I. Amendment of Cyprus AML Law
The Cyprus Parliament has approved on 18 February 2021 an amendment to the Prevention and Suppression of Money Laundering and Terrorist Financing Law 188 (I) 2017 (the “AML Law”), which has been issued in the Official Gazette on 23 February 2021 and has therefore become effective. The amended AML Law implements the EU Directive 2018/843 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (the “5th AML EU Directive”).
II. Introduction of the Crypto Asset Services Providers in Cyprus AML Law
One of the key changes introduced by the amended AML Law is the introduction of the notion of “Crypto Assets Service Providers” which are included in the definition of “Obliged Entities” (entities that are obliged to abide by the AML Law) and are defined as the persons that provide one of the below services:
(a) exchange between crypto assets and fiat currencies;
(b) exchange between crypto assets;
(c) management and/or transfer and/or retention and/or safekeeping, including custodianship, of crypto assets or cryptographic keys or means enabling control over crypto assets;
(d) offering and/or selling crypto assets, including the initial public offering; and
(e) participation and/or provision of financial services related to the distribution, offering and/or sale of crypto assets, including the initial public offering.
The amended AML Law defines “Crypto Assets” as a digital representation of value, that is neither issued nor guaranteed by a central bank or public authority, is not necessarily connected with a legally established currency and does not have the legal status of currency or money, but is accepted by persons as a means of transaction or investment, may be transferred, stored or traded electronically and is not:
(a) fiat currency, or;
(b) electronic money, or;
(c) financial instruments as defined in n Part III of the First Appendix of the Law on the Provision of Investment Services and Activities and Regulated Markets.
The Cyprus Securities and Exchange Commission (“CySec”) has been appointed as the supervising authority for the purpose of supervising the compliance of Crypto Asset Service Providers with the AML Law; issuing directions in relation to their obligations and imposing sanctions in case of infringement. The Crypto Asset Service Providers that offer services from or in Cyprus must be registered in a registry to be kept by CySec and will be entitled to such registration on the condition that they fulfil the relevant requirements as included in the directions to be issued by CySec.
III. European Union
On a European level, the European Commission has issued on 20 September 2020 the proposal for a Regulation on Markets in Crypto Assets (“MiCA Regulation”) which sets out a regime that regulates issuers of Crypto Assets and providers of crypto asset services, including exchanges, custodians, and firms providing investment type services in respect of crypto-assets and its scope is limited to crypto assets that do not qualify as financial instruments.
The proposal for the MiCA Regulation forms part of a broader package of measures that falls under the Commission’s Digital Finance Strategy, whose aim is to further enable and support the potential of digital finance in terms of innovation and competition while mitigating the risks. The Commission’s Digital Finance Strategy also includes a legislative proposal for a pilot regime to test distributed ledger technology (“DLT”) market infrastructure solutions for the trading and settlement of financial instruments, which would apply to crypto assets qualifying as financial instruments.
IV. The future of the crypto assets industry
The changes to the AML Law constitute the first legislative act towards the creation of a regulatory framework in Cyrus for the crypto assets industry and is considered as a great step for its development in Cyprus. More changes are expected on a national and European level, which are highly anticipated by the relevant stakeholders, considering the importance of legal certainly and a clear regulatory regime in this industry.
Materiality and vulnerability of the banking sector
Cyprus has become an international business centre mainly due to its tax system, its strategic geographical location and the advanced professional services sector. The fact that foreign investors find that Cyprus is an attractive location for their investments and for the establishment of their business, has led to the development of the Cyprus economy and especially of the banking sector, nevertheless, it has exposed the industry to greater money laundering (“ML”) and terrorist financing (“TF”) risks.
Cyprus has conducted the National ML/TF Risk Assessment in 2018 (the “NRA”) -which will be conducted every four years- whereby it was found that the most vulnerable sector that is primarily exposed to external ML threats is the banking sector, followed by the administrative service providers (“ASPs”) and the real estate sector. This is primarily attributed to the banks’ involvement with, among other, i) businesses that are not resident in Cyprus with often complex corporate structures, ii) cross-border wire transfers with counterparties in various jurisdictions, iii) businesses that have been introduced by third parties e.g. ASPs, iv) businesses that use nominee shareholders/directors and trusts.
The Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (the “MONEYVAL”) through the Cyprus Fifth Round Mutual Evaluation Report, issued in December 2019 (the “MONEYVAL Report”) has commented on the ML/TF risks in conjunction with the materiality of the banking sector, where it was found that the banking sector is “weighted as being the most important in Cyprus based on its materiality and risks” given that the “the aggregated assets are – even after a considerable reduction following the financial crisis – about two and a half times the GPD of Cyprus” and “the two largest banks are accounting for two thirds of the overall assets”.
