articles | 28 April 2013

‘Dirty money’ claims were just an excuse for bail-in

The European Union, led by Germany, has made Cyprus pay dearly for its alleged money laundering transgressions but one leading anti-money laundering expert questions how the EU will ever repay Cyprus if those charges are proved wrong.

Andreas Frank is an independent adviser to the German Bundestag and Council of Europe, who has already initiated two infringement proceedings against Germany for violations of the EU’s anti-money laundering (AML) directive.

A German national living in Switzerland, he argues that mostly German allegations of money laundering in Cyprus were used to justify the unprecedented Eurogroup decision to force a ‘bail-in’ of depositors in Cypriot banks, the argument being that German taxpayers’ money should not be used to save ‘dirty’ Russian money deposited on the island.

However, this premise could fall flat on its face if the recently submitted reports by the Council of Europe’s Moneyval and private auditor Deloitte Financial Advisory show Cyprus to be no more or less guilty of AML violations than other EU member states. In fact, according to Frank, all 27 member states are failing to comply with the EU’s third AML directive from 2005. The European Commission, meanwhile, is currently working on a fourth. Each new directive repeals and replaces the older one, meaning that when the fourth anti-money laundering directive is passed, the previous three will no longer be applicable.

Speaking to the Sunday Mail, Frank said the reason was that none of the member states were complying with the directives. He highlighted the difference between adopting the directive’s measures “on paper” and actually ensuring “effective implementation”.

Rather than accusing member states of AML violations and taking all 27 to the European Court of Justice, as the Commission is obliged to do, it simply wipes the slate clean every few years and starts fresh with a new directive, giving member states more time to comply, he argued.

The EU’s AML directives are based on the 40+9  recommendations made by the Financial Action Task Force (FATF), an inter-governmental body established in1989 to set standards and promote effective implementation of AML and counter-terrorism financing (CTF) measures.

According to the previous Moneyval review of Cyprus in September 2011, the country was found to be compliant to some degree with all 40+9 recommendations.

It concluded that Cyprus adopted measures that comply with international standards and has a comprehensive legal framework in place which compares favourably with other EU and developed countries. In fact, the ratings assigned to Cyprus in relation to its compliance with the 40+9 FATF recommendations outranked most eurozone countries. 

Cyprus has been evaluated by Moneyval four times before last month’s evaluation, imposed by the Eurogroup, along with a private audit, as a precondition to signing a bailout agreement. In all previous four reports, Cyprus received an overall positive evaluation.

The Basel AML Index, developed by the Basel Institute on Governance, uses a composite methodology, aggregating 15 variables from third party sources that deal with AML/ CTF regulations, financial standards, transparency and disclosure and political risks.

Frank notes that the Basel AML Index assigns Cyprus a lower money laundering risk than the eurozone average and lower than EU countries like Germany, Luxembourg, Austria and the Netherlands.

He also highlights the difficulty in correctly assessing countries’ compliance using current evaluation procedures, hinting at much deeper problems in the worldwide approach to fighting money laundering and terrorism in general. “To stop money laundering and transnational organised crime from further undermining the civil societies, the current AML/CFT regulations must be urgently adjusted and improved,” he said.

Taking Germany as an example, Frank noted that Germany’s 16 federated states (Lander) have requested the federal government take on the responsibilities of implementing the AML directive as they are not able to do so.

Germany’s largest Lander, North Rhine-Westphalia with a population of 18 million, has clearly acknowledged that its’ offices of public order will not be able to oversee AML measures in the non-financial sector of the federated state.

Frank also notes that on October 22, 2012, Italy’s anti-mafia prosecutor Dr Roberto Scarpinato was asked to speak at a public hearing of the Bundestag Finance Committee where he testified that “for international crime syndicates and Italy’s mafia, Germany is one of the most important countries for their money laundering operations”.

A staunch supporter of the EU project, Frank has over the years lobbied and pressured the German government to ensure full implementation of the EU’s AML directive, even getting a mention in German Finance Minister Wolfgang Schaueble’s official biography for his efforts.

Frank knew him when he was Interior Minister, and responsible for the AML framework, before it was passed on to the German Finance Ministry. Frank also shared correspondence with Schaueble’s underling Gerhard Schindler at the time, who incidentally, was later promoted to head of the German intelligence agency BND. 

In the run-up to the Eurogroup’s fateful decision last month to impose massive losses on depositors of the island’s two biggest banks in exchange for a €10 billion loan, the German media and lawmakers embarked on a consistent campaign to point the finger at money laundering activities on the island.

In November, 2012, Germany’s Der Spiegel cited a BND report as saying “Russian oligarchs, business people and Mafiosi” would benefit most from any bailout and that Cyprus was a “gateway for money laundering in the EU”. 

In January, 2013, the same publication wrote: “Several dozen oligarchs and financial sharks have set up offshore companies in Cyprus, where they can protect their assets, at very favourable tax rates, from the Kremlin-controlled Russian justice system,” and listed all Russian magnates with interests in Cyprus.

