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Why is combating money laundering so important after all? The International Monetary Fund (“IMF”) has argued in April 2014 that money laundering and terrorist financing can threaten the stability of a country’s financial sector or its external stability more generally. The way IMF views it, is that:
“…effective anti-money laundering measures are essential to protect the integrity of markets and of the global financial framework as they help mitigate the factors that facilitate financial abuse…”
Money laundering activities may cause negative consequences which may include distortion of international capital flows, financial instability and negative microeconomic performance, resulting to welfare losses and possibly the destabilization of economies of other countries, especially since the globalization of markets is rising. While on the contrary and simultaneously it could be argued that, merely keeping wealth secret is not per se intolerable neither strictly speaking immoral.
Put simply, money laundering is the process through which illegitimate money is obtained or generated by criminal activity which is obscured so as to conceal the link between the money and the illegal activity. It is the attempt by launderers to render it impossible for evidence to be brought before a court which would allow the court to establish the origin of the money. Typically money enters as dirty money in the cycle of transactions and comes out as clean money at the other end; therefore enabling the launderer to use the money again without fear that any civil or criminal sanction will be imposed upon him.
Terrorist financing entails the raising and processing of assets to finance terrorist activities. Terrorist financing is at times more complicated than money laundering since some of the funding may have come from legitimate sources, which are then mixed with illegitimate assets therefore making it more difficult to prove their origin.
The Legislative background:
Launderers and terrorist financiers exploit both the complexity inherent in the global financial systems as well as the differences between national rules and regulations; with jurisdictions of weaker or more ineffective controls attracting more illicit activity.
Fine, every country and every international organization has developed anti-money laundering (“AML”) and combating terrorist financing (“CTF”) rules and regulations; the pivotal point however is, to what extend are such measures being implemented and what the opportunity cost of implementing such measures is?
Arguably, the stricter the regulations the greater the burden on the financial and legal industry to implement them; and therefore, the greater the possibility that in an effort to combat money laundering, economic recovery may be hindered in light of the extensive burden of information which is required before any transaction could be effected.
There is no doubt that money laundering and terrorist financing are global phenomena, therefore any attempt to combat such activities should have an international dimension otherwise the application of such measures, merely at a domestic level, will be to no avail.
A bounteous array of international conventions and measures have been introduced throughout the years in an attempt to battle illicit money including, the Vienna convention 1988, against illicit traffic in narcotic drugs and psychotropic substances; The International convention for the suppression of the financing of Terrorism 1999 which aims to block the flow of terrorist funds without disrupting the circulation of capital and the continuation of business across global markets, which have been ratified by Cyprus. Cyprus has also ratified the 1990 Council of Europe Convention on Laundering, Search Seizure and Confiscation of the proceeds of Crime, the 2005 the Council of Europe Convention on Laundering, Search Seizure and Confiscation of the proceeds of Crime and the UN Convention against Corruption ratified in 2008.
Further Cyprus is also in full harmonization with the European Union Directives, with the latest being Directive 2005/60/EC of the European Parliament and of the council of Europe on the prevention of the use of the financial system for the purposes of money laundering and terrorist financing.
Cyprus also applies the recommendations of The Financial Action Task Force on Money Laundering (FATF) a ministerial task force on money laundering, established in 1989, which strives to develop a worldwide standard for AML/CFT whilst at the same it time cooperates with other key organizations like the IMF, the UN as well as the World Bank. FATF has also issued recommendations in June, 2013 regarding politically exposed persons (“PEP’s”) which are very detailed and are followed by professionals in a variety of sectors. By issuing a list of recommendations which set out a universally applicable framework of AML/CTF measures, the FATF recommendations are now recognized as the principal standard in this field. Cyprus is a member of the Moneyval Committee of the Council of Europe (Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures), and associated member of FATF. In 2013, Moneyval reported that Cyprus is in compliance with the International anti-money laundering rules and regulations.
The fight against money laundering has also been strengthened by Interpol, Europol and the world customs organization joining this battle, by providing, inter alia, technical assistance and training on AML methods.
Measures implemented in Cyprus to combat money laundering:
Cyprus is an attractive business destination; possessing a strategic geographical location with an extensive reputation in providing high quality services, a common law legislative network and an extensive list of Double- tax treaties. Cyprus has made considerable progress in enforcing AML regulations. Domestically, such activities are combated by The Prevention and Suppression of Money Laundering Activities Law 2007 (Law 118(I)/2007) as amended until today, which came into force on the 1st of January 2008 therefore harmonizing the Cyprus legislation with the European Union Directive (Directive 2005/60/EC).
