The government-controlled area of the Republic of Cyprus is a major regional financial center with a robust financial services industry that includes an offshore sector. As with other such centers, Cyprus remains vulnerable to international money laundering activities. Fraud and other financial crimes, and narcotics trafficking are the major sources of illicit proceeds laundered in Cyprus. Casinos and internet gaming sites are not permitted, although sports betting halls are allowed.
A number of factors facilitated the development of Cyprus' offshore financial sector in Cyprus: the island's central location; a preferential tax regime, double tax treaties with 40 countries (including the United States, several European Union (EU) nations, and former Soviet Union nations); a labor force particularly well trained in legal and accounting skills; a sophisticated telecommunications infrastructure; and, relatively liberal immigration and visa requirements. Since the offshore financial sector was established in 1975, more than 54,000 offshore international business companies have been registered. Reportedly, there are approximately 14,000 international business companies (IBCs) are currently registered. An International Banking Unit (IBU) is a Cypriot limited liability company or a branch of a foreign bank, which has obtained a banking license from the Central Bank. An Offshore Financial Services Company (OFSC) engages in dealing, buying, selling, subscribing to or underwriting investments; managing investments belonging to other persons; giving investment advice to actual or potential investors; and establishing collective investment schemes. The Central Bank vetting process for offshore companies also ensures that prospective OFSCs are linked to existing investment or financial services companies in well-regulated countries.
In recent years, Cyprus has introduced tax and legislative changes effectively abolishing all legal and substantive distinctions between domestic and offshore companies. All Cypriot companies are now taxed at a uniform rate of 10 percent, irrespective of the permanent residence of their owners or whether they do business internationally or in Cyprus. A transition period allowing preferential tax treatment to offshore companies that existed prior to 2002 expired on January 1, 2006. Additionally, the prohibition from doing business domestically has been lifted and companies formerly classified as offshore are now free to engage in business locally. Bearer shares have been abolished. It is not clear whether the beneficial owners of the more than 50,000 international business companies formally registered in the offshore sector are now known to the Cyprus authorities.
The GORC continues to revise its anti-money laundering (AML) framework to meet evolving international standards. In 1996, the GOC passed the Prevention and Suppression of Money Laundering Activities Law, which mandated the establishment of the Cypriot financial intelligence unit (FIU). This law criminalizes all money laundering, provides for the confiscation of proceeds from serious crimes, and codifies the actions that banks, nonbank financial institutions, and obligated nonfinancial businesses must take, including those related to customer identification. The anti-money laundering law authorizes criminal (but not civil) seizure and forfeiture of assets. Subsequent amendments to the 1996 law broadened its scope by replacing the separate list of predicate offenses with a definition of predicate offense to be any criminal offense punishable by a prison term exceeding one year, by addressing government corruption, by providing for the sharing of assets with other governments and by facilitating the exchange of financial information with other FIUs.
Amendments passed in 2003 and 2004 authorize the FIU to instruct banks to delay or prevent execution of customers' payment orders; extend due diligence and reporting requirements to auditors, tax advisors, accountants, and, in certain cases, attorneys, real estate agents, and dealers in precious stones and gems; and permit administrative fines of up to 2863 Cypriot pounds (approximately $6,390). The amendments also increase bank due diligence obligations concerning suspicious transactions and customer identification requirements, subject to supervisory exceptions for specified financial institutions in countries with equivalent requirements.
Also in 2003, the GORC enacted legislation regulating capital and bullion movements and foreign currency transactions. The law requires all persons entering or leaving Cyprus to declare all currency, Cypriot or foreign, or gold bullion worth approximately $15,500 (approximately 6730 Cypriot pounds) or more. This sum is subject to revision by the Central Bank. This law replaced the exchange control restrictions under the Exchange Control Law, which expired in May 2004.
