Non-resident bank deposits registered a 13 per cent drop in 2018 as a result of stricter anti-money laundering (AML) policies adopted by the banking sector, the central bank of Cyprus (CBC) said on Friday.
Including special purpose entities, non-resident deposits dropped by €1.4bn, or 12.7 per cent year-on-year in 2018, compared with a 2.1 per cent fall in 2017.
“This is partly due to the stricter guidelines to banks as part of reinforcing AML practices,” the CBC said in its annual report.
As regards local deposits, the report said the uncertainty created by the sale of the co-operative central bank stabilised the deposits of Cyprus residents, which chalked up a €2.1 per cent rise on an annual basis compared with a 5.5 per cent increase at the end of 2017.
In June last year, the CBC had instructed supervised banks to avoid business with “shell and letterbox companies.”
The term ‘shell companies’ refers to non-public traded, limited liability companies and other entities to which any of the following could apply: There is no physical presence, i.e. “a meaningful mind and management” in the country they are domiciled other than a mailing address, the companies have no established economic activity, they have little to no independent economic value lacking documentary proof to the contrary and the jurisdiction in which they are registered does not require the submission of independently audited accounts.
The CBC report coincided with a report on money laundering by the US State Department’s Bureau of International Narcotics and Law Enforcement Affairs.
According to the report, at the end of 2017, Cyprus had 217,588 companies registered, many by nonresidents.
“The Cypriot financial system is vulnerable to money laundering by domestic and foreign criminal enterprises and individuals, although proceeds generated abroad pose a greater threat,” the report said. “Despite legal requirements to identify beneficial owners to government authorities, some Cypriot law and accounting firms help construct layered corporate entities to mask the identities of financial beneficiaries.”
The report said organized criminal groups and others have reportedly used Cypriot banks to launder proceeds, particularly from Russian and Ukrainian illicit activity.
It warned that the gaming sector may pose new, “potential vulnerabilities as the Cypriot authorities adjust to supervising casino-based activity.”
The State Department acknowledged that Cyprus continues to upgrade its AML legal framework and has finalised its first AML/CFT national risk assessment (NRA) on November 30, 2018.
“The NRA assesses the money laundering threat as high to the Cypriot banking sector and medium-high to trust and company service providers, lawyers and accounting firms.”
The NRA identified numerous areas for improvement, including more effective implementation of AML laws and regulations, enhanced capacity building and awareness training in all sectors, and specialised training for prosecutors, investigators, and the judiciary.
The report said the CBC circular on shell companies has led banks to close noncompliant accounts and refuse to open new ones that did not meet the criteria.
The Bank of Cyprus alone has terminated 8,070 customers, some with multiple accounts, and has rejected 4,354 potential new customers. As a result, it has incurred a loss in turnover of €4.5bn between 2015 and 2018 and a €13.3m in net profit.
The lender said it also eliminated hundreds of professional intermediaries – from 1,601 in 2014, the bank now has 287.
The other big bank, Hellenic, has reportedly closed over 10,000 accounts in recent years. Deposits from high-risk countries have been reduced by more than 50 per cent and currently account for less than five per cent of the total.
The lender has lost €2om in profits because international business de-risking and has also cut introducers by 50 per cent since 2014.