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Cyprus Confidential Investigation Exposes Vast Money Laundering Network

7 min read

Adv Rishabh Kumar

Published on: December 02, 2023 at 21:10 IST

The International consortium of Investigative Journalists (ICIJ) conducted an investigation to uncover the confidential sanctions and money laundering schemes running in Cyprus.

The investigation revealed more than 3.6 million files from six financial services providers. The investigation revealed how Cypriot financial enablers sought to help Russian oligarch and Putin allies shielded their assets to avoid western sanctions.

Cyprus A small Mediterranean island country that is stuck in a financial scandal of its own making.

The investigation by International consortium of Investigative Journalists (ICIJ) tries to lift the veil of secrecy for government and regulatory agencies. The documents reveal how entities with offshore residency were controlled from India, and instructions for financial transactions in these entities are given by individuals in India.

As per Indian laws, it is not illegal to set up offshore company in Cyprus. India has double-taxation avoidance agreement (DTAA) with Cyprus, companies use their tax residency certificates in such countries to enjoy tax benefits that are available legally.

India included Cyprus in a list of countries that refrained from sharing or exchanging valuable tax-related information, giving it a Notified Jurisdictional Area (NJA) under Section 94A of Income-tax Act.

NJA countries face consequences such as a higher tax rate of 30 per cent for payments received by entities registered there. Transactions with entities in NJA are subjected to Indian transfer pricing regulations.

A revised DTAA was signed with Cyprus on Dec 14, 2016. Removing Cyprus from the list of NJA countries, with retrospective effect from Nov 1, 2013.

Offshore companies and offshore branches managed and controlled from Cyprus are taxed at 4.25 per cent, and offshore branches managed and controlled from abroad and offshore partnerships are totally exempted from tax.

There is no withholding tax on dividends, and the beneficial owners of offshore entities or branches are not liable to an additional tax on dividends or profits over the amount paid by the respective legal entities.

No capital gains tax payable on the sale or transfer of shares in an offshore entity, and no estate duty is payable on the inheritance of shares in an offshore company. There is no import duty on the purchase of cars, office or household equipment for foreign employees.

Cyprus International Trust Law defines offshore trusts whose property and income are outside Cyprus, and even the settlor and beneficiaries are not permanent residents of Cyprus.

If the trustee is a Cypriot, the offshore trust is exempt from estate duty, and does not have to pay any tax on the income and gains. The trust need not be registered with any government or other authority, and confidentiality is enshrined in the new law.

The trust allows businesspersons to avoid tax that would have otherwise been paid by the settlor had she/he remitted the income arising from overseas operations, to the country of residence.

Offshore branches of companies not having management and control of their business in Cyprus are granted complete exemption from income tax in Cyprus in respect of their profits derived from sources outside Cyprus, whereas if the management and control is in Cyprus they are subject to a tax of 4.25 per cent.

It is not illegal to set up an offshore company in Cyprus. India signed a Double Tax Avoidance agreement (DTAA) with Cyprus in December 2016. But Indian companies use their Cyprus tax residency certificates to avoid paying tax.

The DTAA allows Cyprus a low tax regime, to be used as a jurisdiction for tax planning. Many foreign investors set up investment firms in Cyprus to invest in India and the country is now an alternative to Mauritius.

But DTAA does not stop the I-T department from denying tac treaty benefits if it is established that a company has been inserted as the owner of shares in India at the time of disposal of the shares to a third party solely with a view to avoid tax.

In 2007, Cyprus introduced what is called the “golden passport” scheme also known as the “Cyprus Investment Programme”. It facilities grant of Cypriot citizenship to financially prominent individuals for FDI in the country.

In 2022, 7327 individuals were cleared for Cypriot passports, of whom 3517 were investors and rest, members of their families. The scheme went through several changes until in 2020 it was scrapped due to misuse and allowing persons with criminal charges to acquire Cyprus passports.

The Cyprus Confidential investigation, led by the International Consortium of Investigative Journalists (ICIJ) and Munich-based Paper Trail Media, exposes how Cyprus served as a hub for Russian oligarchs and allies of President Vladimir Putin to protect and move their assets, especially during the Ukraine crisis, in order to evade international sanctions. The report is based on over 3.6 million leaked files from six Cyprus-based financial services providers and a Latvian firm.

