EU-toezichtmissie in Cyprus vanwege mogelijke witwaspraktijken (en)

BRUSSELS - 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.

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 when 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 i noted on Monday (25 March).

There are two units doing 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" hired by Cyprus' central bank.

The name of the firm and 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 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 they began work.

The set-up poses 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 compromised 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?

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 CDD test.

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

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

It then sends six or so experts who spend three to eight days talking to people in Cypriot financial 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 carry out 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 Moneyval questionnaires, it is useful to look at the Magnitsky case.

Sergei Magnitsky was a Russian accountant who exposed a plot by interior ministry officials to embezzle $231 million from the Russian treasury and who later died in suspicious 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 detailing what happened.

The authorities never replied.

When EUobserver contacted 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 follow-up 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 Cypriot 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 plot, owns a Cypriot-based firm called Fungamico, has an account at the Bank of Cyprus and holidayed in Cyprus with other suspects in the case.

Other parts of the stolen funds were moved via Latvia and Switzerland using several offshore firms linked to Cyprus.

One of them is 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.

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

For his part, the Cypriot attorney general did not open a case until six months later 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 journalists from Finnish broadcaster Yle interviewed Mokas chief Eva Papakyriakou in March, she said: "We haven't opened a case. We will co-operate with some other countries, but we cannot say."

When asked by EUobserver whether there is a case or not, Mokas replied: "We do not wish to comment further."

When Eurozone finance ministers agreed the Cyprus bailout on 15 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 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," Papakyriakou's office told this website.

Whether the "private international audit firm" will look at deposits in the Magnitsky-tainted Alpha Bank, Cyprus Popular Bank, FBME Bank, Privatbank International and Komercbanka 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.