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Cyprus’ Financial Sector Under Scrutiny: ML Vulnerabilities Exposed
The Cyprus financial sector has come under scrutiny, with currency pairs, commodities, and equity indices identified as exhibiting medium- to high-vulnerabilities to money laundering (ML). The assessment, conducted by regulatory bodies, highlights the risks posed by non-face-to-face customer interactions and deep liquidity.
Currency Pairs and Commodities: High-Risk Sector
The sector’s engagement with non-regulated clients and high-liquidity products makes it an attractive playground for criminals. However, a mitigating factor is the introduction of additional controls, as licensed institutions mainly accept small deposits from each client through regulated banks or payment service providers.
Factors Contributing to High Risk
- Non-face-to-face customer interactions
- Deep liquidity
- Attraction to non-regulated clients and high-liquidity products
Traditional Investment Firms: Medium-High Risk
Firms offering investment advice and portfolio management services to international clients were found to pose a medium-high ML vulnerability due to their appeal to high-net-worth individuals.
Factors Contributing to Medium-High Risk
- Appeal to high-net-worth individuals
- International client base
Fund Managers: Medium-Risk Sector
Fund managers, catering to high-net-worth individuals, were assessed as posing a medium ML vulnerability.
Factors Contributing to Medium Risk
- High-net-worth individual clients
- Limited scope for money laundering activities
Insurance Sector: Low Risk
In contrast, the life and non-life insurance activity, supervised by the Superintendent of Insurance, was found to have low ML risks, with no systemic impact on the economy. However, weaknesses were identified in the application of Customer Due Diligence (CDD) and the limited use of Anti-Money Laundering/Countering Financing of Terrorism (AML/CFT) automated systems.
Factors Contributing to Low Risk
- Supervision by the Superintendent of Insurance
- No systemic impact on the economy
Other Financial Institutions: Medium-Low Risk
The assessors evaluated money transfer businesses, card acquiring activities, and electronic money services. While there are ML risks, the sector’s size and strong licensing regime in place reduced the overall risk to medium-low.
Factors Contributing to Medium-Low Risk
- Strong licensing regime
- Sector size and limited scope for money laundering activities
DNFBP Sector: Weaknesses Identified
The DNFBP (Designated Non-Financial Businesses and Professions) sector, comprising lawyers, accountants, trust and company service providers, real estate agents, and betting activities, was found to have weaknesses. These include:
- Different AML directives by each supervisor for the same type of business
- Lack of a unified communication platform for supervisors to exchange information on sanctioned firms
- Limited AML awareness amongst market players
- Real estate developers performing sales of immovable property without adhering to AML/CFT Law
Recommendations for Improvement
- Harmonization of AML directives across supervisors
- Establishment of a unified communication platform
- Increased AML awareness training for market players
- Compliance with AML/CFT Law by real estate developers
Recommendations
The assessment highlights the need for stronger measures to combat ML in Cyprus’ financial sector. Regulatory bodies must strengthen procedures, enhance AML/CFT knowledge amongst practitioners, and improve communication platforms to prevent money laundering activities.
Future Developments
As regulatory bodies work to address these vulnerabilities, we will continue to monitor developments in Cyprus’ financial sector and provide updates on the efforts to combat ML.