructuring is complete, 70% of the bank's new shareholders will be foreign depositors. What will, therefore, be the role of law firms in the formation of the board of directors of the new BoC and, subsequently, of the choice for a new managing director? I believe that all law firms, should as always, provide sound advice to their clients, within the framework of the law. More importantly, I hope that they pay particular attention to the seminal issue of proper corporate governance, the absence of which brought our banks to their present state.

Law Firms will not lose any clients

The report by the Troika appears to cast a shadow over the role of law firms in relation to money laundering mainly because they represent big clients, and might ask for regulatory measures to take place. Could this consequently affect the way law firms operate?

The Troika's report is full of intentional inaccuracies. We should not forget that for more than a year governments, government officials and other public organisations of countries such as the Netherlands and Germany, as well as various mass media organisations, have been carrying on an unprecedented campaign to undermine Cyprus, aiming at our successful economy and at our very existence. Throughout this defamation campaign, they have brutally attacked the status of Cyprus as an international business centre as well as the main participants in the sector, including law firms, accounting firms and others. These fake accusations in relation to money laundering and other defamatory constructions have completely collapsed following the recent research produced by Moneyval and Deloitte, leaving those who set out to destroy us exposed to international contempt and divine judgment. Cyprus law firms will not be affected by such baseless allegations, neither should they change their operational procedures, which are as rigorous as those followed elsewhere in Europe. Nor will they lose their clients, big or small, to those who have gathered like vultures around Cyprus to prey on our flesh and steal our clients. Ironically, those very Russians who they accuse of being involved in dirty business and money laundering in Cyprus are the same people for whom they roll out the red carpet and consider as law-abiding citizens when found in their company.

We will not be defeated by our competitors in northern Europe

The Cyprus model, as we have known it so far, has ended. What do you recommend to the government, considering your experience in dealing with foreign clients?

I do not agree that the Cyprus financial model has ended. The Cyprus model is nothing more than a successful and respectable International Business Centre, which has been built with immense effort, and operates with transparency and reliability. This model is envied by many and this is the primary reason as to why our competitors sought to destroy us. Cyprus, as we all know, does not have a large manufacturing or agricultural sector, or other resources. Some may say that Cyprus is rich in natural resources. This is another issue, which falls within the geopolitical sphere and is not expected to bring short-term results. The only substantial source of income Cyprus currently has is its business services sector, particularly specialised services. Since the beginning of civilisation this is what Cyprus has excelled at: offering services to its neighbours. Throughout the centuries, Cyprus has been a prosperous regional shipping and trading centre. The provision of services, especially specialised services, is part of our genetic make-up and no matter how many measures or bail-out plans we are forced to accept by our good partners in the North, they will not be able to destroy us and deprive us of our only source of income.

What do we therefore recommend to the government and to our colleagues? We urge them to take the opportunity to use the challenges and difficulties we currently face as a catalyst to improve the quality of the services and facilities we offer our clients. We have every obligation, in these difficult times, to defend Cyprus as an International Business Centre; to clear out the dead and rotten wood and make efforts for its improvement and enrichment. First, we must immediately implement the law which has been recently passed for the regulation of fiduciary services. In this way, we will exclude hundreds of unregulated foreign management companies which have sprung up like mushrooms in Cyprus during recent years. These companies blacken Cyprus's good name as an international business centre. This, in my opinion, should be our primary aim. Furthermore, we must develop and offer innovative new products to the international markets. The structure of the Cyprus holding company and the Cyprus international trust are as good as any, but they are not sufficient by themselves. We must free our procedures from excessive bureaucracy and combat interventionism and corruption which has become endemic in various ministries and governmental departments (such as the Department of the Registrar of Companies and Official Receiver) and also in other sectors of Cyprus's society. I could go on forever on this topic but I shall do so in another interview.

Concluding, I would like to repeat that we must all transform the challenges in opportunities. Nations do not progress nor become viable when they rest and find comfort in an existing status quo. On the contrary, nations progress, develop and flourish when they work hard and when they fight against all odds, obstacles and difficulties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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