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The politics of money laundering - Cyprus and the EU


The following text is an extract from a fascinating “Indian Express” article on Cyprus and its relationship with the EU.

Extract…… The politics of money laundering

The European Central Bank finally took control of the eurozone’s banking system in November 2014 — partly in response to the reckless banking that helped to cause the euro crisis.

With the introduction of the so-called Single Supervisory Mechanism [SSM], the ECB was now the direct regulator of the Bank of Cyprus, RCB and other big Cyprus banks; that meant the ECB had the power to conduct on-site inspections and grant — or withdraw — banking licenses.

Among its new responsibilities, the ECB would ensure bank managers and board members were “at all times of sufficiently good repute,” one of five criteria for deciding if they were “fit and proper” to run their financial institution.

The ECB’s new powers were sweeping, with one notable exception:

  • Money laundering.

The financial crime that most requires centralised oversight — that involves multiple jurisdictions — was carefully carved out of the SSM.

EU member-state regulators argued that money-laundering enforcement was an intrusion on national sovereignty (even though the SSM itself amounted to one of the most significant transfers of sovereignty since the EU was created); negotiators also did not see money laundering as the immediate systemic threat that bank-lending practices were.

But in anti-money laundering, technical and legal arguments are often used to disguise political and financial interests.

The status quo largely insulates banks from liability while allowing international payments to flow, even as more than 99 percent of laundered money goes undetected, according to the United Nations Office on Drugs and Crime.

Alexander Apostolides, an economist, and banking historian at European University Cyprus, told ICIJ partner Paper Trail Media.

  • “The fragmentation over the fraud, money-laundering corruption and sanctions may be intentional,”
  • “No one wanted the concentration of powers in one agency that would make the prosecution of bad practices actually enforceable.”

In the end, the job of battling Russian money laundering was left to the likes of the Central Bank of Cyprus, widely understood to be in the sway of a political class itself awash in Russian money.

With the EU essentially tying its own hands in policing money laundering, the exposés started to roll in.

In the spring of 2016, ICIJ, McClatchy, the Miami Herald, German daily Süddeutsche Zeitung and more than 100 other media partners published the landmark Panama Papers project, one of the most explosive exposés of the decade.

Those stories sparked global protests and pushed the offshore financial system to the top of the global political agenda.

Revealed as a central player in these stories: RCB Bank.

The series showed the Cyprus bank had funnelled more than $800 million in lines of credit — unsecured — to a Caribbean shell company that moved money to other shell companies that traced directly to intimates of Putin himself.

For just $1, the RCB-financed shell company gave the rights to $8 million in interest payments to Putin’s boyhood friend, Sergei Roldugin, who introduced Putin to his first wife, Lyudmila, and is godfather to Putin’s daughter Maria.

A concert cellist turned billionaire, Roldugin is commonly referred to as “Putin’s wallet.” (At the time, RCB denied wrongdoing and said that any loans were secured.)

The so-called Mueller investigation into Russian interference in the 2016 U.S. presidential election discovered that the Bank of Cyprus had helped funnel money from Ukrainian kleptocrat Viktor Yanukovych to the future chairman of Donald Trump’s 2016 presidential campaign, Paul Manafort. (In press reports, the Bank of Cyprus said it cooperated in the U.S. probe.)

In 2017, OCCRP found that Hellenic Bank, Cyprus’ second-largest bank, received over $500 million in proceeds from another notorious scheme, the Russian Laundromat, which allegedly moved more than $20 billion out of Russia between 2011 and 2014. Hellenic didn’t reply to ICIJ’s request for comment.

Like RCB, Bank of Cyprus and Hellenic Bank were directly supervised by the European Central Bank.

In 2020, ICIJ and its media partners published the FinCEN Files, which revealed that, in 2017, JPMorgan Chase reported suspicious wire transfers totalling more than $322 million involving shell companies in Cyprus and other secrecy jurisdictions that had done business with Manafort. At least $40.2 million involved the political consultant himself. One of the banks used in the transactions was Cyprus Popular Bank.

Through it all, U.S. and European politicians railed against Cyprus as a hub of laundered Russian money. The country’s reputation as a broken pipe in Europe’s financial infrastructure was now indisputable.

