The crucial role and functioning of financial institutions in the economic area are unquestionable today. Financial institutions gather capital through deposits, a significant portion of which they then lend to a broad range of borrowers. Thus, it’s not surprising that this concentration of wealth and the economic influence it entails are susceptible to illegal activities.
Banks, as intermediaries in the flow of credit and capital, are due to the nature of their operations particularly vulnerable to both organised crime and economic criminality. As a result, they are often subject to public criticism. In any case, a prerequisite for taking appropriate protective measures is to enhance knowledge and detection methods of modern forms of criminal and illegal actions related to banking activities.
The legitimisation of income from illegal activities, also known as ‘money laundering’, is the process through which individuals who have acquired income from illegal activities attempt to conceal the true origin of these funds. Once successful, they retain control over these illegal revenues and provide legitimate cover for the source of their funds. In simple terms, criminals use this process to essentially hide the origin of their illegal income, either through banking institutions or with the assistance of professionals who often unknowingly contribute to their legitimisation.
As mentioned above, combating the legitimisation of income from illegal activities requires immediate action to make this criminal activity less attractive. In an effort to combat this phenomenon, the 2007 Law (Law No. 188(I)/2007) on Combating Money Laundering and Terrorist Financing was enacted. The main purpose of the Law is to recognise and impose penalties on the legitimization of earnings from illegal activities, and to provide for the seizure and confiscation of such monies and/or assets acquired through them.
Specifically, the Law stipulates that individuals involved in financial and related activities must establish and maintain adequate monitoring systems to detect indications of money laundering from illegal activities. The Law requires all persons conducting financial and other related activities to establish and maintain adequate or appropriate systems and procedures to monitor their businesses and their overall financial system to prevent it from being used for the purpose of money laundering from illegal activities. In fact, these monitoring procedures should have two main objectives: firstly, to assist in the recognition and reporting of suspicious transactions, and secondly, to ensure the consistent application of the ‘know your customer’ principle and the maintenance of appropriate records.
Indicatively, among other things, some of the measures that financial institutions must follow to combat money laundering from illegal activities include:
- Customer identification and due diligence procedures.
- Transaction record-keeping procedures related to the identification of customer transactions.
- Internal reporting procedures and reporting to the Unit for Combating Money Laundering (MOKAS) by the designated personnel.
- Other internal control, risk assessment, and management procedures aimed at preventing and obstructing money laundering illegal activities and the financing of terrorism.
- Thorough examination of each transaction that is considered high risk due to its nature, especially complex or unusually large transactions, and all transactions conducted without apparent economic reason.
- Measures to inform employees about the above procedures, legislation related to the legitimisation of income from illegal activities and the financing of terrorism, Guidelines issued by the competent Regulatory Authority, and relevant European Union Directives.
- Provision for employee training in the recognition and handling of transactions that are suspected to be related to the legitimisation of income from illegal activities and the financing of terrorism.”
The Central Bank of Cyprus (CBC) plays a significant role as a supervisory authority for the implementation of provisions related to preventing money laundering from illegal activities. CBC’s supervision includes, among other things, monitoring and evaluating the implementation of legal requirements, European regulations, and guidelines related to combating money laundering from illegal activities.
It is worth noting that during supervision, monitoring, and assessment of the implementation of both the Law, European Regulations, and the issued guidelines, the CBC relies on assessments, decisions, and recommendations from organisations such as the European Banking Authority, the Financial Action Task Force (FATF), the Council of Europe’s Moneyval Committee, and other international bodies. Additionally, for the preparation of guidelines for supervised entities, typology, modern trends, and the risks of using the financial system for money laundering purposes are taken into account, as well as internationally promoted best practices for preventing and combating this phenomenon. Both the Supranational Risk Assessment carried out by the European Commission and the National Risk Assessment conducted by Cypriot authorities under the auspices of the Advisory Authority, established according to the Law, are central references for the supervisory framework.
CBC’s supervisory framework for combating money laundering from illegal activities, apart from issuing guidelines, circulars, and directives, also includes the submission of preventive statements and reports from supervised entities at predetermined intervals and reporting periods, as well as on-site inspections at regular intervals.
Based on these factors, the CBC creates enhanced supervisory programs to ensure that supervised entities comply with their obligations and take necessary measures to combat money laundering from illegal activities.
It should be noted that the CBC has the authority to take strict measures if a supervised entity fails to comply with the Law and guidelines related to combating money laundering from illegal activities. These measures include imposing monetary fines, modifying, suspending, or revoking the operating license of a supervised entity, and terminating or removing any board member, director, or officer.
Despite the applied measures, the success of the effort to address money laundering from illegal activities is constantly evaluated based on the credibility and political will of the state to implement the already robust legislative framework, without ignoring the legitimate interests of credit institutions and financial organisations. The fight against money laundering from illegal activities is crucial both for combating organised crime and for maintaining the integrity of the financial system.