Four authorities regulate and supervise financial institutions in Cyprus: the Central Bank of Cyprus, responsible for supervising locally incorporated banks as well as subsidiaries and branches of foreign banks; the Cooperative Societies Supervision and Development Authority (CSSDA), supervising cooperative credit institutions; the Superintendent for Insurance Control; and the Cyprus Securities and Exchange Commission. Designated nonfinancial businesses and professions (DNFBPs) are regulated by three entities: the Council of the Bar Association supervises attorneys; the Institute of Certified Public Accountants supervises accountants; and the FIU supervises real estate agents and dealers in precious metals and stones. The supervisory authorities may impose administrative sanctions if the legal entities or persons they supervise fail to meet their obligations as prescribed in Cyprus's anti-money laundering laws and regulations.
The GORC-controlled area of Cyprus currently hosts a total of 40 banks. Fourteen of these are incorporated locally. Eleven of the fourteen banks are commercial banks and three are specialized financial institutions. Of the commercial banks, six are foreign-owned, and two are branches of foreign banks. The remaining 26 banks are foreign-incorporated and conduct their operations almost exclusively outside of Cyprus. At the end of August 2006, the cumulative assets of domestic banks were $53.9 billion, while the cumulative assets of subsidiaries and branches of the foreign-incorporated banks were $22.8 billion.
As of May 2004, when Cyprus joined the EU, banks licensed by competent authorities in EU countries could establish branches in Cyprus or provide banking services on a cross-border basis without obtaining a license from the Central Bank of Cyprus, under the EU's "single passport" principle. By the end of 2006, four foreign banks were operating a branch in Cyprus under the EU's "single passport" arrangement.
Cyprus hosts six licensed money transfer companies, 40 international independent financial advisers, six international trustee services and 200 feeder funds. There are also 47 investment firms, two management firms handling "undertakings for collective investment in transferable securities" (UCITS), 43 licensed insurance companies, 238 licensed real estate agents, 1,858 registered accountants, 1,631 practicing lawyers and around 350 credit institutions. These 350-plus credit societies and cooperative savings banks retain 32 percent of total deposits.
In October 2006, the IMF released a detailed assessment of the "Observance of Standards and Codes for Banking Supervision, Insurance Supervision and Securities Regulation." Among other issues, the report noted that the SEC was legally unable to cooperate with foreign regulators if the SEC did not have an independent interest in the matter being investigated and that the SEC was experiencing difficulty obtaining information regarding the beneficial owners of Cypriot-registered companies. The SEC is working to resolve both of these issues. The report also noted that commitments emerging from EU accession had "placed stress on the skills and resources" of the staff of the CSSDA and the Insurance Superintendent and recommended additional training.
In recent years the Central Bank has introduced many new regulations aimed at strengthening anti-money laundering vigilance in the banking sector. Among other requirements, banks must (1) ascertain the identities of the natural persons who are the "principal/ultimate" beneficial owners of corporate or trust accounts; (2) obtain as quickly as possible identification data on the natural persons who are the "principal/ultimate" beneficial owners when certain events occur, including: an unusual or significant transaction or change in account activity; a material change in the business name, officers, directors and trustees, or business activities of commercial account holders; or a material change in the customer relationship, such as establishment of new accounts or services or a change in the authorized signatories; (3) adhere to the October 2001 paper of the Basel Committee on Banking Supervision on "Customer Due Diligence for Banks"; and (4) pay special attention to business relationships and transactions involving persons from jurisdictions identified by the Financial Action Task Force (FATF) as noncooperative. This list is updated regularly in line with the changes effected to the list of noncooperative countries and territories by the FATF.
All banks must report to the Central Bank, on a monthly basis, individual cash deposits exceeding 10,000 Cypriot pounds (approximately $22,000 in local currency) or approximately $10,000 in foreign currency. Bank employees are required to report all suspicious transactions to the bank's compliance officer, who determines whether to forward a report to the Cypriot FIU for investigation. Banks retain reports not forwarded to the FIU, and these are audited by the Central Bank as part of its regular onsite examinations. Banks must file monthly reports with the Central Bank indicating the total number of suspicious transaction reports (STRs) submitted to the compliance officer and the number forwarded by the compliance officer to the FIU. By law, bank officials may be held personally liable if their institutions launder money. Cypriot law partially protects reporting individuals with respect to their cooperation with law enforcement but does not clearly absolve a reporting institution or its personnel from complete criminal or civil liability. Banks must retain transaction records for five years.
