U.S. Takes on Russia’s Favorite Money Haven: Cyprus
Washington regulators crack down on money laundering in the tiny Mediterranean island in a bid to check Moscow’s power in Europe
Nektaria Stamouli and Drew Hinshaw
NICOSIA, Cyprus—On Good Friday, top managers of this island’s largest bank were at Greek Orthodox churches when their phones began to buzz. Their largest shareholder, Russian oligarch Viktor Vekselberg, had just been sanctioned by the U.S. Treasury.
Still in their church clothes, the Bank of Cyprus managers quickly met to draft a letter informing the billionaire investor that he must withdraw his money from the bank.
Their sunsplashed island, long the favorite money haven of rich Russians, was becoming the focal point of an American offensive to sweep up the money that U.S. officials say Vladimir Putin’s allies launder through Europe.
For Cyprus, America’s new sanctions list was the start of a campaign to change a decades-old business model deeply entrenched in the island’s economic and political culture. So much Russian money enters the European Union through Cyprus that the tiny island of 1 million people appears in international statistics as by far the largest net recipient of foreign direct investment from Russia.
The fight to change that model represents a test of American power on the wilder edges of Europe’s financial system, where Russian wealth collides with Washington regulators in an area—money laundering—where the European Central Bank has limited authority.
“The U.S. and Russia are in a kind of economic war and you fight those wars where the two sides meet,” Bank of Cyprus CEO John Hourican told The Wall Street Journal. “They meet in Cyprus.”
The rapid changes rippling through Cyprus offer a ground-level look at how U.S. cabinet officials, one rung below President Trump, are pressuring Russian oligarchs in an effort to weaken Mr. Putin. A ring of countries on Europe’s periphery, also including Malta and Latvia, are under enormous pressure to drop lucrative Russian clients.
Nowhere more so than Cyprus.
In early May, shortly after the expansion of American sanctions on Russia, a U.S. Treasury official met with the island’s top regulators, waving a list naming the next set of Russian oligarchs likely to face penalties. The American official mentioned a Latvian bank recently shut down following U.S. allegations of laundering Russian money.
“You saw what happened in Latvia?” said Marshall Billingslea, the U.S. Assistant Secretary for terrorist financing. “You don’t want anything like that happening here.”
“Bring it on,” a Cypriot regulator snapped back.
The U.S. moves have grated with Cyprus’s political class—and with ordinary people. Moscow is broadly viewed positively here, as a great power willing to protect the country from Turkey, which has occupied the island’s north since 1974. Bankers feel the scrutiny is unfair.
“Cyprus is being picked on bit more, because we are small,“ said Marios Skandalis, head of compliance at Bank of Cyprus, as Turkish jet fighters flew past his window. “Why isn’t London or Germany being picked on?”
An influx of Russian money has transformed Limassol’s skyline. PHOTO: PETROS KARADJIAS/ASSOCIATED PRESS
For decades, Cyprus has been one of the world’s great gateways for the legally grey fortunes of Russian depositors ranging from arms traders to gambling firms, fast-fortune billionaires and pornographic websites. Powerful players of the post-Soviet sphere—among them, Serbian President Slobodan Milošević—brought cash-filled suitcases in the early 1990s, enriching pop-up banks. Behind them came a wave of Russian tourists, sunbathing under Cyrillic billboards and newly built condos.
By 2010, total deposits in Cyprus’s banks were about five times the country’s annual economic output. Only one other economy, Luxembourg, had a more disproportionate amount of money in its banks.
In 2013, Cyprus’s swollen banking system fell victim to Europe’s financial crisis. The government sought a rescue loan from the European Union and the International Monetary Fund. Those institutions forced large depositors in Cypriot banks, including many rich Russians, to accept the loss of much of their cash as shares in the near-worthless banks instead, called a “bail-in.”
In return for its rescue loan, Cyprus agreed to reduce its reliance on offshore banking, particularly for Russians. It didn’t work out that way, partly because the banks emerged from the crisis with strong Russian shareholders.
“The bail-in was foolish. To get rid of the Russian money, they gave the banks to the Russians,” a bank official said.
Among them was a former KGB agent turned mining executive, Vladimir Strzhalkovsky, who was catapulted onto Bank of Cyprus’s board. Around the same time, American investor Wilbur Ross—now the U.S. Commerce Secretary—led the purchase of a 15% share in the bank and became vice chairman.
The duo didn’t coexist for long. In 2015, Mr. Ross discovered that Mr. Strzhalkovsky was trying to buy a hotel listed as collateral on one of the bank’s non-performing loans. Mr. Strzhalkovsky was also requesting that the bank place commercials with an ad agency he owned in Russia.
Mr. Ross complained to European regulators in Frankfurt and managed to have Mr. Strzhalkovsky ousted from the board.
Mr. Ross left in 2017 when he became Commerce Secretary. U.S. pressure has only increased since, bankers say.
“They cannot say to Cyprus, get rid of all your Russian accounts,” said Nobel Prize winning economist Chris Pissarides, a longtime member of several Cypriot bank boards. “They say...it must be money laundering because they’re all so rich.”
In response, the island’s central bank is shutting down hundreds of shell companies and demanding that banks perform face-to-face interviews with their depositors. Cypriot regulators are asking Russian clients to fly home and retrieve tax certificates. Middlemen, like lawyers, are being cut out of the process as bankers insist on establishing the true owners of the companies that bank here.
Tens of thousands of customers have received letters that their accounts have been closed because they didn’t meet new criteria. They include a think tank funded by Germany’s Social Democratic Party—which managed to keep the account open on appeal—and one large American depositor—Paul Manafort, President Donald Trump’s former campaign chairman—who refused to answer questions about his money’s source.
Bank deposits have shrunk, but are still equal three times the economy of a country that decades ago relied on small-scale gourd farms to fill government coffers. Some Russian oligarchs still do business here, although the Bank of Cyprus says it has them under close watch. The shoreline in the resort town of Limassol—locally called “Limassolgrad”—is stacked with high-rises owned by Moscow’s business elite, who can get Cypriot passports, bestowing freedoms throughout the EU, if they buy property worth $2.3 million.
“Russia built this economy,” said one bank official, complaining that they’re being asked to cut their best customers. “We can’t go back to growing cucumbers.”
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