Cypriot banks under the spotlight

GUE/NGL Cypriot MEP Takis Hadjigeorgiou took part in a fact-finding mission to Nicosia, Cyprus, by the European Parliament’s Panama Papers inquiry on Friday July 7. MEPs met with the Minister of Finance, Minister of Interior and Minister of Commerce as well as the Financial Intelligence Unit (FIU) and the legal and financial regulators.

Speaking at the conclusion of the mission, Mr Hadjigeorgiou said: “Tax authorities have identified around 2,400 individuals or corporations linked to Cyprus in the Panama Papers. Cypriot banks have also been implicated recently in international money laundering schemes. The goal of our visit was to ask regulators and ministers how failures in the regulatory framework allowed such activities to take place and what steps have been taken to address them.”

Cypriot government representatives informed the visiting MEPs that many significant positive developments have taken place in recent years including under the former government.

Officials and political representatives openly stated that Cyprus had been an offshore centre until the recent past. They uniformly cited Cyprus’s accession to the EU in 2004, the Troika intervention in 2013 and a political decision by the government following the bailout to ‘clean up’ Cypriot banks as the key reasons for Cyprus having been removed from the US’s list of countries of key concern for money-laundering in 2014.

The Cypriot Tax Commissioner said that since the Panama Papers were published, Cypriot banks have terminated 90% of their relationships with professional intermediaries, cutting the number from from 1600 to 234.

Finance Minister Harris Georgiades said that the Cypriot banking sector had been oversized and far too exposed to foreign deposits.

“The business model we had here was based on sizeable foreign deposits, from individuals and companies without significant substance. But these excessive deposits were a liability for the banks, fuelling the expansion of credit and a property bubble which then burst. Now we have a much smaller banking sector with stricter regulation, which allows it to focus on core functions such as servicing the real economy. At the end of 2012, Cypriot banks held €21.5bn in foreign deposits, but today this sum has been reduced to €9 billion,” he said.

In some aspects, Cyprus has better legislation in place now than many other EU states – for example, they have introduced the ability for the FIU to postpone suspicious transactions without a court order.

On identifying the true owners of companies, Cyprus is introducing a register of beneficial ownership in the near future, and it has introduced a threshold for being identified as a beneficial owner of a company of 10 per cent, while the EU Commission proposal under the revised Anti Money Laundering Directive is a threshold of 25 per cent.

The Commerce Minister (with responsibility for the Companies Register) Yiorgos Lakkortrypis explained that in the past couple of years, the Company Register has been transformed by scanning 40 million documents, digitising all of the information and making it available publicly to search online. Around 59,000 inactive companies have been struck off the company register in recent years for non-compliance with transparency requirements.

However, as usual, the major test is whether the stricter regulations are being effectively enforced or not.

The so-called ‘Russian Laundromat’ exposed by the Organized Crime and Corruption Reporting Project in March this year – which revealed a scheme that laundered at least $20.8 billion out of Russia from 2010-2014 – found Cypriot shell companies were central to the operation (together with shell companies in the UK and New Zealand), and that three Cypriot banks were among the 732 banks internationally where the cash ended up: the Hellenic Bank, Eurobank Cyprus and Cyprus Popular Bank

GUE/NGL also has concerns about the process of regulating enablers of offshore schemes, especially lawyers, who are regulated by the Bar Association.

Mr Hadjigeorgiou questioned the Tax Commissioner on why he had not requested the original Panama Papers documents from the ICIJ, as the whistleblower indicated they would cooperate with law enforcement who requested them. The Tax Commissioner replied that his office did not have the resources to look at all the documents until only a small number of serious cases were first identified.

GUE/NGL also has concerns about the Cypriot Citizenship by Investment Programme, under which foreign wealthy individuals gain Cypriot and EU citizenship within six months by investing a sum of at least €2 million.

Mr Hadjigeorgiou asked the Finance Minister how much money had entered Cyprus as a result of the 1,200 successful applicants, and he replied that it was a sum of €4.7 billion in forward investments over a period of five years. Much of this – €2.15 billion – was invested in real estate, which is a key way to launder money.

The final PANA mission will take place to Switzerland in September.