An Eastern European island getaway

By bne IntelliNews November 23, 2009

Jiri Kominek in Prague -

For many, Cyprus is synonymous with sunny beaches and Mediterranean flair. Yet as a recent lawsuit by the natural gas trader Itera Group shows, the Greek half of the island is still mired in a post-Cold War shadowy world of Eastern Europeans laundering ill-gotten gains five years after it joined the EU.

Documents compiled by a law firm representing the Netherlands Antilles-based Itera - which has a long, but murky, history of trading gas in the former Soviet Union - claim that a notorious Russian businessman Valery Mikhailovich Korotkov has embezzled over $20m from Itera's various holdings, using 19 shell companies where he is the ultimate beneficiary. These shell companies are registered in Cyprus, Belize and other offshore tax havens, and all of them hold bank accounts in Cyprus.

According to Itera's lawyers, who have filed a complaint with the Cypriot Financial Intelligence Unit (Mokas) over the alleged unlawful activities of Korotkov in the country, all the 19 companies have no other assets other than the capital Korotkov has invested in them using funds allegedly stolen from Itera.

According to Russian police sources, Korotkov and his Russian partners are also under investigation by Russian civil and criminal authorities, who are looking into their alleged involvement in the theft of tens of millions of dollars through illegal transfers and unpaid loans, which were then transferred to offshore accounts in Cyprus and elsewhere.

Short arm of the law

Korotkov has a long history with the Russian authorities: in 1995, he was under investigation for allegedly organising fictitious shipments of crude oil to Belarus, Ukraine and Greece while he was deputy director of TransKreditBank. The investigation revealed that in November of 1994 the Russian Ministry of Finance transferred RUB7.12bn (€166m in today's money) to TransKreditBank for use by the Ministry for Internal Affairs. Allegedly, Korotkov used this money to send fictitious deliveries of oil to refineries in Ukraine, Belarus and Greece. The proceeds of these alleged scams were deposited into Korotkov's offshore bank accounts. Sources in Moscow say the investigation has been mysteriously suppressed, suggesting that Korotkov has powerful friends in high places. Indeed, Korotkov still resides in Moscow, where bne contacted him via telephone. On the Cyprus allegations, Korotkov tells bne that, "Everything is a misunderstanding and I am willing and able to clear up the entire matter with Russian and Cypriot investigators."

Russian law enforcement sources also tell bne that Korotkov has worked for other Russian and Ukrainian companies involved in the energy sector and for individuals in these companies who have close ties to top officials in the Russian government, to the senior management of Gazprom and, allegedly, to the Solntsevo organised crime syndicate.

Some of his associates have allegedly been involved in supplying pipes at grossly over-inflated prices for the Russian phase of the Blue Stream pipeline, a trans-Black Sea gas pipeline that carries natural gas from Russia into Turkey. While Turkish authorities arrested and convicted senior management of the state-owned crude oil and natural gas pipelines and trading company Botas for overcharging on the local construction phase of the project, nothing of the sort happened in Russia and business has gone on as usual.

Cyprus' Financial Intelligence Unit, Mokas, would neither comment on the Korotkov case specifically, nor on money laundering in general. Yet such activities still plague the new EU member state, which hosts a well-developed, complex web of offshore banking institutions offering a plethora of services including assistance in the creation of shell companies.

Although Cyprus ratified in March the Council of Europe's Convention on Money Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism, US and European intelligence and law enforcement officials say Cyprus remains a haven for shadowy enterprises ranging from Islamic terrorists to narco-gangsters, as well as for Russian and other citizens of the former Soviet Union seeking the perfect destination to park, clean and re-export billions in stolen cash. Cyprus has been one of, if not the, largest source of foreign direct investment (FDI) into Ukraine for over a decade. The overwhelming amount of this investment is, in reality, laundered money that was spirited out of the country and then reintroduced to the local economy via construction projects and other ventures.

According to a report published in 2005 by the European Council's anti-money laundering group, or Moneyval, "the money laundering situation has not changed in Cyprus in the last four years." The US government and Brussels have urged the Cypriots to tighten up their supervision of the banking industry, but the lure of easy money appears to be too strong despite the mounting international pressure.

Though the Cypriot government in 1996 established Mokas, headed by the country's Attorney General, to combat money laundering, success in prosecuting such activities remains largely ineffective. A court in Nicosia in January 2007 freed Russian businessman Vladislav Kartashov who was wanted by the Russian Prosecutor General's Office in connection with the now-bankrupt Yukos oil company. Kartashov, who fled to Cyprus in 2003, allegedly headed three front companies that were accused of helping Yukos evade taxes to the tune of $13bn.

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