In November 2004, the Central Bank issued a revised money laundering guidance note that places several significant new obligations on banks, including requirements to develop a customer acceptance policy; renew customers' identification data on a regular basis; construct customers' business profiles; install computerized risk management systems in order to verify whether a customer constitutes a "politically exposed person"; provide full details on any customer sending an electronic transfer in excess of $1,000; and implement (by June 5, 2005) adequate management information systems for online monitoring of customers' accounts and transactions. Cypriot banks have responded by adopting dedicated electronic risk management systems, which they typically use to target transactions to and from high-risk countries. Cyprus's Exchange Control Law expired on May 1, 2004, ending Central Bank review of foreign investment applications for non-EU residents. Individuals wishing to invest on the island now apply through the Ministry of Finance. The Ministry also supervises collective investment schemes.
The Central Bank also requires compliance officers to file an annual report outlining measures taken to prevent money laundering and to comply with its guidance notes and relevant laws. In addition, the Central Bank is legally empowered to conduct unannounced inspections of bank compliance records. In July 2002, the U.S. Internal Revenue Service (IRS) officially approved Cyprus's "know-your-customer" rules, which form the basic part of Cyprus's anti-money laundering system. As a result of the above approval, banks in Cyprus that may be acquiring United States securities on behalf of their customers are eligible to enter into a "withholding agreement" with the IRS and become qualified intermediaries.
Established as the Cypriot FIU in 1997, the Unit for Combating Money Laundering (MOKAS) is responsible for receiving and analyzing STRs and for conducting money laundering or financial fraud investigations. At the time of the MONEYVAL mutual evaluation report submission, in February 2006, MOKAS had a multidisciplinary staff of 14. In June 2006, MOKAS hired an additional six financial investigators. A representative of the Attorney General's Office heads the unit. MOKAS cooperates closely with FinCEN and other U.S. Government agencies in money laundering investigations. All banks and nonbank financial institutions, insurance companies, the stock exchange, cooperative banks, lawyers, accountants, and other financial intermediaries must report suspicious transactions to MOKAS. Sustained efforts by the Central Bank and MOKAS to strengthen reporting have resulted in an increase in the number of STRs being filed from 25 in 2000 to 179 in 2006. During 2006, MOKAS received 208 information requests from foreign FIUs, other foreign authorities, and INTERPOL. MOKAS evaluates evidence generated by its member organizations and other sources to determine if an investigation is necessary. Money laundering is an autonomous crime. The MONEYVAL team noted at its on-site visit that there appeared to be 14 money laundering cases in the courts. Only three of the 14 known cases resulted from the STR process.
MOKAS has the power to suspend financial transactions for an unspecified period of time as an administrative measure. MOKAS also has the power to apply for freezing or restraint orders affecting any kind of property at a very preliminary stage of an investigation. In 2005, for the first time, MOKAS issued several warning notices, based on its own analysis, identifying possible trends in criminal financial activity. These notices have already produced results, including the closure of dormant bank accounts. MOKAS conducts anti-money laundering training for Cypriot police officers, bankers, accountants, and other financial professionals. Training for bankers is conducted in conjunction with the Central Bank of Cyprus.
During 2006, MOKAS opened 410 cases and closed 160. There were twelve prosecutions for money laundering, which resulted in seven convictions. During the same period, it issued 28 Information Disclosure Orders (typically involving judiciary proceedings in courts abroad), 13 administrative orders for postponement of transactions, and 4 freezing orders, including two foreign restraint orders, resulting in the freezing of 2.23 million euros (approximately $2.9 million) in bank accounts and three vehicles.. Additionally, during 2006, MOKAS issued one confiscation order for a total amount of 1.33 million euros (approximately $1.73 million). A number of other cases are pending.