Key points from the investigation include:

  1. Financial Enablers and Oligarchs: Cyprus Confidential reveals how Cypriot financial entities assisted Russian oligarchs, including figures like Roman Abramovich, a military contractor, and the oligarchs behind the Russian steelmaker Evraz, in shielding their assets and avoiding Western sanctions.
  2. Covert Transfers and Sanctions Evasion: The investigation details covert transactions, such as Abramovich transferring stakes in an advertising company to Sergey Roldugin, a sanctioned associate of Putin, and how Cyprus firms helped oligarchs like Alexey Mordashov evade European Union sanctions.
  3. PwC’s Involvement: The report exposes the role of PwC’s Cyprus arm in facilitating the transfer of funds for Russian industrialists and reveals hidden payments to a German journalist for writing a book about Putin’s power. PwC Cyprus had clients, including those under sanctions, involved in the 2014 annexation of Crimea and subsequent military aggression.
  4. Shifting Assets and Lavish Lifestyles: The leaked documents provide insights into oligarchs’ lavish lifestyles, including private concerts, superyachts, and art collections. It also highlights the sudden wartime shifting of hundreds of millions of dollars in assets, challenging the notion that financial sanctions effectively halted Russian dark money flows.
  5. Widespread Shell Companies: The investigation identifies nearly 800 companies and trusts registered in locations facilitating asset hiding, owned or controlled by Russians who later faced sanctions. Over 650 of these were in Cyprus.
  6. PwC’s Response: PwC Cyprus claimed to have terminated approximately 150 client groups, citing a Russia-related sanctions policy and a broader de-risking review after the Ukrainian invasion. The firm emphasizes its commitment to complying with sanctions.
  7. International Collaboration: The investigation involved 272 journalists in 54 countries, including media partners like Der Spiegel, The Guardian, Le Monde, and The Washington Post. It exposes activities beyond Russia, involving PwC-administered shell companies linked to a Curacao-based insurer and pension fund.

Cyprus Confidential uncovers the extensive role played by Cyprus-based entities, including PwC, in facilitating the movement and protection of assets for Russian oligarchs, raising concerns about their role in sanctions evasion and the broader implications for international financial accountability.

The Finance minister, Makis Keravnos told the reporters that the country has been working with UK government to strengthen the regulation on the financial industry and tackle money laundering.

Keravnos alleged that these developments were supposedly set to be announced by the end of November. To their convenience the investigative journalists got the jump at them.

Lawmakers in EU said that the Cyprus Confidential highlights the need for strong anti-money laundering rules within the bloc and urged member states to close loop-holes that allow dirty money into the financial system.

Panama Papers (2016)

Offshore documents of companies set-up as by Panama based law firm and Mossack Fonseca. A lot of Indian celebrities were also highlighted as big investors in the scheme. The leak involved around 11 million files including emails between Mossack and its customers. Documents revealed the setting-up of shell entities that acted as front for fraud, tax evasion and money laundering. The real owners were hidden behind nominees who simply lent their signature without any stake.

Paradise Papers (2017)

This leak was recorded from Bermuda firm Appleby, as well as Singapore based Asiaciti Trust involving 13 million files that revealed ways in which companies and individuals avoided and evaded tax using shell overseas entities. Internal communication showed the majority of the companies with offshore residency were wholly controlled from India. This was a huge expose involving MNC’s like Apple, Nike.

Mauritius Leaks (2019)

This  data from Conyers Dill & Pearman, an offshore law firm with several Fortune 500 companies as clients. The documents revealed how multinational companies around the world use tac haven of Mauritius to avoid paying taxes to countries in Africa, Asia, Middle east and the US.

Pandora Papers (2021)

Another financial tax evasion scheme from Panama but all the more serious. An eye opening revelation that banks around the world helped their customers set up off-shore companies with the assistance of Alcogal, a Panamanian law firm. The leaks revealed how powerful people, including head of states, set up complex multiple layered trust structures for estate planning in jurisdictions that are loosely regulated for tax purposes.

Even as governments scramble to seal the leaking regulatory holes, money flows of worldwide elites tycoons, from Russian oligarchs to Syrian warlord, Indian investors to UK football clubs, continue to pour into tax havens.

It is the fine line of distinction between tax planning and tax evasion that will be further investigated by the global authorities on their citizens or de-facto jurisdictional entities. The Indian Income tax department is free to investigate all the companies that conduct their business in India and should have been paying tax here.

The Cyprus government had phased out the “golden passport scheme” by October 13, 2020 it was a little to late and a lot of the international players had established a deep rooted network.

While much is yet to be uncovered and perused, Cyprus government and UK have been putting regulations in place to crack down on Russian dirt money.