Cyprus's request for a bailout has created a political headache for German Chancellor Angela Merkel on concerns wealthy Russians could be the chief beneficiaries, the weekly magazine Der Spiegel said on Sunday, citing an intelligence agency report.
Cyprus is in talks with international lenders on the terms of a bailout expected to total 10 billion euros after its two largest banks incurred huge losses due to the Greek debt writedown earlier this year.
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The scale of the aid is tiny compared to Greece and other struggling euro zone countries.
But a report prepared by Germany's intelligence agency (BND) on money laundering in Cyprus has laid bare the political risks involved, Spiegel said.
"The report of the BND shows who will profit most of all from the billions in European taxpayer funds - Russian oligarchs, businesspeople and mafiosi who have parked their illegal earnings in Cyprus," the magazine said.
Cyprus is a popular offshore tax haven for Russian businesses seeking protection from their country's unpredictable investment climate.
But Cyprus, which joined the European Union in 2004, says it has strengthened its regulations over the past decade against money laundering and is in full conformity with international rules.
Spiegel, citing the "secret" BND report and European officials, said significant doubts persisted over Cypriot implementation of these regulations.
The BND report found that Russian nationals held some 26 billion dollars, or 21 billion euros, in Cypriot bank accounts, Spiegel said, dwarfing both the emergency aid the euro zone is likely to provide and the country's total national output of about 17 billion euros.
Cypriot authorities do not provide a breakdown of bank deposits based on nationality, but Russians are believed to make up a large proportion of non-domiciled accounts.
Germany, the euro zone's largest economy, would provide more than 2 billion euros towards the expected Cypriot bailout. But Germans are angry about having to stump up billions of euros to rescue Greece and other heavily indebted economies.
Carsten Schneider of Germany's main opposition Social Democrats, which hopes to oust Merkel's conservatives in an election due next year, said his party would only vote in parliament in favor of aid for Cyprus on certain conditions.
He said Cyprus must be ready to adjust its low corporate tax rate and crack down further on money laundering.
Germany's lower house of parliament, the Bundestag, has to approve the payment of financial aid for euro zone countries.
(Reporting by Gareth Jones)