Therefore, the size and the international expansion of the sector along with the favourable Cyprus regimes, render Cyprus an attractive venue for individuals seeking to hide the proceeds of crime among the legitimate and sometimes complex business structures, through the variety of services offered by the banks, such us private banking, deposits, loans, cash deposits, wire transfers, credit cards, trade finance, client accounts and correspondent banking accounts.
Policies and supervision
The Central Bank of Cyprus (the “CBC”) is the authority responsible for the supervision of the licensed credit institutions in Cyprus and for the implementation of the anti-money laundering policies.
CBC has issued the fifth edition of the Directive on the Prevention of Money Laundering and Terrorist Financing, in February 2019 (the “Directive”) pursuant to section 59(4) of the Prevention and Suppression of Money Laundering Law of 2007 (188(I)/2007), as amended (the “Law”) which transposed into Cyprus law the EU Directive 2015/849 (the “4th EU Directive”) on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing. The Law specifically states that the Directive is binding and compulsory to the institutions addressed to and the supervisory authority for monitoring the Directive’s implementation is the CBC.
The CBC, for the purpose of its evaluations and assessments, also takes into consideration policies, decisions and recommendations issued by the Financial Action Task Force (“FATF”), which is the intergovernmental organisation responsible for developing policies to combat money laundering and terrorism financing; MONEYVAL; the European Banking Authority; the World Bank and the International Monetary Fund.
It is important to note that further amendments to the Law and the Directive are expected, as the EU Directive 2018/843 (the “5th EU Directive”), which amends the 4th EU Directive, is yet to be transposed into Cyprus law. Cyprus has received a formal notice by the EU for non-compliance, as the deadline for the transposition was in January 2020.
The risk-based approach
The risk-based approach is regarded as an important pillar for a successful strategy against ML and TF.
Through the risk-based approach, the banks are expected to identify and assess the ML and TF risks they are exposed to and take the necessary measures. The focus of banks should be to assess the nature of the risks they are facing and then apply the relevant and necessary preventive measures, having regard to the nature and complexity of the bank’s products and services, their size, business model, corporate governance arrangements, financial and accounting information, delivery channels through which the customers can transact their business, customer profiles, geographic location, volume and size of transactions and countries of operation. Considering the above factors, it is important to note that each bank’s controls might differ depending on their operational complexity.
The due diligence policy of banks
The credit institutions are required to appoint an Anti-Money Laundering Compliance Officer (the “AMLCO”) who will be responsible, among other, for the preparation of the institution’s policy on how new customers will be accepted and the conditions and the procedures under which a customer relationship will be terminated; for cooperating with the relevant departments of the institution in order to design the necessary policies and procedures in compliance with the Law; for recording and assessing on an annual basis the institution’s risks for ML and TF, especially before the launch of new products, business practices or new technologies.
The banks, through the AMLCO and based on instructions from the CBC, ought to establish a specific due diligence policy, that includes the applicable risk-based approach and the measures to be applied in case the bank is exposed to low or high ML/TF risks.
The initial stages of the customer due diligence (the “CDD”) process should be designed to help banks assess the ML/TF risks associated with a proposed business relationship and determine the level of CDD to be applied. Following the completion of the initial stage of the CDD, depending on its risk exposure, the bank should request the relevant amount of information and proceed with the necessary verification checks (standard or enhanced due diligence). Where banks are not in a position to apply the appropriate level of CDD, due to non-cooperation by the client (e.g. refusal to provide the requested information) or if for any reason the bank cannot verify the information received, then the banks are required to not enter into the business relationship or terminate an existing business relationship.
In addition, if during the business relationship between the client and the bank, or during the CDD process the bank is suspicious of any ML/FT activities, then the Unit for Combatting Money Laundering (“MOKAS”) should be notified accordingly. The MOKAS is established through section 56 of the Law and it’s the national centre for, inter alia, receiving and reviewing disclosures of suspicious transactions reports and other relevant information in connection with suspected ML or TF activities; issuing administrative orders for postponement of transactions; issuing guidance to financial institutions, professionals and others.
The MONEYVAL has reported that the banks file suspicious transaction reports to MOKAS far more frequently than other types of financial institutions and that in comparison with other sectors, banks have a generally sophisticated understanding of their exposure to ML and TF risks. In essence, it was found the banking sector has gradually become more effective in addressing and mitigating the ML/TF risks, which is largely the result of the supervision practices of CBC. However, there is a widespread perception in Cyprus that banks are particularly intense in their collection and evaluation of CDD information and that due to their rigid CDD processes, they create unnecessary hurdles to clients and service providers.
