I had a twitter debate with Frances Coppola over the weekend in which she claimed first that Cyprus was not a tax haven as there was no evidence of illegality, second that Russian money had not caused the crisis, third that Greece had precipitated the fall (which is only true in the sense of it being a tipping point) and fourth the Russian money, if it had been there, was all gone now.
All those claims are wrong. But let's just deal with the last as it gives a lie to the rest. The FT says this morning:
With most banks in Cyprus due to reopen on Thursday, the island's many Russian depositors are scheming ways to beat the looming limits on withdrawals and money transfers designed to stem a run on the banks.
A majority of the deposits of more than €100,000 at the Bank of Cyprus and Laiki Bank are ultimately owned by Russian beneficiaries, a person close to one of the lenders told the Financial Times — meaning that Russian businesses and individual depositors will be paying the lion's share of the local bailout.
While the person said he expected Russian clients of the two lenders to lose €3.5bn-€4bn, Eugene Tarzimanov, a banking analyst at Moody's in Moscow, called that estimate “optimistic”, noting that Moody's estimates were higher.
I added the emphasis and it is key.
Of course it does not look on the face of it that many of the funds in Cyprus are Russian: they're hidden behind the secrecy of trusts and companies that places like Cyprus so readily provide to disguise the ownership of funds. Any banker should know that.
And those funds are still there. Why? Because those trustees and company directors who hide the ownership of these funds weren't moving it anywhere for their clients: their livelihood depended on it remaining in Cyprus and that, I am sure, is why it's still there. A tax haven client and their trustee don't always share the same interests. Those who use these place should note that, carefully.
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Zerohedge says the Russian money has already gone:
http://www.zerohedge.com/news/2013-03-25/have-russians-already-quietly-withdrawn-all-their-cash-cyprus
I disagree
Time will tell
I remember meeting several Russian property investment companies 5 years ago that were all ultimately based in Cyprus to take advantage of the low tax rate and double tax agreement with Russia. And I met with Greek property developers that were building housing in Cyprus specifically catering to rich Russian that were flocking there to park their money.
Looking at the Cyprus central bank report for foreign depositors, there does not appear to have been any outflow of foreign deposits from Cyprus up to Jan this year. And I am sure we can safely assume these are mostly Russian
Given that when when many of the Cypriot companies and bank accounts were set up it was illegal for Russians to hold shares in foreign companies or froeign bank accounts without the permission of the Central Bank of Russia I’m afraid Frances Coppola’s argument fell at the first hurdle a long time ago. Anyone who has worked in Moscow knows that nearly every dubious business there made use of the Cyprus connection and often equally dubious transfer pricing. I agree with Frances that much of the serious money transferred out of Russia now resides elsewhere other than Cyprus and that what is left will be the deposits of the second and third tier crooks – €20bn is peanuts in relation to the amount of capital that has been “stolen” from Russia.
The Russian law on bank deposits since 2003 has been pretty clear, before that I’m pretty certain that prior permission from the Central bank of Russia was required.
http://www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/Tax/Newsletters/dttl_tax_alert_Russia_March-2013.pdf
I wonder how many banks in Cyprus (or London for that matter) check that Russian depositors have notified the Russian tax authorities within one month of opening an account and before any significant transfers are made? They might also wish to ask why not doing so would be consistent with the EU regulations on money laundering.
All of this would be fine if I had actually said what Richard says I did. But I did not.
1) “…she claimed first that Cyprus was not a tax haven as there was no evidence of illegality”.
I have never claimed that Cyprus was not a tax haven. Clearly it is a low-tax jurisdiction and there may indeed be illicit money flows – indeed it would be surprising if there were not. On twitter, Naked Capitalism produced a post that argued that Cyprus was not a tax haven, and Brian Lucey produced evidence that Cyprus’s money laundering regulations were actually tighter than Germany’s. Because of this I asked Richard to produce counter-evidence of illegality. I don’t think it is unreasonable, if you are accusing someone of criminal behaviour, to be expected to produce evidence in support of your assertion – especially when others are producing evidence to the contrary.
2) and 3) “…second that Russian money had not caused the crisis, third that Greece had precipitated the fall (which is only true in the sense of it being a tipping point)”.
I did say this, and I stand by what I said. It is simply not true to say that Russian money was the “cause” of the crisis. Russian inflows could have been invested anywhere in the EU, or outside it for that matter. Cypriot banks chose to invest them in lending to Greece – private and sovereign debt. And they would have lent to Greece even without Russian inflows because of their historic and cultural ties. The collapse of the Greek economy and the Greek debt restructuring in March 2012 all but destroyed Cypriot banks’ Greek assets, leaving them with massive holes in their balance sheets. They have needed recapitalisation ever since.
4) “the Russian money, if it was there, has all gone now”. I didn’t say that either. I said that most of the dodgy money has now gone, because dodgy money always moves first. Capital flight was already under way at the beginning of March, long before the first attempt to confiscate deposits.
