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Cyprus ‘golden passports’ scheme a laundering risk, says watchdog (Update 3)

A European money laundering watchdog has cautioned that a secretive investment-for-passports programme run by Cyprus was vulnerable to money laundering and fraught with risk.

In a report published Wednesday, the Council of Europe’s anti-money laundering body MONEYVAL calls on the Cypriot authorities to pursue more aggressively money laundering from criminal proceeds generated outside of Cyprus, and take a more proactive approach to the freezing and confiscation of foreign proceeds.

The report makes a comprehensive assessment of the effectiveness of Cyprus’s anti-money laundering and countering the financing of terrorism (AML/CFT) system and its level of compliance with the Recommendations of the Financial Action Task Force (FATF).

It concludes that Cyprus understands the money laundering and terrorist financing risks that it faces to a large extent, albeit the understanding of terrorist financing risk is less comprehensive.

The report said that the risks related to the Cyprus Investment Programme have not been assessed comprehensively, and the body recommends that Cyprus should conduct a comprehensive money laundering and terrorist financing risk assessment of this programme.

Cyprus launched the scheme offering passports for an investment in 2013, with more than 3,000 people gaining citizenship through the programme.

MONEYVAL, said that, although Cyprus had broadly taken measures to mitigate key money laundering risks, the risk of vulnerabilities in the investment programme had increased “exponentially” via real estate, the investment vehicle of choice.

“The risk in the real estate sector has increased exponentially since it has become the preferred choice of investment to acquire citizenship under the Cyprus Investment Programme,” the report said. “As this risk has not been properly mitigated it is recommended that supervision of the real estate sector should be significantly enhanced and that measures should be taken to increase the level of compliance with preventive measures by real estate agents.”

Under the investment scheme, a minimum €2 million investment can get a passport and instant visa-free travel throughout the European Union. The total amount invested under the investment scheme was €6.64 billion between 2013 and 2018, the MONEYVAL report said, calling it “material” to the economy of Cyprus.

In November 2019 the government said it would review the processes used to grant citizenships in the wake of a report by Reuters that Cambodian nationals in the inner circle of long-time leader Hun Sen had acquired passports. It said it had introduced additional safeguards to the programme since its inception to prevent abuses.

It also said it would start a process to revoke citizenship from 26 individuals. However, lawmakers have said this week that the process had stalled on a legal technicality.

The MONEYVAL report also said that while Cyprus was instrumental in assisting other countries, it was “not very proactive” at freezing and confiscating foreign criminal proceeds at its own initiative.

“The competent authorities are not yet sufficiently pursuing money laundering from criminal proceeds generated outside of Cyprus, which pose the highest threat to the Cypriot financial system,” it said.

“Moreover, they have not been very proactive at freezing and confiscating foreign criminal proceeds at their own initiative, although they have been instrumental in assisting other countries.”

In addition, it said, Cyprus has not yet conducted a formal assessment of risks posed by legal persons, despite having a developed company formation and administration sector. This has reduced the authorities’ ability to implement more targeted mitigating measures to ensure the transparency of legal persons, MONEYVAL said.

“There are weaknesses in the implementation of preventive measures by the trust and corporate services sector as a whole,” it added. “This has major implications for the availability of beneficial ownership information of legal persons and arrangements registered in Cyprus and the reporting of suspicious transactions.”

While significant strides have been made by Cyprus to implement a comprehensive supervisory framework for trust and corporate services providers, further progress is required, with certain areas requiring major improvement, the report said.

“Trust and corporate service providers did not demonstrate a uniform level of understanding of the risks of evasion of targeted financial sanctions for terrorist financing and the proliferation of weapons of mass destruction. Given the role played by these service providers as gatekeepers, this shortcoming constitutes a significant vulnerability,” it added.

On the other hand, it said, several measures have been deployed to mitigate some of the main risks effectively. There is a good level of domestic co-operation and co-ordination between the competent authorities, for example, both on policy issues and at an operational level. The banking sector has become more effective in mitigating risks. This is largely due to the increasingly sound supervisory practices of the Central Bank of Cyprus, it added.

The report also notes positively that the authorities investigate the financial aspects where there is a terrorism investigation/prosecution, that they have carried out a number of terrorist financing investigations in the review period and that they have taken steps to increase awareness of terrorist financing risks.

The country has developed mechanisms which are capable of delivering constructive and timely assistance to other countries both on a formal and informal basis, MONEYVAL noted.

The review was conducted in May 2019. Based on the results of its evaluation, MONEYVAL decided to apply an enhanced follow up procedure and invited Cyprus to report back in 2021.

The ministry of finance welcomed the report later Wednesday.

“The report reflects the progress and the measures adopted by Cyprus to combat money laundering in recent years and identifies areas where further improvements are needed,” it said.

