The legal shenanigans buffeting Washington DC's political world spread far and wide, and the trial of the former Trump campaign manager implicates Cyprus as a financial centre, this article argues.

The Trump administration has been rocked by the recent trial of Paul Manafort, the president’s former campaign manager, on a series of charges, including tax evasion. While this publication is not interested in commenting specifically on how this might affect the current US administration, the saga does raise questions for certain international financial centers, compliance with cross-border rules about finance, and related matters. These are clearly important questions for the global wealth management industry irrespective of politics.

This news service is pleased to share thoughts on the Manafort case from Robert Lyddon, who is the director of Lyddon Consulting and former General Secretary of the IBOS Association secretariat in London. In a career in international banking spanning 17 years, he designed the “Connector” network for Bank Boston, and arranged numerous syndicated loans and derivatives transactions for Chemical Bank/Manufacturers Hanover and for Lloyds Bank International.

As ever, the editors of this news service do not necessarily share all the views of guest columnists, but we invite readers to respond. We are grateful for Robert Lyddon for sharing his ideas and expertise on this important matter. To get in touch with us at ClearView, please email tom.burroughes@wealthbriefing.com

The first trial arising from Special Counsel Mueller’s investigation into possible Russian interference during the US presidential election of 2016 has concluded. Paul Manafort has now been convicted on a series of charges, on an indictment citing himself and Konstantin Kilimnik. The two primary charges were breach of the Foreign Agents Representation Act (“FARA”) and tax evasion.

Manafort breached FARA, it was alleged, by failing to register the role of himself and his PR firms as representing the pro-Russian Ukrainian regime, in the form of former President Viktor Yanukovych (who fled to his foreign support base in Russia following a popular uprising in 2014), his Party of the Regions, and the Opposition Bloc (the successor to the Party of the Regions after Mr Yanukovych’s fall).

The charge of tax evasion related to the earnings deriving from this representation was alleged to have come about through the failure to declare beneficial ownership of foreign bank accounts containing over $10,000, using foreign shell companies to receive remuneration instead of declaring it as his own foreign-source income, and then using that money to purchase assets for his use, as well as construing payments to himself from these foreign shell companies as loans rather than as income.

The signatory of the indictment was the US Department of Justice’s Special Counsel, Robert Mueller, and this trial is widely seen as a lead-in to a more direct pursuit of Donald Trump and the influence that Russia may have had in the 2106 Presidential election. Manafort had a role in Donald Trump’s election campaign, and Special Counsel Mueller will be hoping to demonstrate a continuum of undeclared representation of foreign interests.

Manafort’s support for Ukraine tailed off in 2014, as might be expected, when President Yanukovych fled the country, and the indictment shows financial transactions that the prosecution case contended were linked to that support also tailing off, in late 2014 and 2015. 

The final wire transfer payment made into the US for assets for Mr Manafort’s alleged use was a payment of $58,435 from Global Endeavour Inc in the Grenadines on September 11th, 2014 to Vendor E, a “Men’s Clothing Store in New York”. The final loan disbursement was for $1,000,000 made in 2015 from Telmar Investments Ltd in Cyprus.

It is the involvement of the Cyprus financial sector that is the most notable in the various lists of payments and loans, and in the list of shell companies that Special Counsel Mueller alleged were established to receive the consultancy fees from the Ukrainian clients, and then to dispose of them as ordered by their owners, directors and signatories.

The timing of the final transactions coincidentally exempts a bank which was resolved by the Central Bank of Cyprus in 2014 in response to its being named as an “institution of primary money laundering concern” by the US authorities. This was the Cyprus branch of a small foreign bank called FBME. FBME was offered up as a form of scapegoat to appease both the US and EU authorities and to prove that Cyprus was getting tough on money laundering. 

Erroneous press reporting in late 2017 claimed that the FBI had asked the Cyprus authorities for information from FBME relating to the Manafort case. By contrast the Wall Street Journal published an article on August 7th, 2018 to the effect that Bank of Cyprus had admitted handling Manafort’s business up to and including 2015.

The substance and timings quoted in Special Counsel Mueller’s Indictment demonstrate that the shortcomings in the Cyprus financial system were systemic, embracing the indigenous banks, and not limited to one foreign-owned scapegoat. The indictment speaks of a poorly supervised environment with weak policies, processes and controls to counter money laundering and to combat the financing of terrorism (known as “AML/CFT”), and a weak supervisor in the form of the Central Bank of Cyprus.

