How over-compliance in the banking sector threatens to kill Cyprus as a business center.

How over-compliance in the banking sector threatens to kill Cyprus as a business center.

Cypriot banks are under extreme pressure, the last few months, by their regulator, the Central Bank of Cyprus, as regards the opening and operation of bank accounts of companies belonging to non-Cypriots.

This pressure culminates in an over-compliance policy that threatens to kill Cyprus’s position as an international business center.

It all began last May 2018 when the US Treasury Department’s Assistant Secretary for Terrorist Financing Mr. Marshall Billingslea visited Cyprus and met with the Finance Minister, the Foreign Minister and the Governor of the Central Bank.

Marshall Billingslea who took the job of the Assistant Secretary of the Treasury in June 2017, has an interesting job description. On the website of the US Department of Treasure we read that his role is to work:

“with members of the national security community throughout the U.S. government, foreign governments, and the private sector to identify and address threats posed or advanced by illicit finance. , WMD proliferation, and other criminal and illicit activities. His areas of focus include money laundering, terrorist financing, WMD proliferation, and other criminal and illicit activities domestically and across borders.”

In a press release dated 04/05/2018, the US Embassy in Cyprus noted about this visit:

“…The purpose of Assistant Secretary Billingslea’s trip was to enhance cooperation between the United States and Cyprus to ensure that Cyprus has a strong and healthy financial sector. In a series of meetings with Foreign Minister Christodoulides, Finance Minister Georgiades, Central Bank Governor Georghadji, and other officials, Assistant Secretary Billingslea discussed the positive improvements and reforms that Cyprus has made in its anti-money laundering regulations and regulatory oversight. Discussions today also explored areas where the United States and Cyprus can continue to partner to fight threats to the international financial sector.

Positive, long-term economic development requires a strong and well-regulated banking sector. It is vital that illicit actors know that Cyprus is not open for business. The United States was encouraged by the commitments made by Cypriot officials today and will continue to work together to combat corruption, money laundering, and other financial threats.”

The question that is immediately posed is who are the illicit actors to whom we must show that Cyprus is not open for business? And to put it bluntly who are the Americans after?

Well, everybody knows that the US is after Russia and in particular the Russian billionaires (or oligarchs as they are often labelled),  that use Cyprus as business and banking center.

The US considers countries like Cyprus, Latvia and others as hubs where illegal Russian money is easily parked and later invested or used in illegal – in their opinion- business activities.

They, therefore impose political pressure on governments and their regulatory authorities to implement such measures so that it would be impossible for Russians to do business in Cyprus and other countries that are considered Russian friendly.

In this article I do not express a view as to the merits of this policy and as to whether our government should follow it.

What matters for us is that Cyprus must remain and be considered as a reliable and stable international business center that has in place whatever regulatory framework is needed and comply with the international standards as regards money laundering, terrorist activities e.t.c.

Our country has a long tradition in the business services sector which was not built in a night but took years of hard work. To this end many players contributed including governments, public employees, the banking sector and business professionals.

From what I understand the present government supports this model and we heard nothing to the contrary. I would point to the recent interview of the Minister of Finance Harris Georgiades in Bloomberg on the 21st of September 2018 who said that the government is moving on with its reform agenda providing “more opportunities for new business and new investment“.

I wonder, however,  how is new business and new investment going to come to the island when it takes at least three months to open a bank account for a new business?

And further, how are going to keep any new or old business , if for every financial transaction our banks ask for excessive , unnecessary and sometimes stupid details?

So, to return to the US policing of our banking sector. As far as Cyprus is concerned the fact of the matter is that the way the commercial banks try to implement the US directives, has adverse effect on the  banking system and as a result on the position of Cyprus as an international business center.

First of all the regulator, that is the Central Bank of Cyprus, gives vague and insufficient guidance to commercial banks.

Last June it sent a letter to all commercial banks which would be followed by consultation and would consummate to an amendment of the AML directive. The letter stated:

“The Central Bank of Cyprus shall incorporate in the forthcoming revision of the directive for the prevention of money laundering and terrorist financing, issued to credit institutions (…), certain requirements for business relationships with so-called ‘shell companies’,”

It then went on to give a definition of what a shell company is which is not necessary to reproduce here (You can read an article in the Cyprus Mail on the matter) and asked banks to submit comments by the 31st of July 2018.

The definition of shell companies in the aforementioned letter is vague and created uncertainty as to what is included or not. In addition the tone of the letter and possibly the message that was conveyed to banks in private meetings by the Central Bank,  created panic in the market. Commercial banks in an attempt to comply with the amendment that is forthcoming, started closing bank accounts blindly in a totally rushed and improper – to say the least – manner.

In the midst of the hot Cypriot summer, all professional associations under the lead of ICPAC consulted with each other and offered their comments.

In a joint letter to the Central Bank dated 26/07/2018 , eight professional associations*,  even went as far to submit a revised draft for consideration to the Central Bank. The letter states:

“As a matter of principle, we all agree with the aims of the said circular, since the notions of legitimacy, substance, presence and transparency are imperative in today’s international business. Reading through it, we believe that its wording could be refined, in order to better address the legal and operational environment, enhance its robustness and clarity, as well as effectively address the initial concerns raised by the industry. We have therefore taken the joint initiative to propose a revised text of the initially drafted circular, which is herewith attached. Our principal comments, as reflected in the suggested text, are the following:”

Thus the spirit of the letter of the industry to the Central Bank was very positive and the suggestions made very constructive.

By the time of writing of this article (03/10/2018) , the Central Bank of Cyprus failed to issue the final amended AML directive or take any other action.

As a result commercial banks are at a dead end. On the one side they do not want to run the risk of being penalized or targeted by the US,  and on the other hand they do not know what to do in order to be considered as compliant.

The result is that commercial banks are closing bank accounts by the dozens, in many cases without sound business reasons,  and they refuse to accept new clients. In this tsunami many legitimate businesses are victimized and entrepreneurs that worked with Cyprus for many years are sent away.

Further and most important is the fact that whereas the US intervention was targeted against the Russian oligarchs, the way this policy is implemented affects all non-Cypriots entrepreneurs !

So, in our quest to follow the US directives we implemented a blind policy which is no doubt destructive for Cyprus as an international business center.

In the services sector the signals that are being sent out by the players of the economy are of paramount importance. And the signal that we send at the moment is “Go away”!

The services sector in Cyprus is not without flaws. Yes it should be regulated. Yes we must be strong against money laundering. Yes we do not want fake businesses. I do not advocate or suggest that we should go back to the state of affairs prior to 2013.

But, the way things are happening the last few months has no rationalization.

We have reached the position where prospective clients are considered by banks as suspects or even criminals.

So I think it is time for the Central Bank to step in. The suggestions made by the professional associations are to the right direction, well balanced,  and should be adopted.

Any more delay in this matter will be fatal for the services sector.

Unless of course the decision is to haircut it and we will be the last to know…