On November 30, 2001, Cyprus became a party to the UN International Convention for the Suppression of the Financing of Terrorism. Terrorism financing is criminalized by sections 4 and 8 of the Ratification Law 29 (III) of 2001. The implementing legislation amended the AML law to criminalize the collection of funds in the knowledge that these would be used by terrorists or terrorist groups for violent acts. The parliament passed an amendment to the implementing legislation in July 2005 eliminating a loophole that had inadvertently excused Cypriot nationals operating in Cyprus from prosecution for terrorism finance offenses. However, as noted in the 2006 MONEYVAL mutual evaluation report, Cyprus has yet to criminalize the general collection of funds in the knowledge that they would be used by terrorists or terrorist groups for any purpose (i.e. not just for violent acts) as required by FATF Special Recommendation II. In November 2004, MOKAS designated two employees to be responsible for terrorist finance issues. MOKAS routinely asks banks to check their records for any transactions by any person or organization designated by foreign FIUs or the U.S. Treasury Department as a terrorist or a terrorist organization.
Under a standing instruction, the Central Bank automatically issues a "search and freeze" order for accounts matching the name of any entity or group designated by the UN 1267 Sanctions Committee or the EU Clearinghouse as a terrorist of terrorist organization. If a financial institution were to find any matching accounts, it would be required to immediately freeze the accounts and inform the Central Bank. As of January 2007, no bank had reported holding a matching account. When FIUs or governments such as the USG--not the UN or the EU Clearinghouse--designate and circulate the names of suspected terrorists, MOKAS has the authority to block funds and contacts commercial banks directly to investigate. None of these checks have revealed anything suspicious to date. The lawyers' and accountants' associations cooperate closely with the Central Bank. The GORC cooperates with the United States to investigate terrorist financing. MOKAS reports that no terrorist assets have been found in Cyprus to date and thus there have been no terrorist finance prosecutions or freezing of terrorist assets. However, authorities reported that in 2006 there had been one investigation for terrorism financing involving four persons.
Reportedly, there is no evidence that alternative remittance systems such as hawala or black market exchanges are operating in Cyprus on a significant scale. The GORC believes that its existing legal structure is adequate to address money laundering through such alternative systems. The GORC licenses charitable organizations, which must file with the GORC copies of their organizing documents and annual statements of account. Reportedly, the majority of charities registered in Cyprus are domestic organizations.
Cyprus is a party to the 1988 UN Drug Convention and the UN Convention against Transnational Organized Crime. Cyprus is a member of the Council of Europe's Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures (MONEYVAL) and the Offshore Group of Banking Supervisors. MOKAS is a member of the Egmont Group and has signed memoranda of understanding (MOUs) with 17 FIUs, although Cypriot law allows MOKAS to share information with other FIUs without benefit of an MOU. A mutual legal assistance treaty between Cyprus and the United States entered into force September 18, 2002.
Cyprus underwent a MONEYVAL mutual evaluation in April 2005, the results of which were published in a report adopted at the MONEYVAL Plenary meeting in February 2006. The report found Cyprus to be fully compliant in 17 areas, largely compliant in 22, and partially compliant in 10 of the Financial Action Task Force's (FATF) Forty Recommendations and Nine Special Recommendations on terrorism finance. There were no criteria for which Cyprus was found to be noncompliant. The assessment team also put forward a detailed recommended action plan designed to further improve its anti-money laundering system.
