For one thing, rsync uses cygwin while rsyncrypto uses the Win32 API
directly. You really need to find out what win32 APIs are necessary.

It seems the problem lies within FindFirstFile. From msdn:
"If the string ends with a wildcard, period (.), or directory name, the user must have access to the root and all subdirectories on the path."

No idea what's being done in rsync/cygwin.