Cyprus caught between ‘do svidania’ to the rouble & ‘goodbye’ to dollar

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By Stelios Orphanides

While the increasingly stricter anti-money laundering (AML) practices applied in the Cypriot financial system in recent years are already disgruntling businesses, the island’s entanglement in the geopolitical tug of war between the US and Russia, one of Cyprus’s major commercial partners, may have significant implications for the economy.

Interviews with several stake holders –some of whom only agreed to talk on condition of anonymity– show an increasing concern in the ranks of professionals and entrepreneurs in Cyprus over the impact of stricter AML and terrorist financing practices being applied, amid fears that recent US pressure on the island’s financial and business service providers to take US sanctions more seriously into account, may have a transformative effect on the economy.

While some of the interviewees argue that there are ways for Cyprus –which two weeks ago launched a PR campaign to improve its image abroad in terms of combatting the laundering of illicit funds– to both adhere to AML regulations and US sanctions on fears its banks could lose access to the US dollar without angering the island’s large Russian business community, others acknowledged that the situation is at a critical point.

“There is a financial war and we don’t know its outcome,” said economist Marios Clerides, a former banker who also in the past served as chairman of the Cyprus Securities and Exchange Commission (CySEC).

Clerides was responding in a telephone interview a week ago in reference to the US decision to place sanctions on additional Russian government officials, companies and billionaires with ties to the country’s president Vladimir Putin.

As this Russo-American financial war rages, even when Cypriot banks apply strict AML standards while transacting with customers who apparently have no links to persons or entities targeted with sanctions, this still exposes them to additional risks as the means available to them have limitations, Clerides said.

“A Cypriot bank is not the CIA to know whether a certain customer is linked to a certain party” included in a sanctions-list no matter how deep the due diligence procedures applied and so avoid second-round sanctions, he said.

In order to reduce the risk of exposure to sanctioned Russians, Cypriot banks have resorted in recent weeks to prudentially closing accounts belonging to customers with links to Russia, even if the beneficiaries are not necessarily linked to persons targeted with sanctions or had not raised suspicious in the past, two banking sources said.

“The increased due diligence measures taken by banks are a result of the latest sanctions and announcements of supervisory authorities,” a banking source familiar with the matter said adding that the measures may range from “monitoring to closing of accounts”.

A colleague of his at a different bank, also familiar with the matter said that the case of Latvia’s ABLV, which the US Financial Crime Enforcement Network (FinCEN) in February described as a bank of primary money laundering concern with links to North Korea, “has sparked concern among Cypriot banks amid general pressure to clamp down on laundering”.

Already, the side effects of the increased AML measures taken by banks are being felt in the real estate sector, with developers complaining that it has become increasingly difficult for them to get paid for sales of property.

“Transactions with banks have become more difficult in the past six months and they are getting even more difficult,” said Pantelis Leptos, chairman of the Cyprus Land and Building Developers Association (CLBDA) said in a telephone interview. “In the industry it is very difficult to collect from real estate buyers from abroad”.

Leptos said that lenders applying such due diligence processes, while “not exclusively restricted to Russian customers,” have catapulted Cyprus “from one extreme to the other”. Therefore, Cyprus should look “at the highest level” for room to manoeuvre.

A third banking source who was talking on condition of anonymity said that the due diligence procedures are related to the application of a the “know your customer’s customer” (KYCC) practice. While banks could in the past approve an incoming payment to a developer’s bank account when the latter presented the documents of the transaction, now banks also scrutinise the developer’s customer to ensure that his or her funds are legitimate.

The real estate sector, whose demand and supply the government supports with tax breaks and a citizenship scheme as well as town planning relaxations, is a significant source of revenue for the Cypriot economy which three years ago emerged from a prolonged recession, caused by a twin fiscal and banking crisis. The economy expanded last year 3.9 per cent and the finance ministry expects it to grow a further 3.8 per cent this year.

Furthermore, business with Russia, deemed a high-risk jurisdiction with respect to money laundering, is a major source of revenue for Cyprus’s financial services sector, one of the few countries to sign double taxation agreements with Russia. The island is one of the largest investors in the country with the foreign investment stock amounting to €28.9bn in 2016 compared to €31.1bn invested by Russians in Cyprus, reflected also in the large number of Russian-owned companies operating on the island.

On the other hand, Cyprus which aspires to develop its hydrocarbons reserves in its exclusive economic zone (EEZ), relies on the US as a shield against Turkey. While Ankara is strengthening its ties with Moscow, in February, it sent warships to prevent the Italian energy company Eni from carrying out an exploratory drilling. Two US companies, ExxonMobil and Noble Energy Inc. have acquired oil and gas licences, in addition to six other companies from an equal number of countries allied with the US, such as the UK, France, Italy, Israel, South Korea and Qatar.

However, this forecast may be optimistic if one takes into account the impact of the stricter implementation of AML procedures and sanctions on the economy. On top of that, the UK – Cyprus’s main source of incoming tourism which two years ago plunged into uncertainty after its voters decided to leave the EU– is also going hard on Russian capital following the March 4, Salisbury poisoning attack on a former Russian spy and his daughter. The British economy may also be hurt in the process.