The Government of the Republic of Cyprus (GORC) has put in place a comprehensive anti-money laundering regime. It should continue to take steps to tighten implementation of its laws. In particular, it should enhance regulation of corporate service providers, including trust and incorporation companies, lawyers, accountants, and other designated nonfinancial businesses and professions. Now that the GOC is abolishing its offshore financial services, it should withdraw from the Offshore Group of Banking Supervisors to dispel any confusion that its continued membership might engender. It should enact provisions that allow for civil forfeiture of assets. It should also continue to work on improving the collection and centralization of statistical data in relation to money laundering investigations, prosecutions and convictions. Cyprus should criminalize the collection of funds with the knowledge that they will be used by terrorists or terrorist groups for any purpose--not only to commit violent acts. Cyprus should also take steps to implement the recommendations of the recent MONEYVAL and IMF evaluations, including ensuring the staffing level at MOKAS is sufficient for MOKAS to fulfill its mandate.
Area Administered by Turkish Cypriots. The Turkish Cypriot community continues to lack the legal and institutional framework necessary to provide effective protection against the risks of money laundering. It is thought that the 19 essentially unregulated and primarily Turkish-mainland owned casinos and the 15 offshore banks are the primary vehicles through which money laundering occurs. Casino licenses are fairly easy to obtain, and background checks on applicants are minimal. A significant portion of the funds generated by these casinos reportedly change hands in Turkey without ever entering the Turkish Cypriot banking system, and there are few safeguards to prevent the large-scale transfer of cash to Turkey. Another area of concern is the approximately five hundred "finance institutions" operating in the area that extend credit and give loans. Although they must register with the "Office of the Registrar of Companies," they are unregulated. Some of these companies are owned by banks and others by auto dealers. In 2005 and 2006, there was a large increase in the number of sport betting halls, which are licensed by the "Office of the Prime Minister." There are currently seven companies operating in this sector, with a total of 85 outlets. Four of the companies also accept bets over the internet. Turkish Cypriot authorities deported one prominent Turkish organized crime figure, Yasar Oz, following a December 19 shootout at the Grand Ruby Casino that left two dead. As a result of this incident, the Turkish Cypriot authorities arrested seven individuals, closed the Grand Ruby and Denizkizi Casinos and deported much of their staff. Nevertheless, several other casinos are still believed to have significant links to organized crime groups in Turkey.
The fact that the TRNC is recognized only by Turkey limits the ability of Turkish Cypriot officials to receive training or funding from international organizations with experience in combating money laundering. The Turkish Cypriot community is not part of any regional FATF-style organization and thus is not subject to any peer evaluations.
The offshore banking sector remains a concern. In August 2004, the U.S. Department of the Treasury's FinCEN issued a notice of proposed rulemaking to impose a special measure against First Merchant Bank OSH Ltd in the area administered by Turkish Cypriots as a financial institution of primary money laundering concern. Pursuant to Section 311 of the USA PATRIOT Act, FinCEN found First Merchant Bank to be of primary money laundering concern based on a number of factors, including: (1) it is licensed as an offshore bank in the TRNC, a jurisdiction with inadequate anti-money laundering controls, particularly those applicable to its offshore sector; (2) it is involved in the marketing and sale of fraudulent financial products and services; (3) it has been used as a conduit for the laundering of fraudulently obtained funds; and (4) the individuals who own, control, and operate First Merchant Bank have links with organized crime and apparently have used First Merchant Bank to launder criminal proceeds. As a result of the finding and in consultation with federal regulators and the Departments of Justice and State, FinCEN proposed imposition of the special measure that would prohibit the opening or maintaining of correspondent or payable-through accounts by any U.S. domestic financial institution or domestic financial agency for, or on behalf of, First Merchant Bank OSH Ltd. On December 4, 2006, the Turkish Cypriot administration ordered First Merchant Bank to cease its operations due to violations of the Turkish Cypriot "Offshore Banking Law." The bank is now only permitted to perform activities associated with closing the Bank such as the payment and collection of outstanding debts.