Richard implicitly equates Russian money with dodgy money. I’m afraid I can’t agree with that. Cyprus deliberately attracted Russian money through high interest rates, exploiting its historic and cultural ties with Russia. It seems unlikely to me that ALL the Russian money placed on deposit in Cypriot banks is the proceeds of crime: unless you believe that Russia is a criminal state, there must be a fair amount of legitimate economic activity that generates profits. Russians may be taking advantage of Cyprus’s high tax rates, or they may be (legally) avoiding Russian taxation, or they may simply be placing money in the EU because they don’t trust their own government – for which they have good reason. Crime is no doubt part of it, but it is not the whole story, and it is grossly unfair to Russians to imply that they are all criminals.
I should add that a fairly high proportion of overseas deposits in Cypriot banks actually come from the UK, again because of historic ties. Some of these are (or were) probably dodgy too. And they too have probably gone, quite possibly back to the UK and onwards to other tax havens. The Bank of Cyprus UK has remained open for business throughout the crisis.
So we agree you said 2 and 3
And I dispute you are right: that is merely the tipping point issue, not what caused the crisis
But let’s move on
On 4 you’re splitting hairs. First, round tripped funds almost certainly broke Russian capital control regulations. Second, no doubt that is why you said I think maybe 5% of funds were Russian and most sources say 80% – the disguise is precisely because of round tripping and illegality. That is the only explanation for your disparity of view. And the evidence of serious capital flight is where?
In addition I never said all Russian money was dodgy – few think round tripping anything else though. FDI can be done much more easily than that. The cost incurred has to be for a reason. But not all – I have never said otherwise.
So that leaves 1 – where we have to agree to differ. If you expect me to write a thesis for your benefit when the evidence of tax haven use for criminal purpose is so well documented, I’m sorry, but you’re obviously intent on wasting my time and I have better things to do with it, not least because I have already put the evidence on my blog.
You’ve now had your right to reply, and it transpires (1) is lazy, 2 and 3 you agree with me and 4 is a straw man argument
Not very convincing.
1) is laziness on your part, not mine. You still have provided no evidence to counter the evidence provided by Naked Capitalism or Brian Lucey.
2) and 3) I do not agree with you
4) is not a straw man. 1bn Euros left Cyprus in February alone, before this crisis hit. http://www.nasdaq.com/article/cypriot-deposits-ahead-of-banking-crisis-reveal-capital-flight-cm231778#.UVb-VBzIbDE
The evidence on 1 is available anywhere and everywhere – I really do not need to do a google search for you
2 and 3 – we disagree but I did not mis represent you
4 – maybe – and if so it does not prove your point that all Russian money wax gone
What I have learned is what many people say – that it is time wasted trying to engage with you
I’ve tried twice
I won’t again
Arguing that a secrecy haven is not a secrecy haven, because there’s no evidence of the exact type of behavior that the secrecy provisions are intended to keep concealed, is such a ludicrous argument I don’t know where to begin.
I think the aforementioned person would do better to offer a more sensible definition of a tax haven!
( that reads better than my first attempt)
Frances
So in what proportion of cases do you believe that Russians informed their tax authorities within one month of opening their Cypriot bank accounts and in what proprtion of cases did the Cypriot banks check that such a legal requirement had been met. I am not sure that you appreciate the amounts of illegal capital flight from Russia that have actually occurred – you may have a valid point that Cyprus was not the only route (but it was certainly one of the most significant) and that much of it may have now gone elsewhere, but aside from that you are a little out of touch with what has happened.
“Is Russia a criminal state?” – an interesting question – but if you have a situation where the the state deliberately decides not to ask too many awkward questions regarding breaches of its own laws when taxes are avoided and capital is allowed to flow out of a country, providing those concerned do not step on the toes of those in charge or point out that those in charge are engaged in the same activities – then you might well meet that definition.
Perhaps we should give a little credit to the Germans for having a better understanding as to how a certain part of Russian society has been behaving in no little part aided by many in the Western banking community. I think you will find that German banks have been a little more choosy when it comes to taking Russian deposits than those in Cyprus, London or Switzerland.
Of course, not all Russians are not criminals the vast majority are victims of those who are trying to rob their country and avoid its taxes. Most can only dream of foreign bank accounts and apartments.
“The Russian economy lost at least US$211.5 billion in illicit financial outflows from 1994 to 2011. These outflows represent the proceeds of crime, corruption, and tax evasion, and have serious negative consequences for the Russian economy.”
See the detailed report here http://www.gfintegrity.org/
Given that onlc c20bn is in Cyprus – perhaps we should be asking where the rest now resides.
Time seems to be at least whispering if not telling:
http://www.zerohedge.com/news/2013-03-26/russian-withdrawals-quantified-cyprus-central-bank-set-expand-emergency-credit-€3-bi
The announcement a few months ago of new exchange of information provisions under the Cyprus/Russia DTT triggered significant withdrawals.
I wonder…could Cyprus (and possibly other tax havens) be another Russian ‘bear trap’?