Special Counsel Mueller has proved to the satisfaction of the jury that Manafort was one of the owners, directors or signatories for these shell companies and the bank accounts opened in their names, and not that his co-operator – Richard Gates – was actually the prime mover, as Manafort’s defense counsel maintained. Gates turned state’s evidence and was a main witness against Manafort.

Special Counsel Mueller needed also to get behind the screen of company formation agents and nominee directors that were involved with the fifteen legal entities incorporated outside the US that handled the payments and loans.

Cyprus entities
Twelve out of the fifteen entities were incorporated in Cyprus and were set up between August 2007 and March 2012, using a Cypriot formation agent. Two of the other three were incorporated in the Grenadines and the other in the UK. 

It is noteworthy that the Cyprus companies were all formed before the bailout of the Republic of Cyprus in the timeframe 2013/14, after which the then Governor of the Central Bank of Cyprus pursued a policy of strengthening the country’s AML/CFT framework, as part of the economic adjustment program agreed with the EU and the IMF.  

Whether this new AML/CFT Framework really has shut off the usage of Cyprus for these types of shell company and the payments that derive for them is a matter of some dispute. The Manafort indictment gives a good insight into the pre-existing situation up to 2013/2014, and it is not pretty.

Point 15 starting on page 7 of the Indictment and continuing for 6 pages lists wire transfer payments from Cyprus to various vendors in the US: home improvement companies, antique and clothing stores, car dealers, art galleries, contractors and real estate companies. They are for large amounts, and round amounts, almost all ending with “000”. These are then clearly not commercial payments against a specific invoice. It is not mentioned in the indictment whether Special Counsel Mueller believed these payments really related to goods sold or services rendered by these vendors, and were not part of a pass-through arrangement whereby the vendors channelled all or part of the funds on to other parties. Payments for round amounts is a common indicator of a “pass-through”.

Point 16 on page 14 of the Indictment shows four wire transfer payments made from Cyprus companies to real estate attorneys in the USA, totalling $6,400,000, for properties that Special Counsel Mueller alleged Manafort used as his private homes.

Point 17 on page 14-15 of the Indictment shows seven loans to Manafort from Cyprus companies totalling $13,214,000. Special Counsel Mueller alleged that there was no evidence that Manafort had made any debt service payments on these loans, such that they should have been treated as income for tax purposes.

The payments made out of Cyprus – all of the wire transfers made to vendors and real estate companies as well as the disbursements of the loans – were all criminal as far as Special Counsel Mueller is concerned, because they were part-and-parcel of the alleged tax evasion and breach of the Foreign Agents Representation Act. The banks, accountants, lawyers, and real estate agents that handled such payments are “obliged entities” who must obey AML/CFT legislation and so they could be considered guilty of money laundering in this case. It will be interesting to see whether that is followed up.

Numerous provisions of AML/CFT legislation – the versions already in place in the period in question – should have raised red flags against the companies involved and the individual payments: the involvement of shell companies with no obvious legitimate business, large payments of round amounts and always between the same counterparties, payments out of proportion to the apparent size of services rendered or cost of goods being purchased, nominee directors, Ultimate Beneficial Ownership being disguised through layering, and the involvement of “Politically Exposed Persons” in the shell companies themselves or in the supply chains that the shell company was involved in: Manafort himself, Konstantin Kilimnik, and the numerous Ukrainian politicians would all qualify as “Politically Exposed Persons”.

But then Cyprus had devised the so-called “Cyprus business model” precisely to create a lucrative, EU-based environment in which shell companies could be set up through prominent company formation agents, and where the Cyprus banks would open bank accounts, and make and receive payments as ordered. Several formation agents are managed by leading politicians and officials as owners or partners.

What Special Counsel Mueller’s indictment shows is a clear case of the “Cyprus business model” in action, and in defiance of then-valid AML/CFT provisions.

We are led to believe that all this changed after the 2013/14 financial bailout of Cyprus, but the acid tests of that are that Bank of Cyprus continued, by its own admission, to handle Manafort’s business up to at least 2015, and that many formation agents still appear to be in business in Nicosia and offering the same services that are integral to the “Cyprus business model”.