Unable to delete local file: System Error. Code: 5.

I am unable to delete files (or move them to a remote) on a LOCAL drive. All the permissions are correct, I can easily delete the file(s) in any other program (Windows File Explorer, Altap Salamander), but in WinSCP I receive:
System Error. Code: 5.
Access is denied

However, when I copy the file to remote, delete it in external program and then copy the file back from the remote, I _can_ delete the file. However, the permissions are identical (I have specifically set the parent folder's permissions to Everyone: Full Control). Running WinSCP as Administrator does not help.

(Running Windows 10 18362.720 - Windows Defender is COMPLETELY disabled using a group policy, no other AV software is installed)

Also, deleting the file in WinSCP using Windows system right-click menu also works. It is truly only WinSCP itself that cannot delete the file.

Setting "Delete files to recycle bin" in Panels/Local works (moving the files between dirs on the same local drive works), but moving to remotes is basically unusable as it always tries to delete the files directly and triggers the error.

A very weird issue, probably has something to do with the underlying .net framework.

Is this happening for all local files? Or for some drives/folders only?