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 NICOSIA 00000748 002 OF 002 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