Cyprus banks praised by US for stronger sanctions enforcement

US sanctions imposed on entities and individuals in Cyprus are not targeting the country, but “oligarchs and arms traders” enabling “the Kremlin war machine” to continue the war in Ukraine, US Ambassador in Nicosia, Julie Fisher, said on Wednesday, adding that the Cypriot banks in some cases have adopted higher standards than other EU countries with regard to the sanctions implementation.

Fisher addressed an interbank seminar on “Sanctions and Export Controls: Best Practices” that brought together representatives of the Central Bank of Cyprus, compliance officers of the Cypriot banking sector as well as officials from the US Treasury, Justice and State Departments to discuss the state in the field of sanctions implementation.

During the seminar, compliance officials presented data showing the sizeable reduction of the Cypriot banking sector's exposure in oversees business, as well as the reduction of the sector’s exposure in Russian and Belorussian clients which correspond to less than 1% their balance sheet today compared to 12.5% in 2014.

Addressing the seminar, Fisher highlighted the role of the banks’ compliance department in improving the banking sector’s reputation internationally, adding that this work is acknowledged and highly respected in Washington.

The US diplomat stated that amid Russia’s invasion of Ukraine, financial systems and compliance departments play a crucial role in “disrupting Kremlin’s work” and putting an end to the “tragic war.”

“Our designations while they may touch entities and individuals in Cyprus, we are not targeting Cyprus, but instead targeting the oligarchs, the arms dealers, high tech and dual use goods traders, who are enabling the Kremlin’s military machine to produce sophisticated missiles, aircrafts and bombs and used to devastating effect against innocent civilians in Ukraine,” she said.

She called for “constant alert,” by the banks’ compliance departments, as “sanction evasion networks use transhipment hubs in Europe, the Middle East and Asia to move high-tech goods first to countries which are allowed to import US technologies like Cyprus before sending them on elsewhere.”

Fisher pointed out that banks in some cases have proceeded with the closure of accounts of high-risk clients and sanctioned individuals' relatives, adding that “some caution on that suspicion is warranted certainly to ensure that those doing nothing wrong are not negatively affected.”

She furthermore noted that “we have seen some Cypriot banks adopt and follow the best practice standard namely a prohibition of clients involved in arms, military or defence sectors, making it easier for banks to close those clients’ accounts.”

“This standard was adopted by Cyprus banks on your advice, the advice of compliance departments and it is a higher standard than many others in the EU,” she went on to say.

On his part, Blake Princhett, State Department Senior Advisor on threat-financing, noted that the work of compliance departments to combat sanction evasion is “incredibly important.”

“As Ambassador Fisher noted your country has taken significant steps to curb arms diversion and to work on issues of sanctions violations, to look at money-laundering activities so we want to continue working on this together,” he said.

As he noted since Russia’s invasion of Ukraine back in February 2022,t he US and its partners have imposed sanctions on more than 5,000 entities and individuals in Russia and abroad, whereas the EU has imposed 14 sanctions packages.

Noting that compliance means extra costs for the banks, Princhett added that the compliance field is not static, as “every time we impose sanctions, the Russians are adopting and changing, looking for new vendors, new partners.”

“So it is really about the network we have to target,” he added.

In this context, he referred to the US executive order 114 to impose secondary sanctions on foreign financial institutions who are engaging in significant transactions with Russia’s military industrial base.

Outlining the reforms in the compliance framework of the Cyprus banking system, Marios Skandalis, Director of Bank of Cyprus’ Compliance Division, said that especially following the 2013 financial crisis in Cyprus, the banking sector with the Central Bank in the lead proceeded with adopting a host of measures which were designed “not merely to enhance the compliance function but to reform the culture of the economy and restore confidence in its financial system.”

He added that “the Central Bank of Cyprus in collaboration with other regulatory bodies, but with a leading role in Cyprus has significantly strengthened over the years the regulatory framework governing financial institutions not just in a timely, but rather in a proactive way ahead in most cases of other European countries.”

Skandalis referred to the stricter regulations against money-laundering, enhanced KYC procedures (Know-your-client), requirements for sanction implementation and reporting, as well as the stricter regulations on ultimate beneficial owners (UBOs).

He moreover noted that Cypriot banks have terminated non-transparent shell companies, noting that further to the 2018 provision “Cyprus had and still has, I think, the most precise clear definition of what constitutes non-transparent shell activity and gives clear instructions of what to do in such a case which is to terminate the relationship,” he added.

Banks, he went on to say, are monitoring clients portfolios and transactions against all international sanctions, including the US and the UK, in real time and on a daily basis. He also noted that staff in compliance departments have tripled to 3% of total staff.

Skandalis highlighted that the Cypriot banks’ “most daring initiatives” involve adhering to the sanctions outside their regulatory obligations, that is from OFAC of USA and the OFSI in the UK.

Moreover, Skandalis said the banking sector has shown significant reduction in the exposure to international business and added: “Let us not forget the size of the banking sector which was primarily supported by oversees activities in 2012 which was 8 times of the GDP of the country has dropped today to less that 3 times our GDP and this has been the result of this monitoring process and stricter framework we have applied.”

He also highlighted the “remarkable de-risking from exposure to Russian and former Eastern European countries”, recalling that the exposure to Russian and Belorussian clients dropped from 12.5% in 2014 to less than 1% today.