Georgiades, AG Clerides engage in war of words over co-ops audit (Update 2)

Attorney-general (AG) Costas Clerides on Tuesday accused Finance Minister Harris Georgiades of having only contempt for an opinion by the legal service on the status of co-ops as the latter’s standoff with the audit office escalated.

The ruckus centres on whether Auditor-general Odysseas Michaelides has the right to audit the Cooperative Central Bank (CCB). Georgiades considers it should be treated as non-state owned citing the need for flexibility dictated by competitive market conditions, and thus not audited by the state. Michaelides wants the opposite.

The AG became embroiled on Tuesday in response to Georgiades’ comments that the legislation relating to co-ops that was passed by parliament could be subjected to interpretation. “There are courts which ultimately interpret whether something is legal or not,” the minister said.

This prompted a furious response from Clerides who accused the minister of contempt for the opinion issued by the AG’s office that the CCB is indeed a state-owned company as stipulated by the fiscal responsibility and fiscal framework law of 2014.

“With your comments today you showed contempt for the law office’s and the AG’s opinions by saying that there are often different interpretations of the law,” Clerides said. The AG added that when the interviewing CyBC radio anchor argued that the law office already interpreted the law, “you [Georgiades] replied that there are courts which interpret laws”.

Clerides said the finance minister continued to consider the CCB – into which the government injected almost €1.7bn since 2014 and owns 99 per cent of its shares – as a non-state-owned enterprise.

Clerides said that Georgiades’s comments completely defy “constitutional provisions” according to which the Republic’s law office and the AG are the legal counsellors to ministers and their opinions have to be respected and applied by government agencies.

In addition, three private law firms advising the CCB opined in February that Cyprus’ second largest lender was indeed a state-owned enterprise, and as a result, the provisions of the legislation do apply, Clerides said.

Georgiades later responded in a letter to the AG that he was astonished by Clerides’ comments that the right to resort to the judiciary could be considered contempt for the opinions of the legal service.

“The cooperative will not be converted into a state entity is the clear political position of the government, which is associated with the need to maintain the flexibility and effectiveness each financial institution must have,” he said.

He added that this was also related to the need to comply with the basic conditions under which the CCB had obtained state aid as laid down by the European Commission, and which require the non-involvement of the state in the proper functioning of organisation.

“The opinion you made based on which the cooperative bank is considered as and functioning as a public institution, is precisely the essence of the problem that has arisen and why it may need necessary amending legislation, which is exclusively and inalienably the right of the legislative power,” Georgiades said.

At the same time, he said he recognises that the legal service should indeed act as adviser to the government, and to suggest legal ways of implementing government policy. But he added that the result of the AG’s report had not even been sent to the finance ministry and they had to submit a written request to get it.

“I will avoid characterising this failure as an act of defiance towards the government,” Georgiades said.

Clerides responded to the minister’s letter saying: “The best thing to be done by the minister is to advise the cooperative and its leadership to comply with the provisions of the law as it stands now, rather than disputing the findings of the legal advisers of the state and encouraging the persons affected to examine the possibility of legal action.”

Meanwhile state auditors who attempted on Tuesday to enter the premises of the CCB were not admitted – after being previously prevented from doing so on October 26 -, the audit office said in a statement.

Michaelides said on various occasions that the procedure applied when the bank appointed its former chairman Nicholas Hadjiyiannis as chief executive officer was questionable.

“As the AG opined, the Republic’s auditor-general has all the rights, powers and obligations” like in the case of all organisations he audits, the audit office statement said.

“The Cooperative Central Bank’s financial audit is already carried out by a private audit company,” which the bank appointed, and the audit office is ready to provide its approval a posteriori, the government auditors said, adding that their work would be “an administrative audit which includes a compliance audit” and not the bank’s supervision.

The European Central Bank’s Single Supervisory Mechanism together with the Central Bank of Cyprus has been supervising the CCB since 2014.

Georgiades said on Tuesday the European Commission is likely to demand an immediate and drastic change of course of the cooperative banks, whose non-performing loan portfolio stood in June at 59 per cent.

The finance minister who was commenting on state-radio CyBC on Tuesday morning, a day after the Cyprus News Agency reported that the shareholders of the CCB would meet at an extraordinary general meeting on Monday, said that the European Commission was concerned that the co-op-banks were moving towards becoming part of the state apparatus, which would violate Cyprus’ bailout terms.

“As long as terms are violated, it is likely for the European Commission to demand an immediate and drastic course correction,” Georgiades said.

The directorate-general for competition was against any policy or government intervention in the co-ops which could delay its privatisation or discourage potential investors. The bank was instructed to increase its value and reduce its cost-to-income ratio of roughly 50 per cent mainly through a merger of administered cooperative saving banks. The agency added that bank may also have to speed up its privatisation process. On top of the other spats currently in play, main opposition Akel opposes privatisation and has submitted a draft law to the parliament to prevent it from happening.

At the same time, ruling Disy and the government want to decrease the competences of the government’s audit office, citing the need of allowing the bank to operate on market terms.

Michaelides, who is known for his no-nonsense attitude and wants to remain the bank’s auditor as long as the government is calling the shots, said that the appointment of Hadjiyiannis as bank’s chief executive officer in 2015 followed a questionable, hasty procedure. The job became vacant after former CEO Marios Clerides unexpectedly submitted his resignation in June 2015.

The auditor-general said five weeks ago in an interview to Alpha TV that the CCB advertised the vacant CEO position only for a week exclusively on the bank’s webpage attracting a total of eight applications, including that of Hadjiyiannis who got the job and happened to be the chairman of the board which decided the appointment.

The parliament is scheduled to vote on the bill which could restrict Michaelides’ office from auditing the co-ops on Friday, three days before the CCB’s extraordinary general meeting.

Georgiades said that in case the parliament passes any law “we shall respect (it) and have an obligation to respect (it)” but hinted that it could be appealed at the Supreme Court.