THE STATE DEPARTMENT REPORT ON THE MONEY LAUNDERING SITUATION IN CYPRUS
UNITED STATES DEPARTMENT OF STATE
BUREAU FOR INTERNATIONAL NARCOTICS AND LAW ENFORCEMENT AFFAIRS
MONEY LAUNDERING AND FINANCIAL CRIMES
Below is the extract on Cyprus from the International Narcotics Control Strategy Report for 2001, on the situation of Money Laundering.
CYPRUS. The Republic of Cyprus is a major regional financial center with a robust offshore financial services industry, and as such, remains vulnerable to international money laundering activities. Organized crime, credit card fraud, burglary, and theft are the major sources of illicit proceeds laundered in Cyprus.
In 1996, the Government of Cyprus (GOC) passed the Prevention and Suppression of Money Laundering Activities Law. This law criminalized non-drug related money laundering; provided for the confiscation of proceeds from serious crimes; codified actions that banks and non-bank financial institutions must take (including customer identification); and mandated the establishment of a financial intelligence unit (FIU). Previously enacted legislation criminalized drug-related money laundering. A 1998 amendment to the 1996 anti-money laundering legislation extended the list of predicate offenses to include criminal offenses punishable by imprisonment exceeding one year from which proceeds were derived. The amendment also addressed government corruption, and facilitated the exchange of financial information with other FIUs, as well as the sharing of assets with other governments.
A law passed in 1999 criminalized counterfeiting bank instruments such as certificates of deposit and notes. In November 2000, the GOC further amended its 1996 money laundering law by eliminating the separate list of predicate offenses. This amendment, coupled with the central bank's guidance note to commercial banks reminding them of the importance of reporting any suspicious transaction to the FIU, has contributed to a nearly three-fold increase in the number of suspicious activity reports from 25 in 2000 to 67 in 2001.
The GOC in January 1997 established its FIU, the Unit for Combating Money Laundering (UCML). The 14-member UCML is comprised of representatives from the Attorney General's Office, Customs, law enforcement, and support staff. The UCML statutory authority directs it to evaluate evidence generated by its member organizations and other sources to determine if an investigation is necessary. The UCML also conducts anti-money laundering training for Cypriot police officers, bankers, accountants, and other financial professionals.
In 2001, the UCML opened 202 cases and closed 98. The Unit issued 115 Information Disclosure Orders and 21 freezing orders, resulting in approximately U.S. $2.67 million in frozen assets. During 2001, there were three convictions recorded under the 1996 Anti-Money Laundering law, while twelve cases were pending at the end of the year.
On 22 November 2001, Cyprus Parliament ratified the UN Convention on the Suppression of the Financing of Terrorism. The GOC created a sub-unit within the UCML that will focus specifically on the financing of terrorism. The unit reinforces the UCML with additional staff. The UCML will coordinate with the new counter-terrorism unit under the authority of the Attorney General. The GOC has cooperated with the U.S. to investigate terrorist financing.
The GOC places restrictions on foreign ownership of property and transportation of currency and bullion. Cypriot law requires declaration of all cash entering or leaving Cyprus in the amount of U.S. $1,600 or greater. Declarations over U.S. $10,000 are sent directly to the Investigations Section of Cypriot Customs and the central bank. All banks and non-bank financial institutions-insurance companies, stock exchange, cooperative banks, lawyers, accountants and other financial intermediaries-must report suspicious transactions to the UCML. Bank employees currently report all suspicious transactions to the bank's compliance officer, who determines whether to forward the report to the UCML for investigation. Reports not sent to the UCML are filed monthly with the central bank. Banks are also required to document cash deposits in excess of U.S. $10,000 and to file monthly aggregate reports with the central bank. A declaration form must accompany all foreign currency deposits. In 1998, the central bank instructed banks and financial institutions to pay special attention to complex, unusually large transactions, and to report cumulative electronic funds transfers that exceed U.S. $500,000 per month for a single customer. There are no statistics available on compliance with these regulations.