A London-based banker said that the UK’s decision to go hard on Russian capital may also be related to the US efforts to make it more difficult for Russia, a major oil producer, and its oil producing allies such as Iran, to benefit from a recent increase in energy prices. This, he continued, was not unrelated to US president Donald Trump’s decision to unilaterally withdraw from the Iran nuclear deal.

The impact of the new sanctions and stricter AML procedures could also be felt outside the banking and real estate sector unless political initiatives are taken to ensure that Cyprus “will not have to change its economic model,” by giving up on its business services sector, said a former managing partner of a major accounting firm in a phone interview.

“I don’t believe that Cyprus has taken its final decisions on how it will proceed,” he said, asked to comment on information that some major accounting firms were considering shifting their Russian business to either Hong Kong or Singapore because “developments are unpleasant”.

The chairman of the Institute of Certified Public Accountants (ICPAC) said that he did not feel that concern was justified as the body, tasked with supervising the AML compliance of accounting offices and professionals, carries out regular audits on the basis of “one of the strictest” regulatory regimes for combating financial crime.

“The ICPAC is cooperating with major institutions from abroad,” such as the UK-based Association of Chartered Certified Accountants (ACCA) in implementing an effective supervisory framework under with regular onsite visits and audits,” said ICPAC chairman Marios Skandalis who also heads the compliance department of Bank of Cyprus. “The results of these audits to date certainly do not reflect a dramatic emergency situation”.

However, even if all companies in a sector comply with the stricter AML framework and sanctions, one exception could cause severe damage, economist Clerides warned.

“It only takes one office to engage in business with controversial customers and this may hurt the reputation of everyone else,” he warned.

Cypriot banks came close to being banned from transacting in dollars four years ago when the US authorities threatened to blacklist the fragile Cypriot banking system unless the island took action against FBME Bank, which the US branded, just like ABLV, a financial institution of primary money laundering concern.

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About Author

Stelios Orphanides is a journalist at CyprusBusinessMail.com. To contact Stelios Orphanides: [email protected]

  • A is B

    Aint life a bitch, lets hope the lawyers, developers and bankers suffer as much as they made their customers suffer, more if possible. If they take the side of the Russians, Cyprus will collapse, full stop.

    • .ROC

      It wont one side, this person who wrote the article is his own view, he been wrong before in his articles, I think ROC will work with both.

      • A is B

        Not possible ROC, in this case it has to be one or the other, no sitting on the fence, the past is finally catching up with the double standard commies in Cyprus.

        • Guest

          Cyprus is non-aligned, and has been for donkeys years, it won’t change.

          • A is B

            It has to change “G” you know it, I know it, every one knows it.

          • Bystander

            better say, mis-aligned

          • Stephen Vaslui 1475

            I think your thinking is mis-aligned.

          • Bystander

            you think?

          • Stephen Vaslui 1475

            It’s for sure.

      • gentlegiant161

        What professional financial acumen and certificates of learning do you have to challenge anyone’s opinion and figures on this subject ?
        Sorry but its time to **** or get off the pot.

        • .ROC

          You answered it DumA its an opinion that my point same as the person who wrote it, its the Turkos commentators that seem to quote rather than say its their opinion, big diff, you on the other hand have not even bothered to gives your view on it, maybe that because you come here only to troll

          • gentlegiant161

            Oh where to begin?
            Well I didn’t give a view because the commentators in the article are Bankers and economists and financial institutions and I am not, I asked where your expertise came from as I understand your a simple fish tosser in North London not an economist with the BoE..
            And to use your very own words to another poster :
            “and you are are in no position to make such a ludicrous reply'”
            As for a troll your fish business must be rubbish as your here almost every day pontificating on many subjects within a wide spectrum without knowledge just to mention the word Turkey in a typically random comment without bearing, I’m in no doubt who the troll is.

    • Guest

      Ain’t you a sad, bitter person? I suppose I should pity you.

      • A is B

        No and why.

  • clergham

    What is it with Russian Governments that they always feel the need to make nuisances of themselves in other countries?

    This has been going on for the last 100 years

    • .ROC

      What similar to what Turkey does with aggression in other countries? same SHT

      • gentlegiant161

        Hooray you managed to put the word turkey in a useless comment.
        Can’t let your fans down eh.

  • Bernard Smart

    Make your mind up time!
    Russian satillite or part of the European union and West.

    • .ROC

      This is one mans view, so dont believe everything you hear, there is no “make your mind up time” this article is just to make waves, one can work with all,

      and you are are in no position to make such a ludicrous reply

      • Bernard Smart

        I am in such a position because I have posted a perfectly reasonable comment .
        If you don’t like it tough – I have told u before FOAD you annoying little troll.