The analysis of the Cypriot AML regime has been assessed both by Moneyval and Deloitte in 2013, mainly employed to evaluate the banking system, concluding that the Cypriot legal regime is adequate and in line with international standards with Deloitte noting that in some areas, the Cypriot requirements are more rigorous than other jurisdictions.
Arguably, the Cypriot legislative approach may rightly be seen as being more demanding from the FATF recommendations in certain areas, for instance, the Cypriot law requires that any individual who acquires 10% of the shareholding of the company must be adequately identified; this is a much higher threshold than the 25% ownership required under FATF.
Albeit the fact that the Law affords adequate protection in the fight against money laundering and terrorist financing; nonetheless, it is to an extent complicated and technical. According to the Law, banking institutions, investment firms, accountants and lawyers amongst other professionals are subject to the obligations of the Law. The Law is rigid, equipping the relevant authorities with immense powers, including the freezing of money, the confiscation of assets and the tracing of property.
Lawyer’s obligations: in brief
Activities and services falling within the ambit of the Law include, inter alia, the provision of services relating to securities, mergers, acquisitions of undertakings, provision of services for instance auditing, secretarial, nominee services, formation of companies and trusts. In cases where such services are rendered, then the requirements and obligations of the law arising from the provisions laid down in the Act, ought to be fulfilled.
It is of paramount importance that internal procedures are in place so as to detect and prevent money laundering offences. Money laundering offences, according to the law, will occur where conduct with regard to money or assets, deriving from a predicate offence is, converted or transferred with the purpose of concealing its illicit origin, or where an individual assists a person who is involved in the commission of such offence, or concealing or disguising the true nature of the property, or acquiring such property, or participating in any manner including providing advice for such activities.
Any person who knows or ought to have known that any type of property constitutes of proceeds which derive from the commission of an offence is liable to imprisonment and/or fine and/or both. The Law also criminalizes tipping –off; arguably criminalizing both tipping-off as well as imputing knowledge on the lawyers providing services which fall within the ambit of the Law . Knowledge, which is an element of the above offences, may be inferred from the objective factual circumstances of each case. All of the above lead to one conclusion that the burden for the lawyers is heavy and they have to obtain all the relevant identification documentation in order to be able to spot a suspicious transaction.
A suspicious transaction will be identified in cases for instance where the transaction is incompatible with the client’s known business activities or is inconsistent with the normal business of that type of client taking into account a variety of factors. This is where proper due diligence methods and proper KYC should be in place in each office. The obligation according to the Law arises as soon as the client establishes a business relationship with the law firm and continues to exist until the end of the business relationship. In cases where the client refuses to disclose their information then this might be an indication that the client is or might be engaged in money laundering activities and the lawyer will have to report the incident accordingly.
The Law establishes the Unit for Combating Money Laundering (“MOKAS”); as lawyers, whenever a suspicious transaction occurs, the Compliance Officer of each office must be notified through the firms’ internal procedure, who will accordingly notify the Cyprus Bar Association, as its supervising authority and/or MOKAS. MOKAS has the power to collect, search, classify and evaluate information relating to illicit activities and conduct the relevant searches where there is reasonable suspicion of the money laundering activities whilst at the same time, it cooperates with similar organizations abroad. MOKAS may make an ex-parte application to the court in order to enter into any building and conduct a search and may also apply by summons requesting the Court to order any entity or organization to disclose the Ultimate Beneficial Owners (UBO’s) of any entity, including any trust. Following the 2013 amendment to the Law, MOKAS may now conduct such searches where such a request is filed to MOKAS by any EU or other country. Therefore, Cyprus is actively increasing the cooperation with foreign countries.
The above mentioned legal framework evident in Cyprus indicates that unless there is a universally applicable standard, then launderers will seek to transact in jurisdictions where the regulations are less stringent. In 2013 FATF has issued a list with the jurisdictions which do not apply measures to protect the international financial systems. Such countries include Iran and the Democratic People’s Republic of Korea while jurisdictions with deficiencies that have not made enough progress include Turkey amongst numerous other jurisdictions.