Cyprus Banks To Be Probed For Money Laundering

In light of a potential bailout plan for Cyprus by its European Union lender, dialogues have begun to bring in external investigators to look for signs of money laundering in the Cyprus’ banking system, according to a report in today’s Financial Times.

The main instigator of the probe is Germany.  Still one of the strongest economies in the European Union, Germany has shown concern that if a $17 billion bailout plan for Cyprus would become effective, a discovery would be found implicating the protection of illegal Russian deposits within Cypriot financial institutions.

Europeans have already begun to prepare for reduced spending in the financial sector in an attempt by European governments to reduce expenditure for the purpose of lowering their rapidly rising budget deficits.

According to Lee Buchheit, a partner based in the New York office of Cleary Gottlieb Steen & Hamilton LLP, specializing in international and corporate transactions, including Eurocurrency financial transactions, sovereign debt management, privatization and project finance, stated in a paper co-written with Mitu Gulati and Ignacio Tirado, “The eurozone has within its power a unique ability to deflate expectations on the part of prospective holdouts that they will realize a higher recovery by staying out of the sovereign restructuring”.

Mr Buchheit was hired by the Greek government as legal counsel during the restructuring of their economy.  Due to the fact that most of the debt in this instance was issued under country law, allowed Greece to regulate themselves in order to put into effect new legislation regarding bond contracts.

According to Mr Buchheit “collective action clauses” will probably be included in new EuroZone Government Bonds.  However, many of Cyprus’s bonds were issued under international law, thus making it easier to sue in an International court.

There is a fear that restructuring could weaken Cypriot banks.  Due to the fact that they are the main shareholders of the government bonds, a restructuring at this time seems unlikely.