Friday

22nd Mar 2019

Feature

EU audit on Cyprus money laundering - whitewash in the making?

  • Moneyval already believes there is little wrong with CDD in Cyprus (Photo: goobimama)

Auditors on an EU-sponsored mission to see if Cypriot banks launder money for Russian criminals began work last Wednesday (20 March).

The project has slipped out of view amid dramatic talks on Cyprus' new bailout.

Read and decide

Join EUobserver today

Support quality EU news

Get instant access to all articles — and 18 year's of archives. 30 days free trial.

... or join as a group

But it is likely to come back with a vengeance when the Dutch, Finnish and German parliaments vote in April on whether the EU should lend Cyprus the €10 billion it needs.

The German government pushed for the probe in the first place because the Social-Democrat opposition threatened to veto a Cypriot rescue on money laundering grounds.

"This is a matter of concern … for public opinion in several of our member states," European Commission chief Jose Manuel Barroso noted on Monday.

There are two units supposed to do the job.

One is Moneyval, a specialist branch of the Strasbourg-based Council of Europe, whose top man, John Ringguth, a former British prosecutor, was in Nicosia last week to kick things off.

The other is a "private international audit firm" to be hired by Cyprus' central bank.

The auditors' terms of reference (what powers they have, which banks they will check) are "confidential," to use the phrase of one German official.

Moneyval told EUobserver its task is to "focus exclusively on the effectiveness of Customer Due Diligence (CDD) measures in the [Cypriot] banking sector." In other words, to see if banks check who their customers really are.

It said the private audit firm will "look into individual banks and a number of deposits and loans."

The report is due by the end of March, or 11 days after Moneyval began work.

The set-up poses a few questions.

Firstly, on potential conflict of interest. If the audit firm is any of the "big four" - Deloitte, Ernst & Young, KPMG or PwC - its neutrality will be tainted because they have clients in the Cypriot banking sector.

The EU already slipped up by recently hiring Pimco, a US investment firm, to assess the bailout needs of Cypriot banks despite the fact its other business is to speculate on the value of the euro.

Another question is what can the auditors do in 11 days or less?

Cyprus hosts more than 40 banks which manage about €130 billion.

In terms of their customers and CDD, Moneyval in 2005 noted that Cyprus also hosts 14,000 offshore firms, 12,000 of which have no physical presence on the island. One purpose of creating shell companies is to conceal the identity of the owner.

Meanwhile, Moneyval's normal modus operandi gives an idea of what it might be doing on its current CDD test.

It sent four delegations to Cyprus in the past - in 1998, 2001, 2005 and 2010 - and wrote eight reports.

It operates by sending a questionnaire to the Cypriot government, which evaluates itself on compliance with international anti-money laundering standards.

It then sends six or so experts who spend three to eight days talking to people in Cypriot government institutions, such as the central bank, Cysec (its main financial regulator) and Mokas (the Cypriot attorney general's anti-money laundering division).

Its last report, in 2011, was described by an independent expert, Tommy Helsby, from the US-based audit firm Kroll, as full of "glowing words."

On CDD, Moneyval noted that: "Cyprus has taken extensive measures to rectify its compliance with customer due diligence requirements."

It said Mokas works in "a professional and timely manner" and "is adequately performing its role as a key player in the [anti-money laundering] system."

On Cyprus in general, it said authorities have "sufficient powers to supervise compliance." It also praised Cypriot banks for showing "a higher degree of awareness of their responsibilities."

The words are startling compared to some of the facts in the same report.

Despite the size of Cyprus' financial sector, it said that since 2005 authorities convicted just two people and issued nine orders to freeze accounts in cases focused on money laundering.

It noted that "sanctions imposed in practice have been mainly in the form of warning letters."

It also said Cyprus lacks the IT and human resources to implement laws, highlighting Cysec, which is supposed to do on-site inspections of suspect firms, but which made just 10 visits between 2008 and 2010.

To get an idea of what really goes on in Cyprus while its regulators fill in questionnaires, it is useful to look at the Magnitsky case.

Sergei Magnitsky was a Russian accountant who exposed a plot by tax officials to embezzle $231 million from the Russian treasury and who later died in alarming circumstances in pre-trial detention.

The plot involved the theft of three Russian firms, which were owned by two Cypriot companies, which in turn belonged to a UK-based investment firm called Hermitage Capital.

The directors of the Cypriot firms in June 2008 sent a complaint and two affidavits, seen by EUobserver, to the Cypriot authorities asking for help.

The authorities never replied.

When EUobserver phoned the Cypriot attorney general in January to ask why, he said he is too busy to explain.

In July 2012, Hermitage's lawyers sent a second complaint, also seen by this website.

It contains 133 pages of evidence, including bank account extracts, indicating that $31 million of the stolen money was moved using five Cyprus-based banks - Alpha Bank, Cyprus Popular Bank, FBME Bank, Privatbank International and Komercbanka.

It also shows that Dmitry Klyuev, a convicted Russian fraudster at the centre of the scam, owns a Cypriot-based firm called Fungamico, has an account at the Bank of Cyprus and holidayed in Cyprus with top suspects in the case.

Other parts of the stolen funds were moved via Latvia and Switzerland using shell companies with Cypriot links.

One of them was Nomirex Trading, registered in the UK in the name of Lana Zamba, a yoga teacher in Cyprus, and owned by the Cypriot firm Voilent Trading.

Another one was Arivust, based in Cyprus and owned by Vladen Stepanov, the ex-husband of a Russian tax official, Olga Stepanova, who authorised the bulk of the $231 million payment from the Russian treasury to Kluyev's bank.

