More on the Trumped-Up Charges Against Cyprus

As readers may recall, the Eurozone decided to make an example of Cyprus by using it to set the precedent of raiding deposits to fund a bailout (query: is a self-bailout even properly called a bailout?). Admittedly, if you are going to let your banking sector get to be 800% to 900% of GDP, you had better be sure your banks have really good assets and lots of equity, and the authorities look to have been remiss in that regard. And a lot of cynics thought the real reason for Cyprus being handled so harshly was that the Greek Cypriots had rejected the Annan Plan in a 2004 referendum, nixing integration of the island. The EU had wanted Cyprus to enter the union undivided and was unhappy about the rebuff.

But that wasn’t the reason given for being rough on Cyprus. Instead, the European and US media ran the official script that Cyprus was a big seedy tax haven. As one reader wrote (and supplied ample back-up):

Cyprus is an exemplar of an OECD ‘low-tax jurisdiction’ country (one that the US constantly, it seems, want to emulate) since it combines a low-tax regime with an extensive network of double-taxation treaties (which neither the Cayman’s nor the Isle of Man does)…

Read more at I am sure that Cyprus has its own fair share of Banking, AML, Mafia, Drug Smugglers, non-paying dog license owner’s etc. issues. You may not like tax treaties, or tax havens or even Cyprus itself (fine let’s discuss that in general terms for all countries), but, to equate the blatant money laundering and tax evasion of the Cayman’s, Isle of Man or Chinese pawn shops that Romney, GE, Apple, Siemens, and their directors have so effectively used to evade tax, to the vastly more transparent inter-mediation of Cyprus Banks is ill-informed and abusive.

The retort from the Cyprus-bashers, who pooh-poohed its better-than-Germany marks from MoneyVal (the official Council of Europe body that evaluates anti-money laundering measures) is that Cyprus might have perfectly good rules, but it didn’t enforce them. The critics seemed to be vindicated when MoneyVal “significantly revised” its four earlier, favorable reports after Deloitte was sent in to do a quick-turnaround assessment. A widely ballyhooed extract of a summary of the report (the full text has not been released) stated that anti money laundering efforts had “systemic deficiencies” and, per Bloomberg:

Cypriot banks flagged no suspicious transactions to regulators between 2008 and 2010 with regard to customers included in the assessment, one in 2011 and “a few” last year, according to the summary. “Deloitte’s forensic analysis of customers’ transactions revealed 29 potentially suspicious transactions during the last 12 months,” none of which was reported by banks, the report shows.

Even so, EU ministers apparently were of the view that the report found less dirt than they expected (wanted?) and thought it was remiss in focusing on Cypriot banks, and not including Cyprus branches of foreign banks.

It turns out another shoe has dropped. The Central Bank of Cyprus obtained a copy of the full report, and issued a sharp statement describing how the summary misrepresented the underlying report. For instance, recall the 29 transactions that it deemed to be suspicious that were waved through. It turns out those 29 transactions were out of a universe of 570,000.

An extracts of what the MoneyVal report said, from the CBC statement courtesy Google Translate:
Strong compliance to customer identification: “In line with the CBC Directive, banks confirmed that they identify customers in all cases and do not operate anonymous or numbered accounts. For international business, most customers are corporate entities and supporting documentation is obtained to confirm the identification of the customer, the directors and the owners. Although some of these structures are complex and can involve legal entities in two or more jurisdictions, there was a consistency in the responses of the banks that they are required to, and do in practice, identify all relevant parties through all layers of these structures. The assessors did not come upon any examples to suggest lack of understanding or weak compliance on this aspect.”

And the CBC said the report did not bear out the “systemic deficiencies” accusation:

Considering the above findings and shows as a whole, there is no mention or indication of systemic deficiencies. Instead, show the existence of the essential components that preventive measures and procedures to banks to prevent money laundering is generally in good shape, and that banks have a high level of compliance with legal and regulatory requirements, which are more stringent than other European and international requirements. Although identified some shortcomings, the overall picture is not negative, which is not reflected in the summary report.

Now this is of course academic. Cyprus, like Greece, is being broken on the rack. Bank of Cyprus, its biggest bank, likely requires more funds to prevent a collapse. That’s hardly surprising given how the Trokia engineered a negative feedback loop. They shot the international banking business, which was the mainstay of the banking industry, confiscated the most liquid wealth in country, destroyed a lot of local businesses by seizing substantial funds from operating accounts. How could you not expect that to hurt bank balance sheets? And to add insult to injury, Bank of Cyprus had a few billion euros stolen from its Greek branches to give to Pireaus Bank and was saddled with ELAs from failed Bank Laiki.

With Cyprus as a precedent, one has to wonder what the Troika has in mind for Spain’s sick banks. Stay tuned.

This piece is cross-posted from Naked Capitalism with permission.