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Would a bailout for Cyprus mean underwriting dirty money?

Potential creditors in Europe are hesitant to bail out debt-ridden Cyprus as they suspect the country's banking industry may be a haven for money-laundering by Russian oligarchs.

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A man on a scooter exits a gate of the Central Bank of Cyprus in Nicosia, Cyprus in March 2012. Cyprus is deep in debt, but German politicians appear in no mood to help due to concerns about the country's banking industry being a haven for money laundering.

Petros Karadjias/AP

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When compared to the hundreds of billions of euros used to prevent Greece from collapsing, the €11 billion needed to recapitalize the banks of Cyprus is a relatively small sum. But Cyprus, the fourth eurozone country applying for financial aid in order to prevent a state bankruptcy, has potential creditors pausing just the same.

Their reason: concerns that Cypriot banks are a haven for money laundering.

Discussions about a bailout package for Cyprus – which the Eurogroup finance ministers announced earlier this week would be put off until March – have been overshadowed in the past few months by allegations that the country’s unusually large banking sector was used by Russian oligarchs to park and launder dirty money.

“We have serious doubts in the Cypriot business model,” says Carsten Schneider, financial spokesman for Germany’s Social Democrats, the main opposition party.

The Republic of Cyprus, an island in the eastern Mediterranean, has been a member of the European Union since 2004 and adopted the euro as its currency in 2008. Banking, tourism, and shipping are the biggest industries. Last year, the left-wing government in Nicosia announced it would need international help to keep the country afloat, after rating agency Fitch downgraded Cyprus’s credit rating to junk status. Fitch justified its decision with the heavy exposure of Cypriot banks to bad Greek debt.

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