For his part, the Cypriot attorney general did not open a money laundering case until six months after he got the information and now appears keen for it go away.

Mokas told EUobserver by email in December that there is "an open investigation on this matter." It later held an interview in Nicosia with one of Hermitage's lawyers.

But when Finnish broadcaster Yle spoke to Mokas chief Eva Rossidou-Papakyriakou in March, she said: "We haven't opened a case. We will co-operate with some other countries, but we cannot say."

Asked by EUobserver to clarify if there is a case or not, Mokas replied: "We do not wish to comment further."

When eurozone finance ministers agreed the Cyprus bailout on 25 March, they said they are "reassured" by the Monyeval audit, which they billed as "an independent evaluation of the implementation of the anti-money laundering framework in Cypriot financial institutions."

But whether Mokas - in Moneyval's words, a "key player" in the framework - really is "professional and timely … adequate," is not even up for scrutiny.

"Mokas will not be involved since the evaluation will focus only on the application of the CDD measures by banks. The supervisory authority for these issues is the central bank," Rossidou-Papakyriakou's office told this website.

Whether the private audit firm will look at deposits in any of the Magnitsky-linked banks remains to be seen.

Or perhaps not.

When asked by EUobserver if the EU-sponsored report will be made public, Moneyval, the Cypriot finance ministry, the European Commission and the International Monetary Fund declined to say.

News in Brief

  1. Former top EU official takes job at law firm
  2. Draft text of EU summit has Brexit extension until 22 May
  3. Juncker suggests emergency Brexit summit next week
  4. Macron: Voting down May's deal means no-deal Brexit
  5. Merkel warns days after summit could be vital
  6. EU court rules 44 Italian landfill sites illegal
  7. Dutch anti-EU party surges in provincial vote
  8. EU fines Google €1.49bn

Stakeholders' Highlights

  1. Nordic Council of MinistersLeading Nordic candidates go head-to-head in EU election debate
  2. Nordic Council of MinistersNew Secretary General: Nordic co-operation must benefit everybody
  3. Platform for Peace and JusticeMEP Kati Piri: “Our red line on Turkey has been crossed”
  4. UNICEF2018 deadliest year yet for children in Syria as war enters 9th year
  5. Nordic Council of MinistersNordic commitment to driving global gender equality
  6. International Partnership for Human RightsMeet your defender: Rasul Jafarov leading human rights defender from Azerbaijan
  7. UNICEFUNICEF Hosts MEPs in Jordan Ahead of Brussels Conference on the Future of Syria
  8. Nordic Council of MinistersNordic talks on parental leave at the UN
  9. International Partnership for Human RightsTrial of Chechen prisoner of conscience and human rights activist Oyub Titiev continues.
  10. Nordic Council of MinistersNordic food policy inspires India to be a sustainable superpower
  11. Nordic Council of MinistersMilestone for Nordic-Baltic e-ID
  12. Counter BalanceEU bank urged to free itself from fossil fuels and take climate leadership

Stakeholders' Highlights

  1. Intercultural Dialogue PlatformRoundtable: Muslim Heresy and the Politics of Human Rights, Dr. Matthew J. Nelson
  2. Platform for Peace and JusticeTurkey suffering from the lack of the rule of law
  3. UNESDASoft Drinks Europe welcomes Tim Brett as its new president
  4. Nordic Council of MinistersNordic ministers take the lead in combatting climate change
  5. Counter BalanceEuropean Parliament takes incoherent steps on climate in future EU investments
  6. International Partnership For Human RightsKyrgyz authorities have to immediately release human rights defender Azimjon Askarov
  7. Nordic Council of MinistersSeminar on disability and user involvement
  8. Nordic Council of MinistersInternational appetite for Nordic food policies
  9. Nordic Council of MinistersNew Nordic Innovation House in Hong Kong
  10. Nordic Council of MinistersNordic Region has chance to become world leader when it comes to start-ups
  11. Nordic Council of MinistersTheresa May: “We will not be turning our backs on the Nordic region”
  12. International Partnership for Human RightsOpen letter to Emmanuel Macron ahead of Uzbek president's visit

Stakeholders' Highlights

  1. International Partnership for Human RightsRaising key human rights concerns during visit of Turkmenistan's foreign minister
  2. Nordic Council of MinistersState of the Nordic Region presented in Brussels
  3. Nordic Council of MinistersThe vital bioeconomy. New issue of “Sustainable Growth the Nordic Way” out now
  4. Nordic Council of MinistersThe Nordic gender effect goes international
  5. Nordic Council of MinistersPaula Lehtomaki from Finland elected as the Council's first female Secretary General
  6. Nordic Council of MinistersNordic design sets the stage at COP24, running a competition for sustainable chairs
  7. Counter BalanceIn Kenya, a motorway funded by the European Investment Bank runs over roadside dwellers
  8. ACCACompany Law Package: Making the Best of Digital and Cross Border Mobility,
  9. International Partnership for Human RightsCivil Society Worried About Shortcomings in EU-Kyrgyzstan Human Rights Dialogue
  10. UNESDAThe European Soft Drinks Industry Supports over 1.7 Million Jobs
  11. Mission of China to the EUJointly Building Belt and Road Initiative Leads to a Better Future for All
  12. International Partnership for Human RightsCivil society asks PACE to appoint Rapporteur to probe issue of political prisoners in Azerbaijan

Join EUobserver

Support quality EU news

Join us