The birthplace of Aphrodite, and one of Europe’s finest destination for both vacationers and people with large surpluses of money has hit the news hard. Ever since Der Spiegel published a vile article with allegations of weak money laundering controls and called it a haven for “Russian oligarchs, businessmen and mafiosi who have invested their illegal money in Cyprus”, things have simply not been the same.

All this is happening against the backdrop of the June 2012 Cypriot request for financial assistance from the EU to prop up its banking sector. It appears a €10 billion support facility is being drafted but nothing has been agreed yet. Meanwhile, Germany’s local version of the CIA, the BND, has secretly voiced concerns about the effectiveness of Cyprus’ anti money-laundering and terrorism financing framework. These concerns ended up in the article by Der Spiegel mentioned above and have sparked significant criticism from Germany and the EU.

Needless to say, Cyprus is very upset with this obvious slander and has sharply criticised the allegations. So, let’s take a look at the different aspects of what is now the ‘Cyprus case’.

Cyprus the tax haven

Cyprus taxes corporate profits at an efficient 10% flat rate. That is low by most standards. Cyprus also has well over 50 tax-treaties with other countries to avoid double taxation for its tax residents. In 2000, Cyprus committed to the OECD global efforts to end Harmful Tax Practices by improving transparency and establishing effective exchange of information in tax matters. Cyprus is not listed by the OECD as an Uncooperative Tax Haven (in fact, since May 2009 no country is listed as such).

Cyprus’ anti money-laundering track record

Cyprus is a member of the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism or MONEYVAL. MONEYVAL is associated with the Council of Europe, which is not the same as the European Union. It is Europe’s FATF Style Regional Body (FSRB) and as such Cyprus’ main evaluator.

On 27 September 2011, MONEYVAL released its 4th evalutation report of Cyprus. The evaluation itself took place in June 2010. Whilst generally positive, MONEYVAL reported the following critical notes, stating that Cyprus should:

• perform a national risk assessment and implement subsequent measures to address the risks (note: certain vulnerabilities were identified and focussed on);
• set up a comprehensive system to freeze terrorist assets;
• step up the number of on-site visits in particular for MTBs, investment firms and regulated markets;
• improve the effectiveness of supervision of designated non-financial businesses and professions;
• should review the effectiveness of the AML/CFT framework;
• increase efforts to make non-MLA related assistance equally effective.

None of these classify as blatant weaknesses in an AML framework. And indeed, Cyprus is not listed by FATF as a high-risk or non-cooperative jurisdiction nor as an ‘ongoing monitoring process’ jurisdiction. And as the head of the local FIU (MOSAK) pointed out, Cyprus currently ranks higher in FATF-compliance than several other EU countries, including Germany. It has zero non-compliant elements, and 12 fully compliant elements. Germany in its latest review (FATF, 2009) had 5 non-compliant elements, and 5 fully compliant elements. France (FATF, 2010), Luxembourg (FATF, 2009), Netherlands (FATF, 2010) and Spain (FATF, 2010) also rank lower than Cyprus.

In addition, Cyprus ranks 29th on the Transparency International 2012 ranking. Looking at TI’s world map, the island is an oasis of transparency in the pretty dodgy eastern Mediterranean region.

But this is what the German intelligence officers apparently had to say:

Formally, the island nation sticks to all the rules on combating money laundering laid down by the EU and other international agreements, the agency said. The country had passed the necessary laws and set up the required organizations. But there were problems when it came to implementing those rules, it added. They weren’t being applied properly. The Cypriots, the BND said, sign everything, pledge a lot, but keep few of those promises.

Really?

Cyprus and the bail out request

Cyprus is geographically very close to Greece, and shares a common ancestry. The Cypriot banking sector has large exposures to the Greek economy, which is in a dire state. Cyprus has not been able to tap international capital markets since May 2011, and is running low on cash. Russia provided a €2.5 billion bilateral loan at the end of 2011, to support the 2012 budget and repay maturing debt. Cyprus propped up its largest bank Cyprus Popular Bank in June last year, when a EUR 1.8 billion rights offering by the bank failed and the government stepped in to buy the rest.

Looking at Central Bank of Cyprus figures, the country has a relatively large financial sector with total deposits at €70 billion or roughly 4 times its annual GDP. The exposure to Greece is obvious, with 38% of total assets exposed to the Greek economy, and 71% of the banks’ Tier 1 capital in Greek government bonds.

A decision on the bailout request is expected after the February 17th presidential elections in Cyprus. Yet the figures speak for themselves, as do the multiple downgrades by ratings agencies in 2012. Cyprus needs money, quickly.

Cyprus and Russia

Cyprus maintains warm relationships with the Russian Federation. In fact, the current president Demetris Christofias is a communist, educated in Moscow and a fluent Russian speaker. Mr. Christofias is the first communist president for Cyprus and the only one in the EU.

Russian deposits into the Cypriot banking system stood at €18 billion at the end of 2011. There are over 60,000 Russian expatriates in Cyprus and the Russians are large investors in the local banks. These close ties also explain the €2.5 billion bilateral loan from Russia in 2011. No other EU country has secured bilateral support during the crisis.

Last, Cyprus has been implicated in the high-profile Magnitsky-case, a Russian lawyer who died in prison after exposing corruption and tax-evasion in the Russian government. This case has recently led President Obama to implement sanctions against 60 Russian officials. Magnitsky’s former employer, the Hermitage Capital Investment fund, has provided documents that claim money was laundered through Cyprus. The Cyprus FIU recently launched an investigation into the matter.

Where does all this lead to?

Understandably, this is a serious matter for Cyprus. As recent as last week, presentations outlining the country’s stance on money laundering by the Head of the Cyprus FIU and the Central Bank were published on the website of the Ministry of Finance. Public EU/German rage against Cyprus over this situation may make it difficult for the bail out money to arrive at all, or may lead to tighter strings attached.

If you ask me, what is really causing all this uproar is not the concern about the effectiveness of the Cypriot anti money laundering and terrorist financing framework. Rather, it is a general irritation with this pesky tax haven in the corner of the EU, combined with a real fear that hard-earned EU/German euros are headed for Russia. Remember those €18 billion in Russian deposits?

http://www.moneytrail.eu/2013/01/15/cyprus-europes-weakest-aml-link/