The Latvian Scenario for Cypriot Banks

The Latvian Scenario for Cypriot Banks

I was recently reading The Economist and in one of the more notable articles, the author gave recommendations to Donald Trump to not abuse the leading position of the US dollar in the world economic arena. Otherwise, less stable currencies will start taking countermeasures and start looking for other payment options. Everyone understands that such a scenario is realistic, however will take some time to implement it because there is no easy solution to finding new payment options capable of replacing US currency.

Time will tell whether the United States will try to reclaim its former influence in the world arena or rather attempt to place their country in order, touching on a sore subject for the neighbours. Meanwhile, the changes in the Eastern Europe banking system are obvious: after events in Estonia; Latvia turns its back on non-residents as well, so to speak. 

The fear of being cut off from the payment system in USD makes the heads of the Central Bank of Eastern Europe take extreme measures, accepting the American side's "arguments" in terms of reducing the proportion of non-residents in the US banking system. There were even  some media reports that Americans demand the number of foreign customers in US banks to not exceed 5%. It is difficult to say how accurate this information is, however, it's becoming apparent that there is a massive closure of companies from bank accounts in tax-free harbours currently.

It is interesting to note that every week, businessmen with money "stuck" in Latvian banks Rietumu and ABLV come to us. They ask us to find a substitute in order to continue their commercial activities as soon as possible. Probably the dinosaurs also became extinct due to not understanding how to adapt and change to their new environment (although, it is worth noting that they, probably had nothing to understand it with).

What are the real opportunities to alleviate the situation then, which, in theory, would only continue to intensify, and eventually it would spread further to Malta, Lithuania and the Czech Republic? Also, these processes could not only affect both Poland and Bulgaria.

This may seem strange, however we are seeing a pattern of solutions to these situations:

  1. Resign yourself to fate and become a "steward". Obviously, not everyone will be able to adapt to the rapidly changing situation. Our generation is not lucky - it has to live in the era of changes.
  2. Frantically rushing around searching for "the same" solution (opening an account in a loyal bank for a company from a tax-free jurisdiction) either until they get exhausted or until they lose everything.
  3. Change the company's jurisdiction from the so-called tax-free harbour to the jurisdiction where the bank account is opened, for example, in Cyprus.
  4. Register a company and open a bank account away from the European Union with its clamp-down mechanism. I think that very few people have already realised the impending storm in the form of the 5th EU Directive on combating money laundering, and in particular the new requirement for public disclosure of information on ultimate beneficiaries. Such jurisdiction may be either in Hong Kong or Singapore. The only problem is that these jurisdictions are expensive and not everyone can afford it.

Now everyone is waiting for the scenario which the Cyprus banking system will choose: whether the banks freeze accounts and demand a full package of provsionals from customers, including documents on tax payment and source of funds; or whether they allow the withdrawal of funds to other banks. Although it is not clear yet what banks agree on; accumulating such kind of money on the accounts because it's obvious that they will also fall under the press of the US financial system eventually.

Let's look into the recent past and recall the fate of the ill-fated branch of the Tanzanian bank FBME in Cyprus. What happened to this bank?

The Americans accused it of money laundering without any supporting evidence and the bank quikcly closed down. Now, the bank is in on tenterhooks, as its accounts still contain deposits and balances for accounts of some unlucky people. If the bank went along the path of the Latvian ABLV, then at least some money could be returned. However.. no case, no trial.

Not so long ago, the Head of the Central Bank of Cyprus mentioned that in July 2014, the US delegation flew to Cyprus and delivered an ultimatum to the main bank of Cyprus: either close the Cyprus branch of FBME down or the entire banking system of Cyprus will be cut off from the US dollar. The result of that conversation is obvious.

Most interesting is to observe how the ECB acts: it keeps a dead silence while the States one by one take the banks of small EU countries by the throat and in fact have the upper hand in the game. It is difficult to understand where such notorious European solidarity is. Apparently, it does not exist and everyone survives by itself.

After the last meeting with representatives of the US Treasury, the Central Bank of Cyprus hastened to intensify the fight against money laundering, more precisely with non-residents, and it has already earned praise from its US colleagues.