It said MOVNEYVAL’s assessment was a very demanding exercise with very few countries achieving high results.

“Within this background, the assessment shows a very satisfactory picture of the implementation of the measures, with Cyprus being one of the 25 countries out of the 98 that have been subjected to this assessment and which do not exhibit a low rating on any of the 11 pillars evaluating the effectiveness of the measures,” the finance ministry added.

At the same time in the Technical aspects of the Report, Cyprus showed ‘compliant’ or ‘largely compliant’ ratings on almost all 40 parameters and no ‘non-compliance ratings’.

“The purpose of the report is be a tool for improving the measures against money laundering and contribute to the international effort to combat the phenomenon, for which Cyprus has shown its commitment to implement strong policies, against money laundering and terrorist financing activities,” the ministry said, adding that Cyprus was committed to implementing off of the recommendations “which are largely consistent with the findings of the National Risk Assessment Report on AML/CFT as well as with the action plan and strategy plan prepared by the authorities and approved by the council of ministers.

 

KEY FINDINGS

There are some elements in the Cypriot AML/CFT regime which are functioning adequately:

  1. Cyprus understands the money laundering/terrorist financing risks that it faces to a large extent, albeit understanding of terrorist financing risk is less comprehensive. A number of measures have been deployed to mitigate some of the main risks effectively.
  2. There is a good level of domestic co-operation and co-ordination between the competent authorities both on policy issues and at an operational level.
  3. The banking sector has become more effective in mitigating risks. This is largely due to the increasingly sound supervisory practices of the Central Bank of Cyprus.
  4. The financial intelligence unit has the ability to support the operational needs of competent authorities through its analysis and dissemination functions.
  5. Cyprus has developed mechanisms which are capable of delivering constructive and timely assistance to other countries both on a formal and informal basis.

However, there are various major shortcomings which hinder the effectiveness of the Cypriot AML/CFT regime:

  1. The competent authorities are not yet sufficiently pursuing money laundering from criminal proceeds generated outside of Cyprus, which pose the highest threat to the Cypriot financial system.
  2. The competent authorities have not been very proactive at freezing and confiscating foreign criminal proceeds at their own initiative, although they have been instrumental in assisting other countries.
  3. Cyprus has not conducted a formal assessment of risks posed by legal persons, despite having a developed company formation and administration business. This has reduced the authorities’ ability to implement more targeted mitigating measures to ensure the transparency of legal persons.
  4. There are weaknesses in the implementation of preventive measures by the trust and corporate services sector as a whole. This has major implications for the availability of beneficial ownership information of legal persons/arrangements registered in Cyprus and the reporting of suspicions transaction reports.
  5. While significant strides have been made by Cyprus to implement a comprehensive supervisory framework for trust and corporate services providers, further progress is required, with certain areas requiring major improvement.
  6. The risk in the real estate sector has increased exponentially since it has become the preferred choice of investment vehicle to acquire citizenship under the Cyprus Investment Programme. These risks have not been properly been mitigated – the implementation of preventive measures by, and the supervisory framework of, the sector display significant weaknesses.
  7. The risks related to the Cyprus Investment Programme have not been assessed comprehensively.
  8. Administrative service providers did not demonstrate a uniform level of understanding of the risks of TFS evasion. Given Cyprus’s status as an international financial centre and the role played by administrative service providers as gatekeepers, the fact that some service providers may not always be in a position to identify individuals or entities who may seek to conceal their identity behind complex structures to evade sanctions constitutes a significant vulnerability. The application of a risk-based approach to the non-profit sector was still at a nascent stage at the time of the on-site visit.

 

Priority Actions

  1. The competent authorities should be more aggressive in pursuing money laundering from criminal proceeds generated outside of Cyprus.
  2. The competent authorities should be more proactive at freezing and 12 confiscating foreign criminal proceeds at their own initiative.
  3. Cyprus should conduct a formal and comprehensive assessment of risks posed by legal persons and arrangements.
  4. Cyprus should ensure that ASPs take action to enhance their ML/TF risk understanding and apply preventive measures commensurate with the risks, including by providing more guidance, training and feedback.
  5. The CBA should strengthen its authorisation procedure. All ASP supervisors should continue developing the application of the risk-based approach to supervision. Effective and dissuasive sanctions should be imposed for breaches of AML/CFT requirements.
  6. The supervision of the real estate sector should be significantly enhanced, and measures should be taken to increase the level of compliance with preventive measures by real estate agents.
  7. Cyprus should conduct a comprehensive ML/TF risk assessment of the Cyprus Investment Programme.
  8. Measures should be taken to increase ASP understanding of the risks of TFS evasion.
  9. Cyprus should proceed with the implementation of a risk-based approach framework to the non-profit sector.

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