system
Given the following post, respond as if you're commenting on Reddit:
human
ELI5: why are countries like Panama, Cyprus ideal for laundering money?
gpt
To understand how countries facilitate international money laundering you have to understand a peculiarity about how EU countries treat their citizens in regards to foreign investigations.  Which is to say, EU countries will not investigate their citizens at the request of foreign countries, nor will they extradite their citizens.  

For a long time this meant that if you were a French citizen you could cross the border into Germany and commit as many crimes as you wanted.  As long as you made it back to France without being caught by the German police, you were essentially immune to prosecution for everything that you did because France would neither investigate nor extradite you since you were a French citizen.  This system obviously didn't work when the EU was formed.

EU countries didn't abandon their blanket refusal to investigate or extradite their citizens when the EU was formed.  Instead, they just decided to treat requests for investigation and extradition from other EU nations to be "domestic" requests.  So nowadays France will extradite you to Germany, regardless of whether you're a citizen of France, because Germany is in the EU and so France considers Germany to be part of France for the purposes of extradition requests.  

But lets say that you're a French citizen who commits a crime in Egypt.  Egypt is not a member of the EU, so France considers it to be "foreign" and will not extradite you since you have French citizenship.

How does this relate to Cyprus?  Cyprus is a member of the EU but it considers other EU states to be "foreign" for the purposes of responding to requests for investigation or extradition.  That is to say, if Germany asks a Cypriot bank to investigate money laundering involving a Cypriot citizen, the Cypriot bank will tell Germany to get an order from a Cypriot court.  The Cypriot court will refuse to grant that order, because it considers Germany to be a "foreign" nation and the investigation concerns a Cypriot citizen.

Both legally and philosophically the EU has had a difficult time reconciling why EU countries are allowed to refuse to investigate or extradite their citizens on behalf of some countries but not others.  Because of the contradictory nature of the EU's position on this, they haven't been able to pass anything binding on Cypriot banks.  They have tried to apply pressure by threatening to reduce EU funding, but every time they do so Cyprus just agrees to "do better in the future" and then does nothing.

And the EU has even less of a basis to try to ask a non-EU country like Panama to comply with EU money laundering regulations, at least as to Panamanian citizens.

So if this only affects Cypriot/Panamanian citizens then why is it a big deal?  Both Cyprus and Panama sell citizenship.  Its not unusual for a country to have a visa program that allows for someone to invest a certain amount of money in the country and to then gain permanent residency there.  But that requires you to *invest* the money into some productive business, not just stick it in a bank.  And the path from permanent residency to citizenship typically takes quite a long time and requires that there isn't any suspicion that you're an international criminal.

That isn't the case in Cyprus or Panama.  You become a citizen of either of those countries as soon as you stick enough money in one of their banks and they don't care who you are, what you do, or where the money came from.  So if you're an international criminal who wants to launder money through one of those countries then you just stick it in one of their banks and, viola, that money is now clean as far as the EU is concerned.

This leaves the US as really the only country that can enforce money laundering rules on international banks - which the US goes to great lengths to do.  But the US only really goes after banks that are interfacing with the US banking system or providing services to a US citizen.  

Cypriot and Panamanian banks only interface with the EU banking system.  This means that the money can really only be used in the EU, and even then only for very limited purposes.  But if you're a European drug lord or a Russian oligarch that's probably fine for whatever you want to do with it.

Cypriot and Panamanian banks are also very careful not to allow US citizens or anyone who even has US residency to bank with them.  Again, if you're a European drug lord or Russian oligarch this doesn't impact you at all.

Because of this, money laundering through those countries is a distinctly EU problem, and its one that it can't really resolve because of how most of the EU's member states have decided to deal with their own citizens vis a vie requests on behalf of "foreign" law enforcement.