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Cyprus: Island of love or fraud?

Developers retain Title Deeds for many years and use them (without the express permission or even knowledge of the buyer) as collateral to obtain mortgages. While such mortgages exist, the deeds cannot be issued to the buyer.

RECENTLY, a group of former chiefs in the Hong Kong Police and the Independent Commission Against Corruption asked me about the property fraud and Title Deeds scandal in Cyprus. They had been hearing some horrifying stories. Oh dear! Honesty moderated my desire to paint Cyprus as a paradigm of fraud-free and corruption-free good governance.

A looming disaster

Several Risk Watch articles since 2004 have drawn attention to the inglorious Title Deeds-cum-fraud mess in Cyprus, created and nurtured by successive governments for decades. Regrettably, as with many embarrassing issues, the present government remains in denial that a problem exists at all. The bigger and more serious the problem, the greater and more persistent is their denial and the greater the potential disaster that approaches. The disaster will not just be for property owners but also long term for Cyprus as a whole. For, this scandal and its effects cannot be separated from the Cyprus property bubble that is coming close to bursting point. At such a critical time, Cyprus cannot afford to have a bad reputation that turns away buyers and investors.

Labels now commonly applied to Cyprus in the media internationally include ‘Island of Fraud’ and ‘fraudsters’ paradise’. Gone are the days when Cyprus was known as Aphrodite’s Island and Island of Love. When invoking Greek mythology, Aphrodite the goddess of love has been replaced by Apate the demon of fraud and deception. It has come to something when aggrieved victims demonstrate for justice outside the Cyprus High Commission in London every day for several months.

Property tax scam

Recently, the Interior Ministry Permanent Secretary issued an official statement regarding Immovable Property Tax (IPT) fraud by developers, namely that the state cannot intervene and has no mechanism to deal with what goes on between developers and buyers. Such a position beggars belief. Fraud in Cyprus is a criminal offence regardless of which sector of industry or commerce is involved and regardless of contractual weaknesses. The government’s refusal to pursue criminal charges against manifest fraudsters, especially ones using government taxation as a vehicle for fraud, hardly cleanses its image and even suggests complicity.

Moreover, Cyprus has lost and continues to lose vast amounts in uncollected property transfer tax because of this deliberate delaying strategy by developers. The Cyprus Property Action Group estimates that so far the cumulative deficit amounts to €1 billion.

Two obvious questions arise: Why choose deliberately to put the interests of developers ahead of maintaining the tax coffers? Why regard property-related fraud as a non-criminal, almost trivial, matter?

Title Deeds scandal

The UN defines corruption as ‘an abuse of power for private gain that hampers the public interest’. Corrupt practices involve public officials acting in the best interest of private concerns (their own or those of others) regardless of, or against, the public interest. Petty corruption involves individuals or small groups acting on their own initiative. Grand corruption, however, exists when public policy making, its design and implementation are compromised by corrupt practices.

The long-term failure to hand over deeds in less than 5 years or more and the government’s failure to radically correct the system appear to have become an accepted and institutionalized fact i.e. an instrument of state policy. The policy enables and encourages one group (developers) to gain financial advantage over another group (property buyers) against the public interest. This wilful inefficiency and turning of a blind eye opens the government up to accusations of grand corruption.

From Land Registry data, the Cyprus Property Action Group estimates that some 60,000 foreign buyers alone (30,000 properties) who have already paid in full are waiting for their deeds, many of them for more than 5 years and in some cases as long as 35 years. The number of Cypriots in a similar position is much greater and affects over 70,000 properties.

Developers retain the title deeds for many years and use them (without the express permission or even knowledge of the buyer) as collateral to obtain mortgages. While such mortgages exist, the deeds cannot be issued to the buyer.  The banks, who should refuse to participate in such fraud, on the contrary seem to relish the opportunity. Should the developer go bankrupt in this period, the buyers, who have already paid in full, could lose their homes as the lender bank has first call on the properties. Even when such mortgages have been cleared, the Land Registry then continues with years of further constructive delays of its own, during which officials may be tempted to exploit the delay for personal gain. Persistent rumours circulate that Land Registry officials accept bribes for ‘fast tracking’ the issuance of title deeds and that tax officials ‘negotiate’ developers’ IPT payments. Speed payments pocketed by officials are cited by the UN as a common form of corruption where weak and inefficient systems exist, as in Cyprus.

Some 60,000 foreign buyers, including 40,000 British citizens, risk losing their homes as a result of the title deeds trap. There could be the spectre of thousands being forced to return to their country of origin as effectively refugees requiring state assistance. Many will have lost everything. If Cyprus allows this to happen, then the EU let alone Cyprus may never recover.

The Gloves are Off

The Cyprus Property Action Group – CPAG (www.cyprus-property-action-group.net)  has been lobbying the Cyprus Government. They were even commissioned by Mr Michael Sarris, Finance Minister in the previous government, to prepare a report on the problems and their resolution, which was submitted in January 2008. Although neither the previous government nor the new one has criticised the report or challenged any of its findings, the new government has decided not to take any action, as confirmed by the recent statement from the Interior Ministry.

CPAG and thousands of individual Cyprus property buyers are therefore urgently lobbying the UK Government, the EU, the European Parliament and the Council of Europe to put pressure on the Government of Cyprus to (a)  guarantee title deeds to buyers who have lodged their sales contracts with the Land Registry, and (b) develop a strategy to exit this risk-laden situation which affects most buyers in Cyprus, whether Cypriot or foreigner.

Cyprus’ disgrace and the fall-out

In most other EU member states, property fraudsters, their cronies and corrupt officials would face serious criminal charges and lengthy jail sentences. Why not in Cyprus? The silence is deafening.

The Cyprus government’s refusal to censure fraudsters, let alone arrest and charge them projects an image of approving of and encouraging property-related fraud. People around the globe are now aware that something is seriously wrong with state governance in Cyprus, as evidenced by the direct questions I receive from important people in various countries.

The property protection situation in the government-controlled areas of Cyprus appears to totally contravene the Constitution of the Republic of Cyprus, Article 23, and also equivalent EU and UN charters. By such wholesale and wilful neglect of its property protection duties, whether to its own citizens or foreign buyers, the Cyprus government has forfeited the right to demand support from the international community on its otherwise just position on Greek Cypriot property rights in north Cyprus controlled by Turkey. The glaring hypocrisy has not gone unnoticed in Bruxelles, Strasbourg, London and Washington.

Just as ominous for Cyprus is the huge damage the government’s stance and reputation on all these matters is having on inward investment. This includes not only individual property buyers but also far bigger fish. I am aware of a number of major foreign investors (not just in property) who refuse to invest in Cyprus until and unless the government acts decisively to clean up the title deeds-cum-fraud mess. Cyprus is just too risky for them.

Dr Alan Waring, international risk management consultant, is Adjunct Professor at the Centre for Corporate Governance & Financial Policy, HKBU Hong Kong. Contact waringacytanet.com.cy

©2008 Alan Waring

from the pages of Financial Mirror www.financialmirror.com 26 Nov-2 Dec 2008

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