The Lie behind the Cyprus Bank Heist

Remember the Cyprus Bank Heist? The troika formed by the European Union, the European Central Bank and the International Monetary Fund strong-armed the Cypriot government into seizing parts of people’s bank deposits. One of the arguments for this was that Cyprus was a haven for shady banking, most of which allegedly coming out of Russia. As late as May 17, the Wall Street Journal reported:

There are plenty of reasons why Cyprus’s bailout took so long and came with such tough terms. But one is very clear: Cyprus’s reputation as a site for money laundering and tax avoidance made its rescuers loath to prop up its bulging banks.

By stirring up these sentiments, the EU-ECB-IMF troika was able to push the Cypriot government into an unprecedented assault on private property. The only problem is that  the talk about money laundering was mixed with generous portions of hot air. Cyprus Mail reports:

Cyprus yesterday accused the troika of distorting information in a document purportedly summarising the island’s status vis a vis anti-money laundering (AML) measures by “drawing inferences” where none existed in the original reports. … Yesterday the Central Bank of Cyprus (CBC) said the summary did not give a synopsis of the main findings “but rather a description of the perceived weaknesses of the system, drawing inferences where none exist in the original reports.”

How about that – “drawing inferences where none exist”! In short: building a castle on clouds.

“The lack of consultation with the authors of the reports and the failure to refer to any of the positive aspects mentioned therein, has resulted in erroneous and distorted conclusions in the media, especially the international press,” the CBC said in a statement. “A summary of the reports cannot be considered balanced if it omits to mention that  they reveal a number of strengths both in the Cypriot AML framework and in the effective implementation of customer due diligence by Cypriot banks.”

So why has the Troika omitted this from their report summary? Well, here is one clue:

An independent audit of Cyprus’ implementation of AML measures was set as a precondition for an international bailout. Cyprus initially resisted the idea, arguing it had already been cleared in a prior assessment by [EU money laundering agency] Moneyval. The government later backed down and agreed to a fresh review, one by Moneyval and a parallel one by private auditor Deloitte. The summary said that between 2008 and 2010, Cypriot banks reported not a single suspicious transaction under anti-money laundering regulations, and flagged only one in 2011 and “a few” in 2012.

The report on money laundering sampled 590,000 transactions and found a full 29 – twenty nine – that could be deemed suspicious. In other words, 0.000049 percent of all bank transactions could possibly be illegitimate.

That is a legal compliance rate that would make any government agency in Europe or the United States green with envy. I doubt that a single employee of the EU-ECB-IMF troika can prove that only 0.000049 of their daily activities violate some law.

Among the positive aspects the CBC listed as being absent from the troika summary was the fact that Deloitte also said Cyprus had a stricter legal framework beyond normal EU standards. “In the audit for compliance with the CDD (customer due diligence) requirements of the Cyprus legal framework, it is worthy of note that these requirements are more detailed, and to a certain extent prescriptive, than in many other jurisdictions, including other EU Member States that similarly have implemented the requirements of the Third Money Laundering Directive,” the CBC quoted Deloitte as saying. Cyprus also had a solid level of compliance on CDD across the sector and displayed strong compliance in the identification of customers, it said.

Long story short: Cyprus was not a haven for illicit banking. It was simply a low-tax jurisdiction that attracted more investments because of that than banks in larger, higher-taxed countries. For two reasons the Troika decided to use Cyprus as a vehicle for their outrageous scheme to seize people’s bank deposits:

1. Its low taxes were a sore spot for tax-greedy governments elsewhere in the EU, including over-bloated welfare states in north and central Europe. They wanted an opportunity to crush the economy of a “tax haven” and set an example so as to prevent others from breaking the tax-to-the-max ranks.

2. Cypriot banks had invested heavily in Greek treasury bonds. When the Greek government and the Troika forced the creditors of the Greek government to forgive a good part of their loans – prosaically referred to as a debt “haircut” – banks in Cyprus were among the hardest hit. Since the Cypriot government, like every other government in the EU, wanted to prevent its banks from failing as a result of bad investments in bad treasury bonds, they had to consider a bailout scheme. The Troika took the chance to blackmail the Cypriot government into being the first to steal money from bank customers, using unfounded accusations of shady banking practices to twist the arm of the Cypriot government.

The impression that Cyprus was singled out for reasons unrelated to the unfounded accusations of money laundering is reinforced by a concluding statement from the Cypriot government:

Echoing the [Central Bank of Cyprus] CBC, a statement from the finance ministry said the nature and depth of the assessments done on Cyprus were “unique and have never been carried out in any other jurisdiction”. “The outcome of the assessments … indicates a solid level of compliance across the sector,” the ministry said.

In other words, all the other countries that have passed, or are considering passing, deposit confiscation schemes as part of a legal way to “save” their banks have done so based on a false premise, namely that the Cypriot Bank Heist was legitimately motivated by bad banking practices.

Will this make any legislators in Europe or Canada rethink their support for this kind of authoritarian assault on property rights? Probably not. What reasons would those legislators have to reverse the growth of government power?