I am writing this post so that I can stop having to repeat myself in email. (1) The Germans claim to be confused at why there is Russian money and Russian transit flow through Cyprus
(2) That is impressive that Cyprus could have gone through its EU accession in 2004 (a vastly tedious checking of everything in the country) and its Eurozone accession in 2008 (a through audit of its financial system) and somehow the Germans missed the fact that 45% of the economy was in banking and the associated professional services. Cyprus also goes through the Council of Europe Anti-Money-Laundering assessment and regularly scores higher than Germany and Austria and a good chunk of the rest of the EU, but we will ignore that too.
(3) Cyprus is being pilloried as if it was a large player in offshore banking. Let's go to the numbers, from the February 16th edition of the Economist.
Cyprus has about $20-$40B in offshore deposits. That would be less than 0.5% of the offshore banking wealth.
One might have an opinion about whether or not people should be allowed to keep money offshore and there will be many points of view on this topic. But certainly if your point of view is that offshore banking should not exist, it hardly seems like Cyprus is your place to start...
(4) What Cyprus is for Russia is a transit destination. In other words, Russian money that is outside of Russia or earned outside of Russia and Foreign Direct Investment is routed through Cyprus into Russia.
Why? Partially because of tax reasons (the tax treaty rates are favorable, though taxes are fairly low in Russia too), but mostly because Cyprus provides a predictable legal framework that is derived from English law (it was a British colony until 1960), has tax treaties with practically every other country of note and is a fairly neutral jurisdiction for firms from different locations. Cyprus has also built over the three decades an extremely educated legal and accounting profession to support these transactions.
Basically, until three weeks ago, you would be practically negligent not to route a transaction into Russia without using Cyprus.
(5) If there is a theoretical "victim" to Russian tax structuring through Cyprus, it is the Russian Treasury. It certainly is not the Germans. Russia, however, renewed the Cyprus-Russia tax treaty just a few months ago.
Is that because the mighty Cypriot army forced Russia to renew an agreement against its will? Or is it because Russia sees more value in having this channel for investment than its theoretically lost tax revenue?
In any case, why in God's name does Germany care? The Russian government finds the arrangement to be useful & from an EU perspective, Cyprus ought to be commended in taking its greatest asset (a well educated workforce) and finding a niche that brings tax revenue into the EU.
The closest parallel I can think of would be if somehow China shut down the Caymans (used by US hedge funds for their offshore clients) and the Bahamas (used by the US for reinsurance) and confiscated US money there and said "yes, I am protecting the US from itself"
It does not make the slightest bit of sense but the newspapers swallowed the narrative hook, line and sinker.
(6) It is beyond the scope of this post, but anyone who reads the newspaper can recall the dozens of money laundering scandals of the major Western banks involved in Iran sanction-busting, Latin American drug money laundering and so on. Somehow that is brushed aside (HSBC laundered billions for both Iran and drug lords, covering all the bases, and yet the not a single person was found criminally or civilly liable), yet apparently any Russian who engages in any international commerce is an 'oligarch', 'mafioso' or 'money launderer'