NICOSIA (Reuters) - Turkish Cypriot authorities are trying to shed their tiny enclave's image as a haven for crooks with new laws on money laundering and casinos, but their efforts are being undermined by Cyprus's decades-old ethnic partition.
The self-declared Turkish Republic of Northern Cyprus (TRNC) is recognized only by Turkey and has no extradition treaty with other countries, hence its reputation as a safe refuge for criminals, especially from Britain, Cyprus's ex-colonial ruler.
Most of the world, including the European Union, recognizes the Greek Cypriot government in the south as the sole legal representative of the whole of Cyprus but its writ does not run north of the U.N.-policed Green Line that bisects the island.
"We have no police cooperation with the Greek Cypriots. They say to us 'you don't have a police force, you don't have courts. You are illegal'," Turkish Cypriot leader Mehmet Ali Talat told Reuters at his residence in Cyprus's divided capital Nicosia.
"Even when we had bird flu here in Cyprus, there was no cooperation. Zero, nothing," said Talat.
Greek Cypriots fear that dealing with the TRNC could lead to de facto recognition of an entity they regard as illegal and foisted on their Mediterranean island by arch-foe Turkey.
The TRNC is barred from Interpol and other international crime-fighting organizations. Over the decades various people sought by the police have fled to the TRNC, including Turkish Cypriot Asil Nadir, the tycoon behind the collapsed Polly Peck business empire whom Britain wants to try on fraud charges.
But Talat said the TRNC was working closely with British and other police forces and its reputation as a sanctuary for criminals on the run was "greatly exaggerated."
The new money laundering law and a planned casinos law will help bolster the battle against organized crime, he added.
The TRNC, home to fewer than 200,000 people and subject to international trade restrictions, boasts more than 40 casinos, an important part of its allure for visitors from Turkey and southern Cyprus where gambling is prohibited.
Despite Talat's assurances, diplomats worry that much of the cash washing around TRNC casinos -- though not its banks, which have been restructured -- has been laundered from criminal activities such as drug smuggling and human trafficking.
"A large amount of the drugs passing from Afghanistan to Europe comes via Turkey and northern Cyprus. Much of the drugs trade is controlled by people based in or operating out of the north," said one senior Western diplomat based in Nicosia.
British newspapers have taken a greater interest in the TRNC after unconfirmed reports that a man wanted in connection with Britain's biggest ever cash heist may be hiding in northern Cyprus. Turkish Cypriot officials say the reports are untrue.
Sean Lupton and possibly other members of his gang are suspected of smuggling suitcases full of cash out of Britain after the February 2006 heist, a 53 million pound ($103.5 million) raid on a cash depot in Kent, southeast England.
Police recovered only 21 million pounds; the remainder is still missing. Five men were jailed last month for the robbery.
Money laundering is not the only crime the TRNC must tackle.
"The border between north and south Cyprus is porous. The Green Line is wide open," said the Western diplomat, noting that Cyprus had the highest number of asylum seekers per capita in Europe in 2006 before Greek Cypriots sealed their sea borders.
Iraqis, Palestinians and others enter the TRNC on a regular ferry service from Syria and then try to cross into the south to claim asylum in the EU. Many are deported as economic migrants.
Wealthy Greek Cyprus is an EU member that uses the euro, but EU law does not apply in the TRNC, which uses the Turkish lira.
Cyprus has been ethnically split since 1974 when Turkey invaded the north after a Greek Cypriot coup engineered by the military junta then ruling Greece. Ankara still keeps 35,000 troops in northern Cyprus.
Turkish Cypriots backed a U.N. blueprint to reunite the island in a 2004 referendum but the plan foundered on Greek Cypriot opposition. Many hope for a resumption of U.N.-led peace talks after this month's Greek Cypriot presidential elections.
The TRNC's lack of a legal base weighs on its whole economy.
"We can provide no security to foreign investors," said Ayse Donmezer of the North Cyprus Investment Development Agency, who said she pinned her hopes on a revival of the peace process.
For several years earlier this decade, economic growth hit 10 percent, powered by the construction and real estate sectors and triggered by hopes of reunification in 2004.
That has long since petered out. Officials expect the economy to have contracted by up to two percent in 2007.
Ugly, unregulated property development mars some of the once pristine coast. Some buildings remain half-completed, victims of a deepening cash crunch after supply far outstripped demand.
Foreigners cannot get mortgages with Western banks for TRNC property because of the embargo, said Hasip Izet, who runs a building company near the resort of Kyrene (Girne in Turkish).
"We are working on just one big project now. A few years ago we had 19 projects on the go," he said.
Tourism provides only limited relief for the economy.
"As most of our tourism is still casino-based, visitors come on Friday night and leave on Sunday night, so (the) hotel occupancy rate is pretty low," said hotelier Devrim Celal.
Donmezer added: "Without a peace settlement, we expect no improvement in 2008. Without cooperation with the Greek Cypriots and the international community, we cannot solve our problems."
Editing by Mark Trevelyan