Is Cyprus the Black Economy’s Black Hole?

Recent events, historically, that is the last 50-60 years or so have seen a shift in the world’s financial markets. Very recent events, such as the collapse of Lehman Brothers, the massive bailouts of what were the pillars of the world financial structure have only partially formed the change.

A recently read publication about the black economy has left me thinking some none too charitable thoughts about the situation in Cyprus.

The book in question states that approximately 1/8th of the world’s economy is “black,” i.e. unofficial, under the counter, underhand and not to mention downright criminal. Obviously nobody really knows the size of the Black Economy. In Russia it is believed to be about the same size as the White economy. In Italy, Greece and Spain it is thought to amount to 20% – 30% of their Gross Domestic Product (GDP). In Germany the level is said to be 10% of GDP, whereas in the USA the Black Economy is estimated to be 8% to 10%. The Inland Revenue suggests that the UK’s Black Economy is of the order 6% to 8% of GDP. To put this into perspective – the UK Defence budget for financial year 2010 was 3.1% of GDP – at best half the size of the Black Economy. Hundreds of Russians have deposited millions of dollars in cash in the Mediterranean island of Cyprus in what local bankers suspect, but have done little to investigate, has been a giant scheme to launder the profits of covert Middle East arms sales and the proceeds of Moscow’s Mafia.

Although the Cyprus Central Bank insists that strict financial controls by the Greek Cypriot administration prevent any ‘bad’ money coming into the island, local bankers say that Russians have deposited millions – sometimes carrying the money to the banks in taxis direct from Larnaca airport – with only nominal inquiries from banks about the sources of the money.

‘Let’s speak frankly,’ one Cypriot banker said in Nicosia. ‘Russia is bankrupt and can’t generate this kind of cash. All money that’s coming from Moscow is illegal because of Russia’s exchange-control regulations. But we’re talking of millions and that can only come most probably from illegal arms sales, drugs or worse

The numbers, if you start to put them on paper, make even the American national debt look like peanuts. €60 billion bailout for Portugal, €85 billion for Ireland and €110+ billion for Greece appear to be just pocket money on the grand scale of things. But we are, at least, talking here of “regular economy”, clean money, transparent interest rates and auditable accounting. I know there have been snafus in the past where reputable auditors have failed to see the creativity of “cordon bleu” bookkeeping at its finest. Here, Enron springs to mind. Fantasy balance sheets that any one with a notion of how to read them should have screamed, PHONEY!  The “creativity” appears on page one of the audited accounts and continues over many years. The auditors went down almost as fast as Enron did, until they changed their name.

So what’s with Cyprus? As anyone who reads a good thriller or spy story will know, there is always some innuendo or indeed direct narrative about Cyprus being the money laundering centre of the western hemisphere. Has it all changed? Have the brass letter plate companies in Nicosia all disappeared and gone off to pastures new, just because of the EU and the “stricter” regulations? No I don’t think that the Monopoly Import Export Trading Co Ltd (Cyprus) and their ilk have gone. Maybe they have been in the South long enough to be almost respectable now. The masses of once “dirty money” have been washed clean by investors in property, tourism and catering. Setting up shop afresh here though is not so easy any more. I’m not discounting the probability that the right amount of money applied in the right place doesn’t work, just that it is more difficult. I mean you can’t even buy your teeth from public funds these days without someone noticing.

So let’s assume I’m a more morally bankrupt person than I am. Assume I have a few billions swilling around from falsely declared substandard Romanian meat at €60 a carcase, newly documented with fresh stamps and new papers stating it is Grade A Brussel Best Beef at €1200 a carcase. I sell it to a needy country like Sudan or Pakistan where people are starving and the money collected by agencies like “Help the Hungry”, or whatever, goes to pay for this contaminated meat. The hungry are pleased to get the food at a discounted price. A few die as a result? So, with no beef they may have died anyway! Where’s the dilemma? Add in all the subsidies thrown in for a good cause, e.g., EU Grant 1977 for exporting overproduction of beef in the EU plus an export grant for generally exporting outside the EU and EU 1902/67a business setup grant EU 1088/61 and no doubt as Romania is after all in need of development aid, 10% on top for Romania. Our tax money, “clean money”.

