Financial Transparency Coalition

This op-ed was originally published in the European Voice on January 24th.

flickr / Dan…

Cyprus’s teetering economy needs a significant injection of bail-out cash from its European Union partners. However, a group of countries, led by Germany, is baulking at the prospect of propping up what many regard as a money-laundering haven. A bail-out package, it is argued, could see eurozone taxpayers footing the bill for protecting the offshore banking deposits of criminals. European leaders are arguing that Cyprus should have to beef up its anti-money laundering controls in order to qualify for any bail-out package.

The Cypriot government insists that it runs a clean financial centre. In fact, EU ambassadors to Nicosia have been told that Cyprus has a better anti-money laundering record than many other EU member states.

This argument is disingenuous and ignores crucial holes in Cyprus’s attempts to fight the movement of dirty money. Indeed, last year, a leaked report from Germany’s Federal Intelligence Service declared Cyprus to be a “gateway for money laundering activities in the EU”.

Although Cyprus has made commendable efforts to improve its financial crime laws since joining the EU in 2004, there are serious questions about how well these rules are enforced in practice, and the apparent ease with which criminals can abuse Cypriot companies to hide their identity and their ill-gotten gains.

It is pretty straightforward to set up a Cypriot company and use it as a front to hide illicit activity. The professionals that you go to if you want to set up a company – known as company service providers – do not carry out proper money-laundering checks.

In 2011, an international review of Cyprus’s money-laundering controls by the Financial Action Task Force formed at the G7’s initiative identified critical weaknesses in the money-laundering checks that are supposed to be carried out on Cypriot companies. It said that the country’s company service providers, lawyers and accountants are not very good at identifying “higher-risk customers” or working out who is behind the companies they are dealing with. In other words, if you are a serious money launderer, they are not necessarily likely to realise this and the checks that they are meant to carry out are not likely to be done particularly thoroughly.

This is compounded by serious failures with the Cypriot company registry. In November, a Norwegian journalist discovered that the registry was overwhelmed by unprocessed paperwork that in some cases was ten years old. The effect of this is that your anonymous Cypriot company might also be totally invisible to the outside world.

These failings mean that anyone looking into money laundering regularly encounters dodgy Cypriot companies. For example, Cypriot companies were used by the Iranian government to evade international sanctions by concealing the ownership of its oil tankers. Thousands of Cypriot companies were used by Slobodan Miloševic? to smuggle arms for the war against Bosnia and Kosovo. Corrupt Russian tax officials used Cypriot companies to steal hundreds of millions of euros in a case that led to the imprisonment and death of Russian whistle-blower Sergei Magnitsky. Global Witness recently published a report that looks at allegations of a major money laundering scandal at a Kyrgyz bank; some of the dodgy-looking companies with accounts at the bank were set up by a Cypriot company service provider.

Cyprus should ensure that criminals cannot set up anonymous companies. Firstly the country needs to regulate properly the professionals that set up companies for a living. Secondly, Cyprus, along with the rest of the EU, should collect and publish information on the ultimate, or beneficial, owners of companies and trusts. The EU is revising its money-laundering directive at the moment, and this should be a key plank of the Union’s fight against financial crime.

Europe cannot allow taxpayers’ money to be used to help out corrupt officials, sanctions-busters, arms smugglers and tax evaders. If Cyprus wants a bail-out, it needs to clean up its act.

 Some rights reserved by Dan..