17 members of the European Parliament in October 2017 WROTE

  • “Dear President Anastasiades,”
  • “We write to you with grave concern about the role that corrupt Russian government officials are playing in Cyprus in relation to the laundering of massive criminal schemes coming from Russia.”

Yet European financial institutions only pulled closer to RCB, bolstered by its status as an ECB-regulated bank.

‘This is over, it’s finished.’ The year 2018 marked Europe’s money-laundering meltdown.

In February, the U.S. Treasury Department blacklisted ABLV Bank, Latvia’s third largest, as a “primary money laundering concern” related to the financing of a North Korean weapons program — spiralling the bank into liquidation.

That year another rolling scandal blew open when a whistle-blower revealed that an office of fewer than a dozen people at Danske Bank’s branch in Tallinn, Estonia, had laundered as much as $230 billion — nearly eight times Estonia’s gross domestic product — for a clientele largely from Russia and former Soviet republics and satellites. The scandals rocked the financial world, including the European Central Bank, which was now scrambling to explain itself.

“The ECB and anti-money laundering: What we can and cannot do,” declared the headline of an ECB press release that same year.

The central bank explained that it didn’t have the power to investigate money laundering, which had been excluded from the SSM, and had to rely on local authorities; it could act only if money laundering posed a “prudential risk.” It acknowledged, however, that it could ask authorities for help for “fact-finding purposes” about money laundering if it felt it had “insufficient information” to supervise a bank properly.

Critics further contended that a bank’s reliance on massive inflows from foreigners posed an obvious “prudential risk.”

Dana Reizniece-Ozola, then Latvia’s finance minister, told the Financial Times.

  • “Everybody understands if you do supervise the business models, you can’t distance yourself from the risks that apply to the servicing of the non-residents,”

The ECB would later admit that money laundering poses risks to banks’ viability; the EU is still working to establish a new centralised authority.

In a statement, the ECB said that under prevailing regulations,

  • “It is not allowed to disclose any confidential supervisory information on specific credit institutions.
  • Therefore, the ECB is restricted from disclosing any adopted supervisory measures addressed to Cypriot significant institutions.” It also said that under its guidelines, it “cannot discriminate qualifying shareholders depending on their nationality or country of origin – there is no legal basis for that.”

The ECB added that in assessing existing or potential shareholders, it looks at:-

  • “All information either provided as part of the file or publicly available – e.g., sanctions list, etc),” as well as a person’s connections to others, according to European guidelines.

Finger-pointing turned to Cyprus.

In a scathing report to Congress in August 2018, the U.S. Treasury Department charged that the country.

  • “Continues to host a large volume of suspicious Russian funds and investments,”
  • Slamming its “permissive” citizenship program, “weak” supervision of service providers and
  • “Lax” corporate rules that allowed “illicit actors” anonymous access to the international financial system.

As part of Cyprus Confidential, ICIJ combed the records of six Cypriot corporate services firms and a Latvian company that sells Cypriot corporate registry documents through a website called i-Cyprus.

ICIJ found that Cyprus firms in the leaked data provided services to companies owned or controlled by 96 sanctioned Russians, 25 of whom had already been sanctioned before Russia invaded Ukraine in February 2022 — including Viktor Vekselberg.

In May that year, Marshall Billingslea, then assistant Treasury secretary for terrorist financing, met with the island’s top regulators, according to the Wall Street Journal. He waved a list of Russian oligarchs likely to face penalties and mentioned the blacklisting of ABLV.

Billingslea said.

  • “You saw what happened in Latvia?”
  • “You don’t want anything like that happening here?”

The newspaper reported a Cypriot regulator snapped back,

  • “Bring it on,”

But the “Cyprus model” was already under siege.

In June, after years of promises, the Central Bank of Cyprus finally ordered banks to close accounts for shell companies not engaged in legitimate business.

The Cyprus Mail reported that banks closed well over 50,000 accounts and refused to onboard thousands of other customers.

The Bank of Cyprus froze Vekselberg’s accounts, though he remained the largest shareholder.

In 2019, Marshall Billingslea himself would hail Cyprus’ “enormous progress and improvements.” The amount of non-EU resident deposits began to tick down, from more than $10 billion in 2014 to about $7 billion five years later.

In November 2018, Cyprus Finance Minister Harris Georgiades candidly acknowledged the model’s problems in a forum on Cyprus’ economic future.


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