What did Cyprus's national risk assessment find about money laundering?

EU law requires every member state to identify, assess and understand the laundering and terrorist financing risks that affect it, and to keep that picture current. In Cyprus the work is coordinated by the Advisory Authority for Combating Money Laundering and Terrorist Financing, and a summary is published on the Ministry of Finance website.

The national assessment is not only for the authorities. It is meant to help obliged entities carry out their own risk assessments, which must weigh risk factors relating to customers, countries, products, services, transactions and delivery channels. A firm whose business sits in a sector the national assessment rates as vulnerable is expected to reflect that in its own risk assessment and controls.

Cypriot banks have a large international client base, so the assessment found them more vulnerable to the proceeds of crime committed abroad than to local crime, and rated the banking threat high. One factor that raised it was access to banks by legal entities with unclear economic activity, no physical presence beyond a registered address, no employees, or a registered seat in a country with little tax transparency.

Against those vulnerabilities, the assessment gave weight to the Central Bank of Cyprus's regulatory and supervisory framework and to the banks' own internal controls, which together form an important line of defence. The sector's overall risk was rated medium-high.

The sector is made up mainly of fund managers and Cyprus investment firms (CIFs), most of which trade on foreign exchanges or over the counter. Cash is rarely used, and client money usually arrives through credit institutions, which greatly reduces the placement risk. Abuse is therefore more likely at the layering and integration stages. The sector can be used both to launder money made elsewhere and to generate criminal proceeds through insider dealing, market manipulation and securities fraud.

The threat was rated medium-low, mainly thanks to the licensing framework and CySEC's supervisory focus on effective compliance functions; the main threat is international. Vulnerability was graded by type of firm. Online brokers offering CFDs through electronic trading platforms were rated medium-high, because of non-face-to-face clients and highly liquid products, although small deposits routed through regulated banks and payment providers mitigate this. Traditional investment firms serving wealthy and institutional clients with large transactions, and open to misuse for insider dealing or market manipulation, were also rated medium to high, even though their personal contact with clients and bank-routed money are mitigants. Fund managers were rated medium.

Life and non-life insurance form a small part of the Cypriot financial sector, and the assessment rated the money laundering risk as low, with no systemic impact on the economy.

The vulnerability lies in life insurance and annuities, specifically their investment element: money paid in can come back out later as an apparently legitimate payment. People take out these policies mainly to save for retirement, with maturities typically of 15 years or more, and for a tax benefit that is reduced proportionately if the policy is not kept for at least six years.