The latest eurozone crisis comes down to controversy over bailing out a Cypriot banking system that is flooded with Russian black money.
The EU-proposed "haircut" solution — with a 9.9 percent levy on large deposits in Cyprus — received zero votes in Cyprus' parliament and Russian president Vladimir Putin called it"unjust, unprofessional and dangerous." Attempts to find a compromise have foundered.
In any case, it is clear that powerful people in Russia want to preserve the ability to use Cyprus as a tax haven, alleged money-laundering vehicle, and backdoor into the eurozone.
Just look at what happened to Sergei Magnitsky, the Moscow-based lawyer who was imprisoned and died mysteriously in jail after calling attention to Russian corruption, including alleged money-laundering in Cyprus.
Magnitsky had been working for Hermitage Capital, a fund managed by American Bill Browder. After Hermitage's offices were raided in 2007, Magnitsky began investigating and later testified that he had uncovered a huge scam by top police officials to embezzle $230 million in taxes from money that Hermitage Fund companies had paid in 2006.
Magnitsky alleged that the corrupt cops had used corporate seals and documents seized in the raid on Hermitage's Moscow office and set up fake companies under the same names, which then received a full tax rebate.
Hermitage said that some $31 million of that money was then moved out of Russia using five Cypriot banks: Alpha Bank, Cyprus Popular Bank, FBME Bank, Privatbank International and Komercbanka.
The story quickly turned tragic. In November 2008, Magnitsky himself was charged with tax evasion and taken to prison. Kept in Moscow's notorious pre-trial prisons, Magnitsky unexpectedly died in November 2009. His death was originally attributed to a an abdominal membrane rupture before officials changed that to a heart attack. Magnitsky is one of four witnesses in the case who have died in mysterious circumstances.
While an official investigation into his death in 2009 yielded little results, last year a new report, supported by Russia's Presidential human rights council, found that police torture appeared to have contributed to Magnitsky's death. Council member and human rights defender Valery Borshchyov told Interfax, “It turns out that 8 prison employees were beating one prisoner.”
Despite this ruling and further international pressure, the Kremlin has shown remarkable hostility to calls to investigate Magnitsky's death and the tax fraud itself. This week, an official probe into Magnitsky's death was cancelled — officials said that no crime was committed. Magnitsky himself remains on trail for fraud, even though he is dead.
After Browder successfully lobbied the US government to pursue what became known as the "Magnitsky Act"— an act that proposed severe restrictions on Russian national suspected of involvement in the tax corruption case and others involved in human rights abuses — the Russian government swiftly retaliated with a law banning the adoption of Russian orphans by US families.
The Russian response to Magnitsky has been tied in to another problem — the Kremlin is widely seen as condoning fraud and money-laundering. Last month retiring Bank of Russia chairman Sergei Ignatyev said that 2.5 percent national income was illegally siphoned abroad last year, probably by "one well organized group of people". Reuters notes that many of observers viewed Ignatyev's comments as evidence of "Kremlin capitalism".
Russia had been working hard to avoid an EU-wide Magnitsky Act, which would have much wider economic repercussions than the US Magnitsky Act. However, as Ben Aris writes at Business New Europe, the proposed deposit tax on Cyprus bank accounts was seen as "the financial equivalent of the Magnitsky bill as far as the Kremlin is concerned".
Browder has already successfully lobbied Cyprus to investigate the money in their own banks. As of December last year, Cyprus's anti-money-laundering unit confirmed they had launched an investigation based on information given to them by Hermitage Capital. Other European countries have followed suite and launched a joint probe.
“This isn’t just an abstract notion of money laundering,” Browder told the Toronto Star this week. “The Magnitsky case is a real-life example of something that everybody knows is going on. Right now, the Europeans are going to open the bank records on the case, so we’ll see how it plays out.”
This also explains why a potential Russian bailout of Cyprus would be so controversial. To its detractors, Russia and Kremlin has already shown remarkable legal and political support for those allegedly behind massive tax fraud and corruption. If Russia did bail out Cyprus, they would appear to be giving them financial support as well.
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