The Intense Competition in the International Financial Services and Cyprus’ Victimization

During the past few weeks Cyprus has been the recipient of a number of accusations that its fiscal and regulatory framework provides the basis for money laundering and fraud and that a lot of Russian fraudsters seek refuge to this “tax haven” country.

These allegations are very worrying not only because they are completely unsubstantiated, but also because of the timing they are made.  A time when Cyprus is desperately attempting in cooperation with Troika to reach a comprehensive agreement for the financing of its deficit.  It should be noted that this deficit was caused primarily from the hit that the Cypriot financial institutions received following the massive write-down of the Greek sovereign debt that the Eurozone leaders agreed.

Cyprus has today one of one of the most literate and academically qualified populations in Europe and in the whole of the world.  This, in combination with its flexible and stable tax framework, has established Cyprus as one of the most reliable financial services centres in the European region.  Because of this, the financial services sector of Cyprus contributes today 45% to the annual Gross Domestic Product of the country out of which 11% stems from the provision of accounting, auditing, legal, fiduciary, tax and other corporate and consulting services.

The double tax treaties with more than 40 countries, the stability and adequate flexibility of its corporation tax, personal tax, capital gains tax, VAT, tax on financial transactions, defence tax and a number of other tax arrangements, renders Cyprus an attractive and competitive tax jurisdiction.

The tax regime of Cyprus is one of the few in the European Union (EU) that bears all of the following fundamentals:

  • Full compliance with the Basic Freedoms and State-Aid rules of the EC Treaty
  • Full compliance with EU Code of Conduct for Business Taxation
  • Full compliance with the EU tax directives
  • Full compliance with OECD guidelines against Harmful Tax Competition
  • Full compliance with Transparency and exchange of information – OECD White List.  Cyprus has fully adopted the revised Article 26 and insists on its adoption in all of the treaty negotiations
  • Bears no discriminatory rules or preferential treatment of taxpayers

It should be noted that contrary to Cyprus, for most of the above directives and frameworks, Germany is only at the initial stages of compliance.

It is the above attributes which constitute a high quality package for rendering financial services and attract thousands of investors from various countries to select Cyprus as the base for carrying out their operations.

The recent allegations, primarily stemming from Germany, that Cyprus is more or less a base for money laundering, are based on rumours and we believe they are made as a result of the very intense and fierce competition taking place in the international financial services industry in Europe.  Under this weak position of negotiating a memorandum to cover its financial deficit, Cyprus is undoudebtly an easy target to Germany, as well as other friendly countries to them like the Netherlands, who are striving to attract the billions of non-European investors like the Russians, to their own countries.

However the facts and official international reports, state the exact opposite.  Such facts have recently been provided by the Cyprus Unit for Combating Money Laundering based on the Financial Action Task Force (FATF) and include the following:

  1. Cyprus has in place one of the most strict Anti-Money-Laundering regulatory frameworks in the EU.
  2. Germany has a worse record on money-laundering than Cyprus.
  3. Cyprus is totally compliant in 12 areas, whereas Germany is totally compliant in only 5.
  4. Cyprus also has the toughest regime in the EU for identification of beneficial ownership, with the obligation to identify ownership kicking in at 10%, instead of the obligation of 25% threshold provided for in the 3rd EU Anti-Money-laundering directive.
  5. On the basis of the number of areas in full compliance, Cyprus ranks 7th out of 17, whereas Germany ranks close to the bottom, at 14th, just 2 places ahead of Greece.  The Netherlands also rank very low and more specifically on the 13th place.

Moreover no comment is made by German politicians of the very recent significant financial fraud scandals stemming from Germany like:

  • The bribery scandal of Siemens where fines of billions of euros had to be paid
  • The recent investigations taking place for tax fraud and money laundering of hundreds of millions of euro by Deutsche Bank’s senior executives
  • etc.

Based on the recent report of FATF, the overall proceeds from crime generated in Germany, inclusive of tax evasion, are estimated to be around 40-60 billion euros annually.

Of course improvements could be introduced to practically apply the very strict regulations that Cyprus has in place in a more effective manner, and this is something on which the Cyprus authorities are working on an on-going basis.  However when expressing his views on how to further regulate the money laundering activities within the EU, the Minister of Finance of Germany Mr Schaeuble, should primarily be concentrating in setting adequate regulatory frameworks to EU member states with low compliance and more relaxed regulatory Anti-Money-Laundering frameworks.

The aim of this article is not to accuse any of our fellow EU member states, but to reveal how unfair are the accusations against Cyprus for money laundering and to request the establishment of basic mutual respect and support amongst EU member states with a common aim to combat fraud.

Marios M. Skandalis

Board Member of Transparency International (Cyprus)