17 December 2017 Addressing Cyprus’ international reputation

This article first appeared in the print edition of Phileleftheros on Sunday 17 December 2017

Addressing Cyprus’ international reputation

By Lefteris Adilinis and Fiona Mullen

This year has not been a good one for anyone involved in trying to improve Cyprus’ international reputation for probity. International media outlets have zoned in on the relationships of various personalities with Russian business, and more often than not have found a link with Cyprus. Moreover, they continue to describe Cyprus in unsavoury terms.

Just to give the most prominent examples, the description of Cyprus by the New York Times, when writing about the Russian links of the former vice-chairman of Bank of Cyprus, Wilbur Ross, was that it is “long regarded as a favorite financial haven of wealthy Russians”.

Similarly, the US-based The Atlantic said Cyprus “was a favoured destination as a tax haven”, when writing about the financial activities of the former campaign manager of the US president, Donald Trump, adding that Manafort had “laundered money through shell companies and foreign bank accounts in Cyprus”.

Bloomberg said that “Passports for sale lure rich Russians” and said Cyprus was a place where Russians are “hiring sham employees for the investment vehicles they set up on the island”.

Only as recently as October, the Financial Times called Cyprus “a popular tax haven favoured by Russian oligarchs and businesses”.

It is not just the English-language press. Investigations into suspected Russian interference in the presidential election of France and into a former Austrian finance minister on corruption charges also found a financial trail through Cyprus.

Last but not least, of course, the activities of the de facto second in command at the Legal Services of the Republic have also drawn the world’s attention.


The public and business are concerned

Cypriots are also concerned about probity. A survey of Cypriot residents (93% of whom were Cypriots), published by Eurobarometer on 11 December, gave Cyprus the (joint) second highest corruption score with Spain. Only Greece was considered to be more corrupt.

In the Eurobarometer survey, 57% of respondents said that the problem of corruption is “very widespread” in Cyprus, compared with an EU average of just 26%. Another 37% respondents in Cyprus thought it was “fairly widespread”, compared with an EU average of 42%.

The total (very/fairly widespread) was therefore 68% in the EU and an astonishing 94% for Cyprus. Cyprus was among only five countries that scored more than 90% for corruption. The others were Greece (96%), Spain (94%), Croatia (92%), Lithuania (92%) and Portugal (92%).

In another blow, Cyprus came bottom of the class of the Eurobarometer survey when people were asked whether corruption has deteriorated. Some 68% of respondents said corruption had worsened, compared with 63% in Greece (the second worst score).

Businesses are also worried. In the World Economic Forum Global Competitiveness Index, corruption climbed from the 11th most “problematic factor” for doing business in 2006-07 to the second most problematic factor in 2016-17. It did improve in the most recent 2017-18 report, however, as other issues, such as red tape, infrastructure and access to financing, overtook corruption as primary concerns.

The score for judicial independence has also been worsening. In the Global Competitiveness Report it dropped from a peak score of 5.5 in 2010-11, when it was ranked 22nd best in the world, to 4.7 in 2017-18, when it was ranked 40th.


Frustrated professionals

Accountants, bankers and lawyers working in the professional services sectors are understandably frustrated by the international press coverage and the public opinion surveys.

After all, they have spent the best part of the past four years investing a huge amount of time, money and training to meet new and increasingly demanding regulations to tackle money-laundering and ensuring that they implement all the know your customer (“KYC”) rules.

Indeed, there is now a growing industry of compliance firms whose only job is to ensure that their clients comply with all the new rules.

The efforts of the professionals have been rewarded to some extent. In January 2017, Transparency International found that “Cyprus disclosed the most complete set of anti-money laundering data among the 12 analysed countries, with information available for 14 out of the 20 indicators.”

The Transparency International report follows a peer review by the Organisation for Economic Cooperation and Development (OECD), which upgraded Cyprus in 2015 from “non-compliant” to “largely compliant”. In the same review, Cyprus was found to be fully compliant in 7 out of 10 areas: the same number as the Netherlands, Germany and the UK.

However, it is clear from recent press coverage that the message has not yet reached the international media.


Ignore perceptions at your peril

It is tempting to explain away what the rest of the world is saying about us and put it all down to an unfair world. Indeed, some professionals have said the bad press coverage is caused by other countries trying to hide their own bad practices.

Diminishing the importance of the international press would be a huge mistake, however.

Whatever the truth of the perceptions, they have very real-world consequences. To give a couple of examples, in late 2012, the German media were full of bad reports about Cyprus, the “dirty tax haven”. One TV station secretly videoed a Cypriot professional boasting that he had tipped off his client about an official money-laundering investigation. One wonders who tipped him off.

Then in December 2012, less than 12 months before the German elections, the opposition SPD budget representative, Carsten Schneider, said, “We will not use German taxpayers’ money to protect the deposits of Russian black money in Cypriot banks”.

Just three months later, Cyprus became the first and, to date, only country to implement a haircut on depositors. In other words, negative perceptions about who we do business with gave other eurozone countries the political cover they needed to support the unprecedented haircut on Cyprus.

The views of the international media also affect the willingness of big banks to use financial institutions based in Cyprus as counter-parties for business. It also makes institutional investors such as pension funds less willing to put money into the growing investment funds sector.

It also encourages the European Commission to push harder for a common tax base, which would hit hard a key competitive advantage of Cyprus.


The way forward

There are three ways forward on how to tackle this.

The first is to understand that international perceptions about the probity of Cyprus are an existential issue for Cyprus. They have has hurt us badly in the past and can hurt us badly again in the future. Tackling Cyprus’ reputation, therefore, should be a top priority that is given the same, across-the-board attention as the Cyprus problem.

It is also an existential issue because of the size of the sectors involved. In 2016 accountants and lawyers (“professional, scientific and technical activities”) accounted for 7.2% of GDP. That means the sector is bigger than tourism (“accommodation and food service activities”, which accounted for 6.2% of GDP in the same year.

Financial and insurance services accounted for another 10.6%, making that sector bigger than wholesale and retail trade, at 9.5%.

Accepting that our international reputation is an existential issue means understanding that perceptions are not just a problem for the Cyprus Investment Promotion Agency (CIPA). CIPA is doing a great job on a tiny budget, which by the way is only a fraction of what is devoted to tourism. But Cyprus needs the whole weight of the country behind it to turn these perceptions around. That means it is a matter for institutions like the foreign ministry as well.

The second and more delicate issue is Cyprus needs not only to be clean but to be seen to be clean. We know from personal experience that it is very hard to persuade international journalists that the country has changed when they ask, “Why has no one gone to jail?”

People have gone to jail for tax evasion and fraud in the past few years but we cannot recall a single case in which anyone lost their licence, let alone went to jail, for money-laundering activities involving international business. This needs to change.

Finally, and for self-preservation reasons, businesses should start thinking about broadening their client base.

There are plenty of new exciting sectors on the horizon: artificial intelligence, biotechnology and renewable energy. It is never good to put all of your eggs in one basket, be that a single country or clients in a single sector.