Turkish Cypriot authorities have begun taking limited steps to address these risks. Nevertheless, it appears that the Turkish Cypriot leadership lacks the political will necessary to push through reforms needed to introduce effective oversight of its limited and relatively isolated financial sector. In 1999, an anti- money laundering law (AMLL) for the area administered by Turkish Cypriots went into effect with the stated aim of reducing the number of cash transactions in the TRNC as well as improving the tracking of any transactions above $10,000. Banks are required to report to the "Central Bank" any electronic transfers of funds in excess of $100,000. Such reports must include information identifying the person transferring the money, the source of the money, and its destination. Banks, nonbank financial institutions, and foreign exchange dealers must report all currency transactions over $20,000 and suspicious transactions in any amount. Banks must follow a know-your-customer policy and require customer identification. Banks must also submit suspicious transaction reports (STRs) to a five-member Anti-Money Laundering Committee (AMLC) which decides whether to refer suspicious cases to the police and the attorney general's office for further investigation. The five-member committee is composed of representatives of the police, customs, the Central Bank, and the Ministry of Finance. However, the AMLL has never been fully implemented or enforced.
In 2005, the AMLC, which had been largely dormant for several years, began meeting on a regular basis and encouraging banks to meet their obligations to file STRs. The committee has reportedly referred several cases of possible money laundering to law enforcement for further investigation, but no cases have been brought to court and no individuals have been charged. There have been no successful prosecutions of individuals for money laundering, although one foreign bank owner suspected of having ties to organized crime was successfully extradited. There are significant concerns that law enforcement and judicial officials lack the technical skills needed to investigate and prosecute financial crimes.
Although the 1999 AMLL prohibits individuals entering or leaving the area administered by Turkish Cypriots from transporting more than $10,000 in currency without prior Central Bank authorization, Central Bank officials note that this law is difficult to enforce, given the large volume of travelers to and from Turkey. In 2003, Turkish Cypriot authorities relaxed restrictions that limited travel across the UN-patrolled buffer zone. There is also a relatively large British population in the area administered by Turkish Cypriots and a significant number of British tourists. As a result, an informal currency exchange market has developed.
The Ministries of Finance, Economy and Tourism are drafting several new anti-money laundering laws that they claim will, among other things, establish an FIU and provide for better regulation of casinos, currency exchange houses, and both onshore and offshore banks. Turkish Cypriot officials have committed to ensuring that the new legislation meets international standards. However, it is unclear if or when the new legislation will be adopted, and if it is adopted, whether it will ever be fully implemented and enforced. Work on the new bills has been ongoing for more than two years.
There are currently 23 domestic banks in the area administered by Turkish Cypriots. Internet banking is available. The offshore sector consists of 16 banks and approximately 50 companies. The offshore banks may not conduct business with residents of the area administered by Turkish Cypriots and may not deal in cash. The offshore entities are audited by the Central Bank and are required to submit a yearly report on their activities. However, the Central Bank has no regulatory authority over the offshore banks and can neither grant nor revoke licenses. Instead, the Ministry of Finance performs this function. Since 2000, the Turkish Cypriot authorities have registered one new offshore bank. A new law has come into effect that restricts the granting of new bank licenses to only those banks with licensees in an OECD country or a country with "friendly relations" with the TRNC.
The 1999 Turkish Cypriot AMLL provided better banking regulations than were previously in force, but as an AML tool it is far from adequate, and without ongoing enforcement, cannot meet its objectives. A major weakness continues to be the many casinos, where a lack of resources and expertise leave that area, essentially unregulated and therefore especially vulnerable to money laundering abuse. The largely unregulated finance institutions, currency exchange houses, and offshore banking sector are also of concern. The Turkish Cypriot authorities should move quickly to enact a new anti-money laundering law, establish a strong, functioning financial intelligence unit, and adopt and implement a strong regulatory environment for all obliged institutions, in particular casinos, money exchange houses, and entities in the offshore sector. Turkish Cypriot authorities should take steps to enhance the expertise of members of the enforcement, regulatory, and financial communities with an objective of better regulatory guidance, the more efficient STR reporting, better analysis of reports, and enhanced use of legal tools available for prosecutions.
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|Title Annotation:||Country Reports|
|Publication:||International Narcotics Control Strategy Report|
|Article Type:||Country overview|
|Date:||Jan 1, 2007|
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