Confidential Wikileaks Cable (US Embassy in Nicosia) on Russian Money in Cyprus

Curiously, the imposition of a tax on money deposited in Cyprus banks will hurt many Russian tax evaders, as the Wikileaks released cable below highlights, the amount of money placed in Cyprus by Russians attempting to evade Russian taxes is significant relative to the overall Cyprus banking system. The imposition of the tax is surely going to cause a flight of these funds out of Cyprus to a more stable tax haven--which is likely to destabilize the Cypriot banking sector even more.

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SIPDIS

TREASURY FOR INTERNATIONAL AND CHRIS BURDICK

E.O. 12958: DECL: 11/20/2019
TAGS:        
SUBJECT: CYPRIOT OFFICIALS: "LOTS OF RUSSIAN MONEY FLOWS,
NO MONEY LAUNDERING"

REF: 08 NICOSIA 874

Classified By: Deputy Chief of Mission Jonathan Cohen for reasons 1.4 B
 and D

 1. (C) Summary: Cyprus continues to enjoy close economic ties
with Russia and to depend on that country for more than 25
percent of bank deposits and about one-third of foreign
direct investment. However, much of that investment is simply
doing a round-trip back to Russia to take advantage of Cyprus
tax laws. Cypriot bank executives and anti-money laundering
officials are highly confident that these flows are not being
used to launder criminal or terrorist funds, although they
are utilized to avoid Russian taxes. End Summary.

 2. (SBU) Cyprus is one of the largest sources of foreign
direct investment into Russia with FDI flows amounting to
almost Euros 1.4 billion in 2008 and total Cypriot investment
stock in Russia of about Euros 3 billion. Total stock of
Cypriot direct investment abroad is Euros 9.1 billion. Total
Russian investment stock in Cyprus is about Euros 5 billion
out of total inward FDI of Euros 15.1 billion. Much of the
Cypriot investment into Russia comes from Russian-sourced
funds that capitalize Cypriot companies created solely to
hold shares of a Russian operating company. Russian investors
create these "brass plate" companies, to take advantage of
Cyprus' 10 percent corporate tax rate and, under the
bilateral Russia-Cyprus tax treaty, zero withholding on
repatriated royalties and dividends.  While they have no firm
numbers, the assumption of bankers and accountants we have
spoken with is that, aside from the capital of two Russian
bank branches (Autovazbank and Promsvyabank) and a subsidiary
of Russia Commercial Bank, and housing purchased by the
30,000 Russians with homes on the island through
privately-owned corporate entities, the rest of the capital
coming into Cyprus is primarily destined to make the
round-trip back to Russia.

Cyprus Used for Russian Tax Avoidance
-------------------------------------

 3. (C) Russia is also a significant source of foreign
deposits in Cypriot banks. Euros 15.5 billion are identified
by the Central Bank of Cyprus as Russian-sourced deposits; 27
percent of total commercial bank deposits in the country.
Note: the Central Bank does not break out Russian deposits
specifically, but lumps Russia in with "other European,
non-EU, non-resident deposits;" but privately acknowledges
that this category is almost all Russian. End Note.  While
some of these deposits are associated with the resident
Russian citizens, most are from Russians seeking offshore
accounts to stash their foreign currency. The Russian
Commercial Attach here told us that long-standing mistrust
of what the Russian government might do to private accounts
in the future ("people fear the government could require
conversion into rubles, or even nationalize accounts") is
part of the reason for the Russian outflows. He also said
that his government is concerned that many of the Russian
accounts are opened here simply to avoid paying Russian
taxes.



 4. (C) In 2008, Cyprus was one of 54 jurisdictions on a
"blacklist" issued by the Russian tax authorities on the
grounds that it was an "uncooperative territory" in terms of
helping fight Russian tax evaders.  The practical effect of
the blacklist was fairly minimal, removing a tax exemption
for dividends of Russian companies repatriated to Russia. An
amendment to the bilateral tax treaty, awaiting ratification
by both governments, will require the Cypriot authorities to
share information on private bank accounts with the Russian
Ministry of Finance if the Russian authorities suspect tax
evasion on the part of the account holder. In the past, the
Russian Commercial Attach said, the Cypriots would often not
respond to requests for information on this "non-criminal
offense" or would take months to supply the requested data. A
major change will see capital gains earned by Russian
subsidiaries of Cypriot holding companies with more than 50
percent of their assets in Russia taxed at the prevailing
rates in Russia.  While the number of new companies formed in
Cyprus has significantly declined in 2009, how much of this
is due to the impending change in the Russian tax treaty
rather than the downturn in the global economy is uncertain.

Cyprus Banks in Russia
----------------------

 5. (SBU) Cypriot banks, constrained by the small size of

NICOSIA 00000740  002 OF 002


their domestic market, have looked to Eastern Europe and
Russia to generate new growth. Bank of Cyprus, for example,
last year paid Euros 400 million to buy 80 percent of Russian
Bank Uniastrum. Bank of Cyprus General Manager, Vassos
Shiarly, said his bank undertook this transaction to
capitalize on "Cyprus' advantages in the Russian market."
These advantages are "cultural affinity and familiarity"
(especially sharing the Greek Orthodox religion), and the
sense in Russia that Cyprus is a long-standing friend.

But "No Laundering of Russian Money"
----------------------------------

 6. (C) We asked Shiarly about the ability to control money
laundering on funds transferred from Bank of Cyprus' Russian
operations to the parent bank. He responded that his bank had
created a "control room" in Cyprus that monitors all of
Uniastrum's transactions on-line in real time. The control
room looks for transactions of above Euros 10,000 in value or
an unusual number of transactions from a single client and
triggers "due diligence alarms." Shiarly is confident that he
has "the best systems possible" in place and that his
employees are well-trained to prevent the institution from
being used by money launderers.

 7. (C) These views were echoed by Eva Papakyriakou, director
of the Cypriot Financial Intelligence Unit (MOKAS) and her
counterpart at the Central Bank of Cyprus, Michalis
Stylianou. They acknowledged that Russian flows of money into
Cyprus are substantial but noted that they are much less than
that going to Austria and the UK and that Cypriot banks are
highly sensitized to money laundering. Note: Papakyriakou
expects to be named Chair of Moneyval at its December
meeting. End Note. Last year, MOKAS and the Central Bank
strongly objected to a report that indicated Cyprus was being
used to launder funds originating from Russia with
Papakyriakou telling us "we look and can find nothing like
this. If you have evidence, or even can show us a suspicious
transaction that we have not looked at, we are fully prepared
to work with you to investigate. But you give us no
specifics."

 8. (C) Comment: Our Cypriot interlocutors make no secret of
the importance of capital flows between their country and
Russia to the local economy. However, they take great pains
to point out that Cyprus of 2009 is not the same place as
that which laundered Milosevic's money during the Balkan wars
of the 1990s. Cypriot authorities are proud of the AML regime
they have put in place and financial institution executives
argue that they would never put their growing importance as a
regional financial center at risk by lagging in their
international AML commitments.
URBANCIC