After I deduct my expenses, say €120 for the officials to get my new paperwork, I need to “do something” with the money. Of course the income doesn’t need to come from a scam like that it could be simply drugs, or human trafficking, or plain mass murder. Just say I have this embarrassing little problem of explaining where the money comes from.

I need a source of cash income that cannot be questioned. Let’s say I put the right amount of money in the right place and make a few “Friends” in high places. I know nobody would do this, but we are just supposing after all. So my friends in high places say to me, “why don’t you open a bank, a private bank”? I could get an interest free loan from you. Your accounts don’t need auditing as you are a private bank and you can operate loans schemes to private people and businesses. Yes, I think you are getting the gist now. My dirty money I invest as capital for my private bank and because of my “Friends”, no one asks where it came from. I am now free, within the scope of local taxation and fiscal policies, which is to an extent flexible because of my friends, to do what I please with my money.

If the ongoing income from my Beef business continues I can declare the cash as repayments on fictitious loans. It gets even better when I start making real, actual loans. As a private bank I can agree to almost any interest rate I like. Friends gets 0%, normal customer gets normal %, dodgy customer gets 100% or more. Maybe the dodgy customer wants to hide dirty money as well so the investment could be a two way thing. Swapping extortionate interest rates as a way of laundering money? Works for me. The bank could give fictitious loans against fictitious securities, maybe land or buildings that don’t exist, or exist but don’t belong to the borrower. Then maybe the source of the dirty money on that loan dries up so we ask our friends in high places to look away while we “reclaim” what wasn’t ours to start with. I think I can leave you to think of even more creative ways to “make” money work.

We could go into the hotel business. You gonna say, “he crazy, this boy! Don’t he see we got too many hotel here already?” Yeah! Sure, but that’s the great thing about black hotels, you don’t give a damn about bums on beds; occupancy rates for the professionals. If nobody comes and stays, so what? You just spend say $650m on a palace, preferably with a a casino, and book your dodgy income, from beef or drugs or whatever if you’ve forgotten, as hotel and casino takings. Then after a few years the “flourishing” business (see balance sheets and accounts) can be sold on to some other conglomerate registered in Baku or wherever the right amount of money happens to do the job this time.

OK, I hear your point that because international businesses operate in different currencies, Dollars, Euros, Pounds etc., the hotel or the beef merchant has a problem lending in the right currencies. Of course I don’t, I have any number of Bureau de Change shops around the world which can generate as much cash as I want; “clean” and no questions asked. Know any good “Bureau de Change”

Just as a footnote from the Independent, a little bit old (maybe 2006 not sure):

A considerable amount of disinformation has been spread concerning the role of Cyprus as a major money-laundering centre. Rowan Bosworth-Davies sets the record straight.

“No country with an efficient financial infrastructure is immune to the problems associated with money laundering. All mature commercial centres can attract the reputation for being engaged in money laundering, particularly if the interests of their critics are best served by promoting this perception. It is all too easy for an interested party with a political agenda to point the finger at another country or state and assert that, for whatever reason, that country is “soft” on money launderers. Since September 11, such a practice has grown at an alarming rate, but now the suggestion is accompanied by an implication that the country accused is soft on terrorism as well.

No country or state has a monopoly on complete money-laundering compliance. When set against the tests incorporated in the Financial Action Taskforce 40 Recommendations, the US comes way down the list of compliance adherence. This is not to say that the US does not take compliance with its own laws – certainly as far as other countries are concerned – extremely seriously indeed. However, a better test of compliance would be an evaluation of the laws enacted in the relevant jurisdiction and an assessment of the demonstrated willingness to enforce these laws. In this way, a true evaluation of worth and merit can be made and unsubstantiated allegations of egregious conduct can be discounted.

Cyprus has long been identified as an active facilitator of business from Russia and the former Soviet-era states. This arises from a long historical relationship between the two regions. Cyprus’ geographical position has made it an ideal crossroads for all types of commercial business for hundreds of years. To the north is Turkey, with its immediate access to Western Europe, but its attendant political antipathy. To the east lie Iraq, Iran, Lebanon and Syria, an inevitable gateway to Central Asia. To the south-east, the Arab States and Israel provide access to the Gulf and the Middle East.”

As I say it’s all speculation and any and all of the “suppositions” and “speculation” in the article are purely that. No organisation real, existing or in the planning stages have been implied or cited and any resemblance is purely coincidental. Honest. You can believe me.


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