Defiant Greek-Cypriot Bank Helped Fund Two Wars
"Instead of taking measures against Yugoslav sanctions-busting,
leading members of Cyprus's close-knit elite facilitated the transactions"
Kerin Hope in Athens and Stefan Wagstyl in London, Financial Times, July 25, 2002 - The gleaming steel-and-glass headquarters of Popular (Laiki) Bank of Cyprus makes a striking contrast with the discreet office blocks occupied by most Greek Cypriot companies. But even more suggestive of the group's ambitions is a metal sculpture in the courtyard pointing aggressively towards the sky.

When the international community shunned Yugoslavia as a pariah state for much of the 1990s, Cyprus seized its chance to do business with Belgrade, and Popular Bank became former Yugoslav President Slobodan Milosevic's main financial link with the outside world.

According to a report by Morten Torkildsen, an investigator at the United Nations war crimes prosecutor's office, Popular Bank, the island's second largest bank, allowed a group of Yugoslav-controlled front companies to operate in defiance of UN sanctions.

These companies supplied Mr Milosevic's government with fuel, raw materials, spare parts and weapons to pursue wars in Bosnia in 1992-1996 and in Kosovo in 1998-1999.

Mladjan Dinkic, the Yugoslav central bank governor, said during a visit to Cyprus last year that as much as $4bn (€3.9bn, £2.5bn) in foreign currency might have been transferred to Cyprus between 1992 and 1994. The funds were mainly deposited in Popular Bank and its Greek subsidiary, European Popular Bank, he said.

A Financial Times investigation has revealed that instead of taking measures against Yugoslav sanctions-busting, leading members of Cyprus's close-knit elite facilitated the transactions. They included Afxentios Afxentiou, governor of the central bank; Kikis Lazarides, chairman of Popular Bank; and Tassos Papadopoulos, a prominent lawyer and leader since 2000 of the Democratic party, the island's second-biggest political party.

The scale of the island's involvement with Belgrade has revived concerns about Cyprus's commitment to implementing international anti-money-laundering practices at a time when the island's bid to join the European Union in 2004 is under negotiation.

Yet the Greek Cypriot bankers and politicians who were involved sound embarrassed rather than repentant. Mr Lazarides told the FT: "We did nothing illegal. After all, banks are in the business of making money." Cyprus's willingness to help Mr Milosevic get around UN sanctions stems from a long tradition of close ties between Cyprus and Yugoslavia. Greek Cypriots overwhelmingly backed Mr Milosevic during the Yugoslav succession wars.

Cyprus's business links with Yugoslavia were well established before the federation collapsed. After 1989 Serbian businessmen opened offshore trading companies and took advantage of the island's favourable tax treaties with former communist states. But after UN sanctions were imposed in July 1992, the number of Yugoslav-controlled offshore companies on Cyprus soared from fewer than 1,000 to more than 7,000.

Officials at the Cyprus central bank registered Yugoslav front companies as offshore trading businesses. They were financed with cash flown from Belgrade to Cyprus and deposited in special accounts, mainly at Popular Bank. The accounts were managed by officials at the Nicosia-based offshore branch of Beogradska Banka, a state-owned bank run by Borka Vukic, one of Mr Milosevic's closest associates.

Cyprus initially had few measures in place to counter money-laundering. But the relationship with Mr Milosevic continued after an anti-money laundering law was approved in 1996. And cash continued to be transferred after Cyprus started EU accession talks in 1998.

Mr Torkildsen's report details many transfers made after the UN re-imposed an arms embargo on Belgrade in March 1998 because of the worsening conflict in Kosovo.

Dragomir Stojkovic, a courier with the National Bank of Yugoslavia, flew to Cyprus on a private aircraft almost every week between March 1998 and March 1999. The cash he accompanied was stuffed into reinforced paper sacks used for packaging cement and handed over to Popular Bank officials at Larnaca airport.

Mr Stojkovic declared a total of DM453m to customs officials at Larnaca airport, filling out the forms required under banking regulations on cash imports. The entire amount was deposited in a D-Mark account at Popular Bank belonging to Browncourt Enterprises, one of the Cyprus-based front companies.

The central bank gave special approval for the money brought by Mr Stojkovic to enter Cyprus, because the amounts exceeded the $100,000 ceiling then permitted for a single cash transfer. Browncourt Enterprises and another seven front companies were registered as Cyprus-based offshore companies by the law office headed by Mr Papadopoulos, legal adviser both to Popular Bank and Beogradska Banka.

Mr Afxentiou retired earlier this year and was not available for an interview. But Andreas Philippou, the long-serving head of supervision at the central bank, said in an FT interview that senior officials at the bank were aware the front companies were set up as a means of avoiding UN sanctions.

He said: "Through these companies, the Yugoslav state was able to survive and feed its people in spite of the sanctions."

Popular Bank played an important role in a drive by the Cyprus government to reduce dependence on tourism, its main source of revenue, by boosting the offshore banking industry. The bank, which is listed on the small Nicosia stock exchange, also expanded outside Cyprus, to Greece and London. Its biggest single shareholder is HSBC, the UK-based financial group, with a 22 per cent stake.

In an interview with the FT in his marble and wood-panelled office, Mr Lazarides said: "We always acted in accordance with central bank regulations. Because the amounts of cash arriving from Yugoslavia were quite large, we always checked with the central bank to get their permission on a case-by-case before we accepted them."

Asked whether Popular Bank had acted prudently in maintaining a banking relationship with the Yugoslav government during sanctions, he said: "Our books were checked on by international institutions, for example by the US Treasury and by HSBC, our biggest shareholder. They found nothing wrong."

HSBC said: "We went and talked to a few senior people and got assurances." But it added: "We are a minority shareholder and don't have any management control or responsibility for Popular."

Mrs Vukic, a veteran banker who headed Beogradska's offshore branch between 1990 and 1996, set up the front companies at Popular with the help of Mr Papadopoulos's law firm.

In the case of two companies, Antexol and Browncourt, Mrs Vukic and Mr Papadopoulos's firm are accused of colluding to violate Cyprus central bank regulations on setting up offshore businesses by failing to provide documents required to prove beneficial ownership. In both cases the named beneficial owners had never heard of the companies in question, were astonished to be contacted by UN investigators, and have threatened legal actions of their own.

During the Kosovo war, President Glafcos Clerides' government made an effort to distance itself from Belgrade amid belated concern that Cyprus's links with Mr Milosevic could damage its prospects for EU accession. The central bank withdrew Beogradska Banka's offshore banking licence in June 2000 because of insolvency -a decision contested on procedural grounds by Mr Papadopoulos's law office.

Mr Afxentiou and Mr Lazarides last year promised full co-operation with the UN tribunal in tracing the Milosevic funds. Officials from the supervision department of the central bank of Cyprus spent several weeks at Popular Bank collecting documents for possible use at the UN war crimes tribunal.

The government has also promised full co-operation with the UN tribunal. But it has stopped short of ordering an investigation into whether the central bank and the commercial banks violated international rules against money-laundering in the case of the Milosevic funds.

Michalis Papapetrou, the government spokesman said: "In the past two years, we have tightened up on regulations to combat illegal financial dealings, and the international organisations have approved the measures we've taken. We've done whatever was required."