Regulators asked Cyprus's largest bank to provide information about its ultimately disastrous holdings of Greek debt as long as three years ago but got no immediate response and did not follow up, an external investigation said.
A report seen by Reuters said that the recent investigation was hampered by "unnecessary delays" in getting documentation from commercial Bank of Cyprus - one of the banks at the center of Cyprus's international bailout - and that some computers at the bank may have been wiped.
A Bank of Cyprus (BOC) spokesman declined to comment, saying the bank had not been officially briefed on the report.
The probe was conducted by professional services firm Alvarez & Marsal at the instigation of Cyprus's central bank. The company had a broad mandate to investigate the banking crisis affecting Cyprus, which eventually led to the island requiring a bailout from international lenders.
The central bank declined to comment on the contents of the report but said in a statement:
"The investigation will continue, and cover the purchase of Greek government bonds by the Popular Bank, including the expansion of Popular overseas. In parallel it will also examine the role and possible responsibilities of all concerned."
In Bank of Cyprus's case the inquiry was focused on the circumstances leading to its heavy, loss-making exposure to Greek government bonds
The report says BOC was not in breach of regulatory limits, despite a high concentration of Greek debt. But it said there was early regulatory concern about the bank's exposure to Greek government bonds (GGBs).
"The (central bank) formally requested information regarding BOC's holdings of GGBs in March 2010, however, no written response was received from the BOC," the report said. It added that the central bank did not follow up on the lack of a written response in a timely way and the reason for that was unclear.
There had been a verbal communication where BOC had "agreed not to buy further GGBs", even though a former central bank official reported BOC continued buying for another month after March 2010.
The Alvarez & Marsal report also said it had found evidence of a "mass deletion of data" on one computer.
"Based on an initial review of the data, our computer forensic technologists have found that the computers of two employees ... have had wiping software loaded which is not part of the standard software installations at the Bank of Cyprus," the report said.
Of the report's five segments seen by Reuters, four are focused on the Bank of Cyprus and one on Popular Bank, known as Laiki, a bank in the process of being wound down.
Further inquiries are planned into Popular, a preamble to the report said.
An accumulated exposure of Cypriot banks to Greece via its bonds, which were restructured in late 2011, played a central role in the island's economic crisis, ultimately forcing it to accept a bailout last month.
Bank of Cyprus's exposure to Greek government bonds was contained at below 500 million euros until 2009. In 2010, exposure ranged from 0.1 billion to 1.8 billion, and in late 2010 the company started repurchasing bonds, rapidly increasing the Greek portfolio to almost 2.4 billion in June 2010.
The Alvarez & Marsal report said internal Bank of Cyprus documents did not "record a clear justification or rationale for the decision to accumulate" Greek bonds.
"Based on emails and activity in 2009, it appears that BOC pursued an "absolute yield" strategy, purchasing GGBs to deliver net interest income, combined with a "relative value" strategy where they took advantage of selling opportunities to generate disposal gains, especially as reporting periods approached," the report said.
Cyprus's central bank had initiated quarterly monitoring of GGBs from June 2009, but the frequency in data collection meant there was a lag, and regulators only had a partial picture of the bank's transactions.
It also said that although it sought details of sovereign bond holdings, the central bank did not have any formal asset concentration monitoring in place.
"As such, the BOC's high concentration of GGBs within its sovereign bond portfolio was not in breach of any regulatory limits," the report said.
(Editing by Jeremy Gaunt and Alexander Smith)