In 2000, the Financial Action Task Force (FATF) conducted a review of Cyprus's anti-money laundering regime against 25 specified criteria. The report raised a concern regarding customer identification in respect to all forms of trusts. In 2001, the central bank issued rules addressing this concern, requiring banks to ascertain the identities of the natural persons who are the "principal/ultimate" beneficial owners of new corporate or trust accounts. This rule does not apply to existing accounts.
The central bank took several steps during 2001 to improve suspicious activity reporting and identification of beneficial owners of new accounts. The central bank amended its requirement that commercial banks report the opening and maintenance of accounts, by banks incorporated in 19 jurisdictions, to include the Former Yugoslav Republic of Montenegro. The amendment enhanced the requirement to obtain central bank approval for cash deposits exceeding $100,000 per year by requiring banks to apply the annual limit to the aggregate value of deposits from family members and business associates.
The central bank also issued a series of orders requiring banks to notify the central bank of accounts held by any individuals or organizations associated with the financing of terrorist organizations, and to freeze assets held in those accounts. The aforementioned requirements, apply equally to domestic and offshore banks. Banks and professional groups generally support the steps taken by the central bank. At the request of the Central Bank, the lawyers and accountant associations requested their members notify the associations of any work performed on behalf of certain terrorist organizations. Both associations are cooperating closely with the central bank.
A substantial amount of money was illegally transferred out of Yugoslavia while former President Slobodan Milosevic was in office. Estimates range as high as four billion dollars with some of these funds believed to have been transferred through Cyprus. By April 2001, the GOC had turned over documents to the international war crimes tribunal in The Hague concerning possible money laundering by Milosevic and his associates. Some 250 bank accounts have been identified as belonging to Serbian offshore companies based in Cyprus.
The development of the offshore financial sector in Cyprus has been facilitated by the island's central location, a preferential tax regime, an extensive network of double tax treaties (particularly with Eastern European 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. Services provided are confined to banks (total 2001 assets: U.S. $10.8 billion), insurance services, company formation and relatively small fund management and advisory businesses.
Cyprus's offshore sector includes 29 banks, 28 licensed foreign insurance companies, 116 financial services companies, 20 companies that manage collective investment schemes, and 12 offshore trustee companies. The central bank has in place a strict regulatory framework aimed at preventing abuses within the offshore sector. Offshore banks are required to adhere to the same legal, administrative, and reporting requirements as domestic banks. The central bank requires prospective offshore banks to face a detailed vetting procedure to ensure only banks from jurisdictions with proper supervision are allowed to operate in Cyprus. Offshore banks must have a physical presence in Cyprus and cannot be brass plate operations (shell banks). Once an offshore bank has registered in Cyprus, it is subject to a yearly on-site inspection by the central bank. Offshore banks in Cyprus may accept deposits and make foreign-currency denominated loans to residents of Cyprus if the resident has obtained an exchange control permit from the central bank.
As of mid-2001, there were approximately 52,000 international business companies (IBCs) registered in Cyprus. However, approximately 16,000 of these remain active and about 1,000 have a physical presence in Cyprus. Russian IBCs constitute a "significant" share of the total number of active IBCs. The central bank began an intensive program in 2001 to identify inactive offshore companies and to delete them from the registry. Exact figures are unavailable; however, the Central Bank is believed to have deleted approximately 18,000 companies from the registry during 2001. The names of beneficial owners of IBCs can be released to law enforcement by court order. The popularity of the offshore sector can be explained in part, as noted above, by the GOC's dual-tax treaties with 26 nations, including Russia. Profits of Cypriot offshore companies are taxed at a rate of only 4.25 percent. Moreover, there is no tax on dividends, and foreign employees are required to pay only half the normal Cypriot income tax rate. IBCs may keep freely transferable currency accounts both abroad and in Cyprus. If an IBC is registered as an offshore partnership, profits are not taxed. Cyprus does not permit bearer shares.
In March 2001, the IMF conducted an assessment of the offshore sector in Cyprus. In its final report, published in July 2001, the IMF concluded that although lack of resources meant that onsite supervision was less than optimal, Cyprus's supervision of the offshore sector was generally "effective and thorough." The IMF characterized Cyprus' anti-money laundering legislative framework, as well as measures imposed by the central bank and other regulatory authorities, as being adequate. The report noted that, as in other offshore jurisdictions, there was still scope to improve the identification of beneficial owners and the reporting of suspicious transactions, particularly in the case of non-resident controlled companies.
