VZCZCXYZ0012
PP RUEHWEB

DE RUEHNC #0522/01 2231257
ZNR UUUUU ZZH (CCY ADX9C078F MSI7151 - 648)
P 111257Z AUG 09
FM AMEMBASSY NICOSIA
TO RUEHC/SECSTATE WASHDC PRIORITY 0060
INFO RUCNMEM/EU MEMBER STATES COLLECTIVE PRIORITY
RUEHAK/AMEMBASSY ANKARA PRIORITY 5503
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS NICOSIA 000522 
 
C O R R E C T E D  C O P Y -- CORRECTING TEXT 
 
SENSITIVE 
SIPDIS 
 
TREASURY FOR CHRIS BURDICK 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PTER CY
SUBJECT: NORTH CYPRUS BUDGET WOES AND MONEY LAUNDERING 
ISSUES 
 
REF: NICOSIA 363 
 
¶1. (SBU) Summary: The north Cyprus economy continues to 
deteriorate and the "government" is faced with a relatively 
massive budget deficit. They are trying to reduce the largest 
single government expense item, civil servant compensation, 
but the unions have already begun work-to-rule and strikes 
which will only get worse after the summer. With all these 
problems, getting the "government" to focus on a key USG 
concern, implementation of recently-passed legislation 
regulating casinos to limit money laundering, will need 
coordinated pressure from ourselves, the UK and the EU. End 
Summary. 
 
¶2. (SBU) In an August 3 meeting with the Charge', Turkish 
Cypriot "Finance Minister," Ersin Tatar, said his government 
faces a budget deficit of YTL 700 million (US$ 475 million or 
27 percent of the total budget) through December, the 
"government's" fiscal year end. In return for an emergency 
injection of YTL 300 million from Turkey, Tatar has pledged 
to cut his "government's" personnel expenses by YTL 200 
million. This is to be accomplished through reductions in 
overtime pay and adjusting cost of living allowances (COLA) 
for government workers and pensioners every six months 
instead of every two months. Once the TC cost-cutting is 
achieved, Tatar expects to fund the remainder of the deficit 
through another contribution from Turkey. He justified the 
Turkish contributions by noting that northern Cyprus 
"imports almost US$1.5 billion from Turkey every year and 
provides free schooling and health care to the thousands of 
Turkish citizens who live in Cyprus." Note: These residents 
presumably pay taxes in northern Cyprus like all other 
residents. End Note. 
 
¶3. (SBU) Tatar claims that many "government" employees double 
their base pay through overtime earnings in what is already a 
vastly overstaffed bureaucracy. When asked if he expected 
civil servant unions to react badly to these measures, Tatar 
replied "they're a bunch of leftists anyway, they don't vote 
for us." The civil servant labor unions have already begun to 
react to these reductions. "Customs" employees have refused 
to work overtime, and since there is only one shift for work 
(0700-1400,) all flights and ships that arrive after 1400 are 
now met only by the police with no customs inspectors 
present. Policemen are permitted to inspect luggage, but have 
no authority to confiscate legal goods or assess duties. 
Press reports suggest that inspections of luggage is not 
taking place at all after 2 p.m. There reportedly is a boom 
in sales at the IKEA located on the Greek Cypriot side as TCs 
load their cars with goods that they now take with them back 
into the north duty-free (ordinarily, TCs pay duty on 
imported goods above Euros 265 value.)  Other unions, 
especially the powerful teachers unions, are reportedly 
planning to strike against the change in COLA when schools 
reopen in September. 
 
¶4. (SBU) "Finance Ministry Undersecretary," Zeren Mungan, 
told us that he expects overtime payment reductions will 
result in a savings of only YTL 8 million/year while the 
change in COLA, given the current low inflation levels, will 
save only YTL 40 million. When asked where the other YTL 152 
million in planned savings will be found, Mungan said, 
clearly indicating his lack of faith in the political 
leadership, "other unspecified and unknown measures." The 
problem, according to Mungan, is that both politicians and 
unions are ultimately confident that, at the end of the day, 
Turkey will come through with whatever funds are needed. 
 
¶5. (SBU) On August 7, "Economy Minister," Sunat Atun also 
lamented the state of the TC economy and a sense of 
helplessness about how to manage the problem. In contrast to 
his high energy level at our last meeting on May 29 (reftel,) 
this time Atun was extremely subdued. We asked how the 
"economic action plan" he had told us his ministry was 
preparing was proceeding. Atun replied that it has not 
proceeded at all "because we have no data, no statistics." 
"All I know," he concluded, "is the economy is a mess and the 
government must depend on Turkey for its budget." 
 
Casino Law and Money Laundering 
------------------------------- 
 
¶6. (SBU) We pressed both Tatar and Atun regarding the 
implementation of laws passed in February 2009 to better 
regulate casinos to help limit their use as a means to 
launder money. A regulatory board should have been 
constituted and a compliance officer named at each casino. So 
 
 
far, this has not been done despite previous promises by the 
"ministers" to do so. Mungan explained that, with all the 
other issues facing the government," money laundering has 
simply not been a priority despite good intentions." We told 
Tatar that if this situation persists, the Financial Action 
Task Force (FATF), which removed north Cyprus from their 
watchlist earlier this year in part due to the passage of the 
casino law, will have no option but to again relegate the 
jurisdiction to the watchlist. The UK High Commission and the 
EU Assistance Office plan to join us in lobbying on this 
issue and they are looking for funds to train compliance 
officers once a regulatory board is seated. 
 
Comment 
------- 
 
¶7. (SBU) Even though GDP continues to decline - estimates are 
for negative growth of 2-4% this year - the budget and 
infrastructure fund transfers from Turkey and the high 
proportion of TCs who receive salaries or pensions from the 
"government" keep things from getting desperate. The long 
term damage to the productivity and competitiveness of the 
private sector, however, will make reintegrating the 
economies of the north and south of the island more difficult 
in case of reunification. The lack of progress on 
implementing the legislation designed to help close off 
casinos as a means to launder funds is due to a lack of focus 
by "ministers" overwhelmed with other issues, a lack of 
understanding of the steps needed to implement the 
legislation and, we believe, because of the political clout 
wielded by the casino owners. We plan to work with 
like-minded embassies and TC bankers to press hard on this 
matter. 
Cohen