        • .ROC

          what gets me you come out with BS statement then when challenged you become a Ahole, let me see if I can help you, the ROC does not place all its eggs all in the same basket, so your statement has no foundation,

          If you want to stand by it, then show me the proof and facts whereby the ROC has to choose as you put it,, its all made up crap from you Trolling again

          • JS Gost

            Hello Mr Pot, My are you looking black said Mr Kettle. I laughed when I read you ‘comment’

          • .ROC

            How I not surprised you Turks never can address the article in hand, its always the same case, no answer lets deflect it or deny it, it must be a DNA thing with you lot.

    • Veritas

      The City of London and all the small English island outlets around the World, are by far a bigger problem regarding money laundering, including Russian money.
      Having said that, I’m in no favour of the present dependance of Russia in Cyprus.
      But we ought to put things in its right perspective.

      • Bernard Smart

        Don’t get me started on the shisters that are British bankers. The slime that the rest of the world needs to slide along on.
        Unfortunately Cyprus is synonymous for dirty money that is now russian.

  • Kyrenia

    Maybe we ought to sit back and see how the City of London deal with a similar situation there. Surely the shining beacon that is British ethics will guide us through the melaise by setting an example for us to emulate.

    • Cydee

      Ha ha, ‘shining beacon’ I like your satire.

    • gentlegiant161

      Abramovich now lives In Israel, well he’s got a passport there now anyway and ten years free from any scrutiny on his financial status as he is Jewish…
      Didn’t get his visa renewed in UK and didn’t even see the cup final…
      Let’s see who else the UK declines.

      • Guest

        Keep up. The British government has said that Mr Abramovich is now welcome to visit on his Israeli passport. He must be a changed man – or the British government must be utter hypocrites. I know which I believe.

        • Jay Bee

          Keep up. Abramovich may visit the UK, but he is prohibited from ‘working’ there….

          • Guest

            Work? Are you for real?

          • Jay Bee

            Work Definition :-Physical or mental effort or activity directed toward the production or accomplishment of something.

        • gentlegiant161

          “Those with Israeli passports are non-visa nationals, which means they do not need a visa to come to the UK as a visitor for a maximum period of six months.”

          He added: “Israelis are required to obtain a visa if they want to live, work or study in the UK.”

          • Guest

            So what?

        • Neroli

          Yes so do I! You should try keeping up!

        • Bystander

          that must be your personal newspaper who wrote about it, hehe

    • Neroli

      You do very well on your own! In the last 10 years €110bl has flowed to Cyprus from Russia

  • Bruce

    With the current Government in Cyprus turning a blind eye to law and regulation-breaking by developers, lawyers, accountants and bankers, banks in Cyprus can continue to play both sides.
    Circulars and statements by lawyers and accountants on the need for greater scrutiny of real estate customers just provide smokescreens.Will the President close down what is a flourishing business for him and his close of kin?

    • Guest

      Any examples, or proof?

      • Title deeds scandal 1000’s affected.

        • Vlad Ab

          Staged scandal to extract additional commission…

          • The scandal exists because properties are re-mortgaged before they are sold. The owner is then collateral to the bank and can have it repossessed.

      • JS Gost

        Wilbur Ross, BoC and almost any Russian company in Cyprus.

      • Vlad Ab

        hahahaha
        your people lick our asses everyday here, we shit on you, and you keep licking – isn’t it a proof?
        I am your Boss, and you’re my slave, slave of my money hahahahaa

        • Guest

          You should be banned, Foxtrot Oscar you drunken swine.

          • Vlad Ab

            You should stop licking… hahahahahaaaaaa

  • Wanderer

    Sounds like Cypriot banks decided to “out-regulate” themselves out of existence. While they over-focus on engaging in this blanket bureaucratic nonsense rather than on turning a profit for their shareholders, banks in other European countries are happy to take on their fleeing customers. (with SEPA and all you do not really need a local bank account anymore) Seriously, what’s all this fuss is about, those sanctions apply to a minuscule number of individuals and companies, yet Cypriot banks go insane and harass thousands of people with this nonsense. A number of my Russian friends moved their accounts elsewhere in Europe and never looked back due to BoC and Hellenic Bank… well, essentially ceasing to be banks and rather becoming meaningless (and not sustainable business-wise) bureaucracies. I suppose haircut-2 is nigh.

  • almostbroke

    ‘ no man ( or country ) can serve two masters’

    • JS Gost

      Cyprus will bend over for anyone, as long as they think it is a one night stand…… too harsh. Grow up and think about it.

      • Vlad Ab

        Cypriots are the best ass-lickers on the planet. We shit on them as much as we can, and they still smile and serve us)) pathetic…

  • desres

    I am currently in the USA and when I mention that I live in Cyprus, do I get, the island of love, Aphrodite, beautiful country – no- Oh that’s where the Russians launder their cash!

    • Bystander

      On the other hand bad publicity is still publicity. Back in 1994 I was calling a major US software manufacturer for support, and, when I told them I am calling from Cyprus, and it is an island, they told ‘that’s Caribbean region then’.

  • Lev

    Russian opposition journalist and outspoken Putin critic murdered in Kyiv hours ago.
    .

    • Bystander

      Resurrected