Cyprus: A Mediterranean Bank

Just a few short months ago in April 2017, Rep. Mike Quigley (D-Ill.) said that he visited Cyprus as part of the House Intelligence Committee’s investigation on Russian interference in the 2016 election. This comes after reports in March about Paul Manafort’s bank accounts in Cyprus that were being investigated. Quigley stated that the Mediterranean country has a reputation for being a “laundromat” for Russians trying to avoid sanctions.

This isn’t the first time Cyprus has been brought up in the context of Russian finances.

In 2013, Tim Worstall wrote an opinion piece for Forbes on Russian money in Cyprus. The question he was trying to answer was “…why would someone earn money in Russia, move it to Cyprus, in order to reinvest it in Russia again?” His perspective on this was slightly different from other writers on the subject, where he blamed neither Russian taxes nor money laundering for the move to Cyprus, but rather an underhanded, political climate in Russia that is hostile to corporate ownership.

Worstall supports his contention by suggesting that taxes in Russia aren’t outlandish enough to warrant the theory that Russians park money in Cyprus to evade high taxes in Russia itself. Rather, it has to do with rule of law and property rights. He cites an occasion in the early 90s when, after opening a small company and bank account in Russia, a man came to his door with his bank information in hand and demanded payment for a ‘krisha tax’. Worstall soon discovered that it was common practice for new business accounts to be leaked to people who would charge additional sums for krisha. This, coupled with the cases of Sergei Magnitinsky and Mikhail Khodorkovsky suggest that corporate ownership in Russia may not be entirely secure.

Furthermore, an additional benefit of taking money out of Russia and reinvesting it as foreign capital means that you can choose where arbitration and legal cases are to take place, and very few people choose anywhere in the Russian Federation for this. Overall, Worstall’s argument is about the greater security in keeping money in places like Cyprus over Russia itself.

And there is a lot of money of Russian origin in Cyprus, indeed. A BBC article says the financial relationship between Cyprus and Russia dates back to the early 1990s after the breakup of the USSR, when individuals coming into new wealth were looking for new places to put their money. In 2013, before the bailout, Russian money accounted for an estimated one-third to one-half of all bank deposits in Cyprus.

This economic connection was tested when part of the deal for the bailout meant that Cyprus had to agree to a ‘bail-in’ for it, where the Popular Bank of Cyprus had to impose a levy on uninsured deposits over 100,000 Euros. This was an act that would primarily affect all that Russian money in Cypriot banks and the wealthy people who put it there. That said, although the bail-in definitely was a controversial shake-up between the two countries, economic relations seem to have stabilized as Limassol, Cyprus in 2017 is still very much a ‘Moscow in the Mediterranean.’

Lawful reasons for high Russian investment into Cypriot banks include a 10% corporate tax rate as well as a tax treaty between Russia and Cyprus that says firms will not be taxed in both places. However, others suggest darker reasons; back in that BBC article, the chief economist at Renaissance Capital said that wealthy Russians probably park their money in Cyprus to avoid close government attention, and the director of the Moscow office at Tax Consulting UK pointed toward the idea that Cypriot banks have precious few questions about the origins of money they receive.

Cyprus refuted these claims, citing their Anti-Money Laundering legislations, which encompass predicate offenses regardless of jurisdiction, so when the time comes for the crackdown, they don’t discriminate by where the offense took place. The problem with Cypriot policy, however, arises from defining what is and isn’t a predicate offense for money laundering.

AML policy has evolved over time, from when it was introduced in the 1980s to combat the proceeds of drug trafficking being introduced into the legitimate economy to the post 9/11 world, where AML policy expanded to include terrorism financing, and not only criminal origin of funds – but also their use for illegal purposes. In 2015, the EU gave a directive to include serious tax offenses under this umbrella. Although that 2015 directive has yet to make it into Cyprus’ domestic legislation, it might be possible to be charged with a money-laundering offense in Cyprus as a result of tax evasion due to the combined effect of various provisions in the country’s law. Criminal offenses related to taxation include fraudulently submitting incorrect information on tax returns and omission of information or deliberate delay in the payment of assessed taxes. These are offenses that can result in fines or imprisonment. So, while Cyprus’ AML law does not specifically say that tax crimes are predicate offenses for money laundering, it’s arguable that tax crimes could become a predicate offense as they are included under the “all criminal offenses” part of the AML law.

Now, some might look at this information and say that because Cyprus doesn’t specifically define tax evasion in its anti-money laundering legislation, it’s creating a loophole for maligned people to get through. Others might see the information and decide that the policy is there in all but explicit statement. What we do know, however, is that regardless of what loopholes exist in Cypriot taxation, apparently there are enough of them that a debate exists over what qualifies as lawful tax avoidance and what is illegal tax evasion. An in-cyprus article suggests that the line between the two is so blurred that it “…creates problems for lawyers, accountants and tax professionals in identifying and reporting suspicious transactions…” Taken in regard to its financial reputation, it remains to be seen how Cyprus will handle the new EU directive.

This article was written by Kristina Weber, Content Supervisor of Centry Ltd.

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