The money laundering debate reaches a crescendo (updated 16 May)

The debate about money laundering in Cyprus rumbles on. On  May 1st Haris Georgiades, the Cypriot Finance Minister, said that two money laundering audits - by Moneyval and Deloitte - had given Cyprus a clean bill of health. That's nice to hear but its a shame that the reports are not being published and we only have Georgiades' word on this. Not any more, Mr Georgiades.

 

Update 14 May:Implementation clearly lacking

 

Jeroen Dijsselbloem, chair of the Euro-Finance Ministers' Group comments in press conference (May 14th 2013) on the MoneyVal and Deloitte audits produced as part of the Memorandum of Understanding with the Cypriot government. Nasdaq's Matina Stevis writes,

 

The report highlights that Cyprus has a legal framework to tackle money laundering but "implementation is clearly lacking," Mr. Dijsselbloem told reporters at a press conference after a regular meeting of euro-zone finance ministers here.

 

Mr Dijsselbloem said that the reports would not be made public because they contain proprietary information.

 

Update 15 May: Systemic deficiencies

 

A summary of the two money laundering audits distributed to journalists in Helsinki and reported by Bloomberg 15 May 2013 concludes

 

“While identifying no regulatory weaknesses, both reports suggest that there are substantial shortcomings in the implementation, by banks, of anti-money-laundering preventive measures."

 

The Deloitte Italy report identified 'systemic deficiencies' of 'preventative methods'.

 

The Deloitte summary says,

 

'“Deloitte’s forensic analysis of customers’ transactions revealed 29 potentially suspicious transactions during the last 12 months,” none of which was reported by banks'.

 

This does not seem to accord with the clean bill of health that Cyprus's Finance Minster read into the MoneyVal and Deloitte reports. Indeed it seems to add up to more than Georegiades dismissal of money laundering accusations as 'a staged affair, achieved through hyperbole' (see below).

 

Georgiades  said on 11 January 2013 “Comments appearing in German media and elsewhere, which portray Cyprus as a money laundering haven, are grossly exaggerated and very simply wrong." They may have been exaggerated but there is enough evidence in the summary report to suggest that they were not simply wrong.

 

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Update 16th May: the leaked summary AML audit report

 

Stockwatch (see PDF) bravely leaks the summary report of the MoneyVal and Deloitte audits of Cyprus's Customer Due Diligence procedures with regard to anti-money laundering. The first second paragraph of the report is pretty definitive.

 

The data included in Deloitte’s analysis exposes systemic deficiencies in the implementation of preventive measures by the audited institutions. While Moneyval was not able to access actual customer files, its findings significantly revise its previous, more favorable assessment of Cyprus’ AML system. In particular, Moneyval’s assessors express their concern that the combination of a number of features associated with international banking business (e.g. introduced business, plus complex structures, plus use of nominees) may, in higher-risk cases, bring the cumulative level of inherent risk beyond a level that is capable of being effectively mitigated by the CDD [Customer Due Diligence] measures currently being applied. (My emphasis)

 

Here are some snippets

 

The reports found that customer business profiles are generally not properly established by Cypriot banks.

 

Around 27% of deposit client files reviewed showed inaccurate information on the customer and beneficial owner. The figure for loan files was 11%.

 

In relation to the 390 customers included in the sample, the audit reveals that simple commercial database checks showed that approximately 10% of these customers are “politically exposed persons” (PEPs) that had not been detected or flagged by the banks. [This varied hugely between banks].

 

The institutions included in the sample appear to have been overly reliant on third parties in providing CDD [Customer Due Diligence] information in the absence of a risk-based verification of the underlying information provided. This is particularly evident with regard to multi-layered and less transparent ownership and control structures involving foreign jurisdictions generally considered to be of higher money laundering risk. (My Emphasis)

 

The current poor functioning of the Company Registry makes identity verification challenging. There is a large backlog of amendments to registration documents at the Company Registry and a lack of follow up for a significant number of unsubmitted annual returns and financial statements

 

The reports reveal that the banks failed to report a significant number of suspicious transactions to the authorities, including in very compelling cases. (My Emphasis)

 

It should be noted that the tone of the Summary Report above is noticeably harsher and more critical of Cyprus's AML procedures than that in the 2011 report below.

 

It's not my intention at all to dance on the grave of Cyprus's business model. 

But to continue to blame the German Secret Service, or the Greens or Carsten Schneider (see below) and claim as Finance Minister, Haris Georgiades, that allegations of money laundering against Cyprus were, “a staged affair, achieved through hyperbole" is to damage the limited credibility of the Cypriot government at a time when it needs as much of it as it can get to negotiate credibly and successfully with the troika and other parties.

 

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The two best investigative articles on possible money laundering in Cyprus I have come across are in the  FT and  Wall Street Journal (see also this good 2009 Business News Europe article that is referenced in the March 2011 briefing to the European Parliament Russian organised crime: the EU perspective).

 

Make up your own mind but for me there is enough smoke here to suggest something akin to a fire.

 

Also the  Moneyval report of 2011, whilst praising Nicosia’s international co-operation and its 'extensive measures to enhance its compliance with customer due-diligence reports” called for more standalone convictions, asset seizures and on-site supervisory inspections. It would be interesting to know if these were stepped-up post 2011.

 

('Monyval' is the Council of Europe's Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism.)

 

For the Moneyval Cyprus September 2011 report (pp. 217) itself go here.

 

Some of the findings of the Moneyval 2010 4th Assessment visit reported in Spetember 2011 were:

 

• Recommendation to put in place a comprehensive national risk assessment of Monely Laundering and Terrorism Financing 'to adequately identify ML/TF risks and vulnerabilities, as well as the targeted sectors in the country ... Cyprus should [also] take appropriate measures to address those risks.