The IMF report noted that Cyprus planned to abandon, by 2005, its existing framework of tax preferences for offshore businesses. Cypriot authorities are drafting a new Financial Services Bill that will extend supervision to cover all investment services in Cyprus, including some domestic businesses currently outside the scope of the current supervisory framework. These steps will eliminate the differentiation between onshore and offshore businesses in Cyprus. This will also assist in clearing the way for Cyprus's accession to European Union (EU) membership.
Cyprus is a party to the 1988 UN Drug Convention, and in December 2000, signed the UN Convention against Transnational Organized Crime. Cyprus is a member of the Council of Europe's PC-R-EV, and is a member of the Offshore Group of Banking Supervisors. The UCML is a member of the Egmont Group. Cyprus and the United States have signed a Mutual Legal Assistance Treaty, but it is not yet in force. In 1997, the GOC entered into a bilateral agreement with Belgium for the exchange of information on money laundering.
Cyprus has put in place a comprehensive anti-money laundering legal framework that meets international standards. Recent central bank rules requiring banks to identify the beneficial owners of new accounts should be extended to cover existing bank accounts whenever there is a significant change in the ownership or control of the corporate or trust account holder. The GOC could enhance enforcement of its anti-money laundering laws by authorizing UCML to conduct unannounced inspections of the bank compliance officers and to also examine suspicious activity reports filed with the Central Bank. In addition, as noted by the IMF, it should ensure that the identities of beneficial owners are easily accessible by law enforcement.
(Cyprus has been divided since the Turkish military intervention of 1974, following a coup d'etat directed from Greece. Since then, the southern part of the country has been under the control of the Government of the Republic of Cyprus. The northern part is controlled by a Turkish Cypriot administration that in 1983 proclaimed itself the "Turkish Republic of Northern Cyprus." The U.S. government recognizes only the Government of the Republic of Cyprus.)
It is more difficult to evaluate anti-money laundering efforts in the "Turkish Republic of Northern Cyprus" ("TRNC") but there continues to be strong evidence of a growing trade in narcotics with Turkey and Britain, as well as significant money laundering activities.
"TRNC" authorities have enacted a money laundering law for northern Cyprus, which went into effect in November 1999. The main thrust of the law was to reduce the number of cash transactions in the "TRNC" as well as to improve the tracking of any transactions above U.S. $10,000. The law also provides for the creation of an experts committee to advise "TRNC" authorities on combating money laundering as well as for the seizure of assets.
The law is an adjunct to the "TRNC's" Exchange Control Law of 1997, which requires banks to report to the "central bank" any movement 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. The law also proscribes individuals entering or leaving the "TRNC" from transporting more than U.S. $10,000 in currency. Under the new law, banks, non-bank 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 transactions to a central multi-agency committee that will function as an FIU and have investigative powers.
"TRNC" officials believe that its 24 essentially unregulated casinos are the primary vehicles through which money laundering occurs. There is also an offshore sector, consisting of 40 banks and 12 IBCs. The offshore banks may not conduct business with "TRNC" residents and may not deal in cash. However, these banks are not audited and their records are not publicly available. Reportedly, a new law will restrict the granting of new bank licensees only to those banks already having licensees in an OECD country.
In spite of a growing awareness in the "TRNC" of the danger represented by money laundering, it is clear that "TRNC" regulations fail to provide effective protection against the risk of money laundering. The new law of the "TRNC" provides better banking regulations than were previously in force. The major weakness continues to be the "TRNC's" many casinos, where a lack of resources and expertise leave that area, for all intended purposes, unregulated, and therefore, especially vulnerable to money laundering abuse.
In September 2001, a Turkish newspaper stated that Osama Bin-Laden used banks in the "TRNC" to launder money, which he then used to purchase munitions and to support his network of spies and training camps. Also in September, an Italian newspaper claimed that Al-Qaeda, through its channels in the "TRNC", supplied Muslims in the Balkans with U.S. $700 million from 1992-1998.