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Viewing cable 09NICOSIA740, CYPRIOT OFFICIALS: "LOTS OF RUSSIAN MONEY FLOWS,

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Reference ID Created Released Classification Origin
09NICOSIA740 2009-11-20 14:28 2011-08-30 01:44 CONFIDENTIAL Embassy Nicosia
VZCZCXRO4187
PP RUEHAG RUEHROV RUEHSL RUEHSR
DE RUEHNC #0740/01 3241428
ZNY CCCCC ZZH
P 201428Z NOV 09
FM AMEMBASSY NICOSIA
TO RUEHC/SECSTATE WASHDC PRIORITY 0321
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHAK/AMEMBASSY ANKARA PRIORITY 5548
RUEHMO/AMEMBASSY MOSCOW PRIORITY 2192
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 02 NICOSIA 000740 
 
SIPDIS 
 
TREASURY FOR INTERNATIONAL AND CHRIS BURDICK 
 
E.O. 12958: DECL: 11/20/2019 
TAGS: ECON EFIN PREL RU CY
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