 

• Overall, the financial sector appeared to be adequately monitored,although it is recommended to step up the number of on-site visits in particular on MTBs and investment firms and regulated markets.

 

• However, the same cannot be concluded as regards the designated non-financial businessesand professions, as there is insufficient evidence that effective supervision is taking place across the board, and in particular as regards trust and company service providers, real estate, dealers in precious metals and stones as well as lawyers. There is also a clear lack of resources in the supervisory authorities with the result that on-site examinations may not be undertaken appropriately, if and when undertaken.

 

• The evaluation team notes however that the number of stand-alone ML and in general the volume of ML convictions appear to be low.

 

• The overall number of sanctions imposed appears low in proportion to the sector implying a high degree of compliance, a position not necessarily endorsed by the evaluation team.

 

• The evaluation team has also expressed serious concerns on the effective implementation of the AML/CFT requirements in the real estate and dealers in precious metals and precious stones sectors.

 

• The human, financial and technical resources allocated to competent authorities regarding AML/CFT matters are not satisfactory on the whole, and the situation is particularly worrisome as regards supervisory authorities.

 

• Cyprus authorities should also take additional measures to gather statistics. Complete statistics were not available inter alia on: a) the number of investigations conducted for ML, including on information on how these cases were initiated and the types of crimes they relate to, on the number of investigations terminated and the reasons for termination, and the cases pending.

 

(Extracts above from pp 7-15).

 

Note also that the 2013 Monyval inspection focussed 'exclusively on the effectiveness of Customer Due Diligence measures in the banking sector alone' Moneyval March 25 2013. (See here for the brief given to Moneyval and Deloitte.)

 

See Section 1.17 of the Memorandum of Understanding for the troika's extensive action plan to increase financial transparency in Cyprus.)

 

Following the 2013 audits  Georgiades said that "any remaining shortcomings, any ‘loopholes’ in the local AML system would be closed shut so that the subject of compliance is settled once and for all."

 

Georgiades went on to assert that allegations of money laundering against Cyprus were  “a staged affair, achieved through hyperbole."

 

Looking back over the accusations of money laundering and the 'hyperbole' to which Mr Georgiades refers it seems that the oft-cited villain of the piece is one Carsten Schneider, MP, and SPD budget spokesman who is quoted in the FT of 21 December 2012 as saying, 

 

“We will not allow the money of German taxpayers to insure Russian black money deposits in Cypriot banks."

 

Schneider's comment was first reported in SpiegelOnline  of 5 November 2012 where Schneider is quoted as saying,

 

"Before the SPD can approve loan assistance for Cyprus, the country's business model must be addressed," SPD budget expert Carsten Schneider said. "We can't use German taxpayers' money to guarantee deposits of illegal Russian money in Cypriot banks."

 

Note here the difference in the translation of Schneider's comment. In the FT the phrase 'Russian black money' is used. In Spiegel Online 'illegal Russian money' is used. In the German edition of Spiegel Schneider uses the word 'Schwarzgeld' which literally tranlated means 'black money'. But Schvarzgeld is (see Wiki De) a 'colloquial term for taxable, but untaxed income, which usually mainly from entrepreneurial or professional activity, so-called moonlighting [in]come'. (Machine translation).

 

In Spiegel Schneider made his comments in response to a German foreign intelligence agency (the Bundesnachrichtendienst - BND) secret report that, according to Spiegel Online,

 

'outlines who would be the main beneficiaries of the billions of euros of European taxpayers' money: Russian oligarchs, businessmen and mafiosi who have invested their illegal money in Cyprus.'

 

It also claims that,

 

'Money laundering is facilitated by generous provisions for rich Russians to gain Cypriot citizenship, according to the BND which found that some 80 oligarchs have gained access to the entire EU in this way.

 

According to the report the BND shared their findings with the troika: "The BND has analyzed the situation in Cyprus and then debated it with experts from the 'troika'."

 

All of which meant that, according to a member of Angela Merkel's government,  "A rescue package for Cyprus could be very incendiary." And so it turned out to be. (See also the followup Spiegel article of 6 November 2012).

 

The head of the BND, Gerhard Schindler, reported in a confidential meeting of the Economic Committee of the Bundestag in late March 2013 (see Handelsblatt) that a certain percentage of Russian money had to be 'black money' as his agency estimated that 40% of all money leaving Russia was black.

 

Returning to Schneider's comments these were given greater potency by the addition of the adjective 'gleefully' by bloggers and later still by an article that suggested he had  'hooted' his comment. Schneider was also attributed with wanting to 'burn' Russian 'black money' when the original quote suggested he wanted was to avoid 'insuring' Russian black money.

 

The 'hooted' and 'burning' seems to be attributable to Joseph Cotterill at FT Alphaville on 16 March who claimed Schneider made his comment in March 2013 even though the WSJ article he links to reports that Schneider made it in February 2013.

 

The Spiegel Online article above has the Schneider quote from way back in November 2012 and the FT itself reported it in December 2012. Maybe he just kept saying the same thing over and over.

 

The 'gleefully' may come from a post by Satyajit Das on the Ritholz blog of 18 March that was apparently republished in The Independent in an abridged version and cross-posted in other blogs.

 

A small point maybe but it is interesting how the rhetoric was ramped up by the addition of the words 'gleefully', 'hooted' and 'burn' by people who presumably were not there to hear Schneider's original comments. And amazing how it was then passed from blog to blog. I even tweeted it myself.

 

Schneider had used the 'black money' comment   before in September 2012 when he said,

 

“We in the SPD want people who have a lot of black money in Switzerland to pay taxes on that money.”