NORTHERN CYPRUS "CENTRAL" BANKER SEEKS

C O N F I D E N T I A L SECTION 01 OF 02 NICOSIA 000748

SIPDIS

SIPDIS

E.O. 12958: DECL: 09/13/2017
TAGS: ECON EFIN KCRM CY TU
SUBJECT: NORTHERN CYPRUS "CENTRAL" BANKER SEEKS
"COOPERATION"

REF: DIXON-SERAFINI E-MAIL (06/28/07)

Classified By: Ambassador Ronald Schlicher for Reason 1.4 (b)

1.(U) This telegram contains an action request; please see
Paragraphs 2 and 9.

2.(C) Summary. Senior officials at the "Central Bank of the
TRNC" on September 10 lamented a lack of trained staff and
updated money laundering and banking "legislation" but still
believe that the "TRNC" banking system is sound and not
easily abused by money launderers. A more worrisome conduit
for cleansing illegal proceeds was northern Cyprus's largely
unregulated casino industry. In hopes of tracking a number
of suspect financial transactions involving U.S. entities,
the "Central Bank" in July had sought U.S. assistance, they
explained (Ref); having received no response, the officials
repeated their request. Providing the bankers with the
information they have requested, if consistent with U.S. law
and policy, will help us to maintain the informal (because of
non-recognition issues) but close cooperation we need from
"TRNC Central Bank" officials to pursue common interests such
as combating money laundering and terrorist finance. End
Summary and Action Request.


3. (C) On September 10, Econoff met with the Ahmet Tugay,
"Governor, Central Bank of the TRNC" and Bogac Sandalli,
"Deputy Governor." Tugay, a mainland Turk (as have been all
"TRNC Central Bank" governors and their deputies to date),
was appointed in June. He had spent his entire professional
career prior to becoming "Governor" with the Central Bank of
Turkey, most recently as senior advisor. (Note: It is clear
that the Turkish Cypriot Bank employees have some degree of
resentment at the fact that they cannot rise above the level
of Unit Head, as the highest positions are reserved for
mainland Turks. Similarly, there was a degree of
condescension in the Governor's office regarding the
capabilities of local bank staff. End Note.)

Bank Supervision Could Be Better
-------------- --------------


4. (C) In response to our questions, Tugay argued that he
does not believe the "TRNC" has too many banks (24) for its
approximately 250,000 population. He noted that the U.S. has
more than 12,000 banks and that as "TRNC" banks begin
complying with more rigorous reporting and compliance
requirements (such as Basle II),the extra expense and
"normal market forces" would reduce the number of banks to
"about 15" through a series of mergers. Turgay also argued
that, because the top three banks have "over 70 percent of
banking system assets," the system already largely reflects
market realities. He acknowledged that supervising this
number of banks was difficult for the "Central Bank" given
the lack of trained staff (only 6 bank examiners) and that
few in his organization know enough about Basle II to ensure
that the banks they supervise will properly implement the
associated risk management systems needed. Sandalli noted
that there was no timeframe for when "TRNC" banks would be
required to be operational for Basle II or other regulatory
regimes needed for EU convergence.


5. (C) Despite these problems, Tugay said that the "TRNC"
banking sector is well-supervised, is in sound financial
condition and is not a likely conduit for money laundering.
Despite the media-reported slowdown in the construction and
property sectors (which had been booming for the past few
year as property prices skyrocketed),Tugay says there has
been no increase in non-performing loans and banks are
well-reserved and highly liquid (loan/deposit ratio around 70
percent although branches of Turkish banks reportedly loan as
little as 6 percent of their deposits locally, sending the
rest to Turkey. Tugay said new regulations would require
banks to lend at least 25 percent of their deposits locally).
(Note: He did not seem to know what percent of loans were
non-performing nor the ratio of reserves to bank system
assets. End Note.)

The Casino Problem
--------------


6. (C) While Turgay seemed sanguine about his ability to
supervise and prevent money laundering activities through
banks, he quickly distanced himself from any responsibility
for the casinos operating in the north. He pointedly noted
that he has no authority over the casinos and that when banks
receive deposits from casinos, they have no way of knowing
the ultimate source of the cash. We were told in a separate

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meeting with a "Central Bank" official that casinos deposit
very little cash in "TRNC" banks. When asked where the cash
goes, the official surmised that "it is carried off the
island in suitcases."

Cooperation Is A "Two-Way Street"
--------------


7. (C) Tugay asked for our assistance with suspicious banking
transactions involving U.S. entities that had been processed
through banks in the "TRNC" (ref). A "Central Bank" official
had originally asked for this assistance in late June but has
not received a response from us to date. The "Central Bank"
Head of Banking Supervision (with whom we have effectively
worked on passing UN 1262 Terrorist Finance information to
"TRNC" institutions, among other issues) strongly requested
USG information regarding these transactions in order to
demonstrate to his superiors that "cooperation with the USG
is a two-way street."


8. (C) Comment: On September 24-25, the EU will hold a
seminar in north Nicosia on money laundering and what the
"TRNC" can do to improve its control over the problem. "Laws"
are pending in the "TRNC" which would establish an
independent Financial Intelligence Unit and update and
tighten "legislation." Both these "laws" have been pending
review by the "Attorney General" for about a year and seem to
have little prospect of moving ahead soon given the normal
slow pace of "legislation" and vested interests which are
likely working against these changes. The British High
Commissioner recently called on the "Attorney General" to
urge progress but with little apparent effect. We hope to use
the upcoming conference to leverage continued lobbying
efforts.


9. (C) Comment continued: Pending such time as the "TRNC"
creates a legal framework and effective enforcement bodies to
better control money laundering, it is important for us to
maintain close, if informal, cooperation with those in the
banking system who are interested in pursuing these matters.
We seek Treasury/FinCen assistance in continuing this
approach which maintains our policy of non-recognition of the
"TRNC" and its "official" institutions but also allows us to
pursue important U.S. interests in the area of money
laundering and terrorist financing. Therefore, if consistent
with U.S. law and policy, we urge a positive Washington
response to the "Central Bank's" request for assistance in
investigating the suspect transactions in question.
SCHLICHER