According to the BND report, attorneys and trustees in Cyprus have specialised in financial services, some of which “are used to conceal money earned illegally”, Spiegel said.

Schaueble and Bundestag MPs threatened at the time to veto a Cyprus bailout deal over money laundering concerns and applied heavy pressure on Cyprus to accept an independent audit on its AML framework.
“Can you imagine what Germany would say if Cyprus demanded the same?” asked Frank.

The AML consultant argued that Cyprus is obliged to abide by the “hard” law provisions of the EU’s AML directive. The Commission, as the “guardian of the treaty”, is responsible for ensuring that EU law is correctly applied.

When the Commission, as a troika member, supported the demand for an independent audit by a private company, it not only broke EU law but also destroyed its foundation, said Frank.

“Why should the member states comply with EU law when the Commission confirms that it is unable to fulfil its obligations in accordance with the treaties on European Union?”

For most Cypriots, the allegations were taken half-seriously, as most were under the impression Cyprus had improved its act after EU accession. To most members of the public, Cyprus was no longer tainted by the serious allegations levelled against it in the 1990s of UN sanctions’ violations connected to bagfuls of money being sent to Cyprus by former Serbian leader Slobodan Milosovic.

It’s not that Cyprus became squeaky clean, but that as a member of the EU, it had to act within a framework of certain rules and standards, meaning any possible AML violations could only go so far before the Commission would come along and take Cyprus to court for non-implementation. 

However, failure to heed the warning signs proved most costly for the average Cypriot who operated their business accounts, deposited their savings or put away their pension/provident funds in seemingly safe places, like the island’s biggest and most systemic banks.

In 2012, the two banks, Laiki and Bank of Cyprus, had suffered massive losses from the EU-imposed haircut on Greek sovereign bonds, to which they were disproportionately exposed. They desperately needed bailing out, but the government was in no position to help, leading the country to request a eurozone bailout.

Various polls showed that the majority of Cypriots were in favour of signing a memorandum with the hydra-headed troika, and swallowing the austerity measures that this would entail, in exchange for a bailout of the systemic banks.

What they didn’t expect was for Cyprus to be used as an experiment, or as President Nicos Anastasiades put it a “guinea-pig” for the Eurogroup to send out a clear message that EU taxpayers will no longer foot the bill for the mistakes of eurozone banks, and even sovereigns. 

Schaueble made it clear after March 25, 2013, that Cyprus was dealt with successfully. The German and IMF-inspired precondition that Cyprus does not inflate its public debt was met by using depositors’ money for most of the ‘rescue package’. This was morally justified, according to Schaueble, because those who were responsible for the crisis have been made to pay for it.

In the process, through its handling of the Cyprus debacle, the EU sent a host of other messages to the European public that, put simply, are almost Orwellian in nature: If you are a prudent saver, as opposed to a reckless spender, you are liable to be punished and whatever money is not taken from you will be frozen indefinitely in your account. If you fail to live within your means and have loans taken out with the bank, your savings will be spared from a haircut.

And equally controversial, if you choose to put your money in a bank which happens to offer high-interest rates on certain deposits, you are liable to be punished. Unless, of course, the offending party happens to be the University of Cyprus, a local authority or the UN Peacekeeping Force in Cyprus (which employed the services of Laiki to run its operations), in which case you are entitled to a ‘get out of jail’ card.

On April 18, theBundestag overwhelmingly voted in favour of the Cyprus bailout, while the debate on money laundering was completely sidelined. “The money laundering accusations were used to serve as justification for the Eurogroup's extraordinary demand for a depositors' haircut, disregarding that many of the expropriated depositors earned or received their deposits from legal sources,” said Frank.

To prevent the creation of conspiracy theories, the results of an “unsparing and transparent” AML/CFT probe has to be published without omissions, he said. “To prove that Cyprus was not discriminated or misused to set an example, the inquiry’s results have to be evaluated in the context and comparison with the AML status in the other EU member states which have to comply with the EU Money Laundering Directive.”

The German consultant was quick to add that US investigations have shown that some Cypriot banks have been involved in money laundering operations for Russian organised crime. But they are not alone. “Many large international banks, some of them operating from the EU, have recently been ensnared in money laundering/financing terrorism cases.”

According to the US authorities, HSBC and Standard Charter laundered billions of dollars for their customers ranging from drug syndicates to failed states while German banks like HSH Nordbank, Commerzbank and Deutsche Bank have also been sanctioned by US authorities for AML related failures, he said.

As for Cyprus, the Moneyval/Deloitte reports were submitted to the troika last Wednesday. It remains to be seen whether they will be published in full, what their conclusions are, and whether Moneyval will reverse the positive evaluations of its last four reports on Cyprus, the most recent being one and a half years ago.

If it finds serious violations of the EU’s AML directive in Cyprus, then Frank believes there are legal grounds to sue the Commission over its failure to ensure enforcement of EU law. If not, how will the EU make amends after forcing Cyprus to swallow a gut-wrenching pill before even completing the diagnosis, he asks.

Source: Cyprus Mail

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