The coronavirus pandemic has had and will continue to have a significant impact in our personal and professional lives, in a way that has proved challenging and difficult to predict. Each government around the world has been taking measures not only in terms of health protection and for the purpose of reducing the spread of the virus, but also to safeguard their country’s financial stability, avoid business bankruptcies, maintain unemployment at a reasonable level and in general minimise as much as possible the economic downturn both for the private and public sector.
Some of the measures taken by the governments worldwide as well as in Cyprus, include the fiscal support through the distribution of funds to businesses, self-employed workers and employees. More specifically, financial support is provided directly to those affected by the crisis who meet the eligibility requirements, through the introduction of schemes for i) the partial and complete suspension of business operations, ii) the support to self-employed workers, iii) granting of special sick leave and the provision of an allowance to employees that cannot attend work for health reasons or to self-isolate and iv) granting of special parental leave and the provision of an allowance to employees in order to care for their children, following the suspension of operations for schools and kindergartens.
However, the capabilities of the public treasury are limited and therefore the government cannot be expected to directly provide financial support to every individual and business in need, for an indefinite period. As mentioned above, the duration of the crisis cannot be predicted, and the governments must manage to remain sustainable and versatile throughout this period.
The banking system is seen by some as the sector that will contribute in “healing” the economy, as it needs to be part of the solution by providing liquidity. Credit institutions as lenders are therefore expected to contribute to the government’s efforts in boosting the economy by ensuring that the affected businesses and individuals that meet certain eligibility criteria will be supported financially as needed and by taking part of the credit risk.
The below factors should be taken into consideration:
– The risk to be taken by the banks should be assessed in conjunction with the great challenges they will face for the duration of the crisis. The fact that lenders will default on their loans and that central banks have introduced the imposition of lower interest rates for future loans, will inevitably put pressure on the banks’ profits.
– The banking sector has lost its trustworthiness by the public, especially after the 2013 crisis, where it was seen as the problem rather than part of the solution.
Measures currently adopted by the Cyprus Government in connection with credit institutions:
The Cyprus parliament has enacted the Emergency Measures for Credit Institutions and Supervising Authorities Law 33 (I) 2020, whereby the Minister of Finance is authorised to issue decrees for its implementation, following a decision by the Council of Ministers and after consulting with the relevant supervising authority.
The first decree, dated 30 March 2020, orders that the obligation to settle any loan instalments, including the interest to credit facilities that have been granted and/or purchased and/or managed by credit institutions, is suspended for natural persons, public entities, self-employed and businesses (the “Beneficiaries”).
The above-mentioned suspension only applies to Beneficiaries that were not in arrears for the payment of their instalments beyond 30 days from the relevant due date, on the 29th of February 2020 and face financial difficulties as a result of the coronavirus pandemic.
The Beneficiaries ought to notify in writing (by email, fax, post) the credit institutions of their eligibility and interest in connection with the suspension, by submitting the relevant notice as included in the relevant decree.
After the expiry of the suspension period:
– the total accrued interest that has been suspended, will be added to the total loan amount,
– the suspended loan instalments (capital and interest) will not be immediately payable to the credit institution, unless otherwise agreed between the credit institution and the Beneficiaries,
– the repayment period for the loan will be automatically extended as required until the final settlement of the loan amount (capital and interest).
For the duration of the suspension, the Beneficiaries have the right -by notifying the credit institution accordingly- to settle any instalments that would have been due, had the suspension not been applied.
The measures will be valid from the 30th of March 2020 until the 31st of December 2020.
Additional suggested measures in connection with credit institutions: Bank Guarantees
In addition to the above, the Minister of Finance has proposed the following measures for boosting the economy through the involvement of banks:
- Government guarantees of up to Euro 2 billion to be provided to banks that will cover: i) loans in the amount of Euro 1,750,000,000 for businesses and self-employed workers and ii) part of the interest rate in the amount of Euro 250,000,000 for natural persons, businesses and self-employed workers.
- The above-mentioned amounts will not be used to cover any existing loans, but can be used to cover interest of existing loans that fall within the government’s scheme.
- The government guarantees will cover 70% of the potential damages from the above loans and the remaining 30% will be covered by the banks, regardless of whether the loan is with collateral or not.
- The duration of the loans will be between 3 months to 6 years, except for current accounts, where their duration will be for 1 year.
- The businesses and self-employed workers will be eligible for the loans, on the condition that they did not have any non-performing loans as at the 31st of December 2019.
- Guarantee to cover loans that have been or will be provided during the period starting from the 2nd of April 2020 until the 31st of December 2020.
- Liquidity to be used to cover the ongoing needs of the self-employed and businesses, settlement of their debts and the payment of salaries.
- Restrictions will apply as to the maximum amount to be provided to each individual or business and to the purpose for the loan.
- The relevant businesses and self-employed workers will only be eligible for the scheme, on the condition that none of their employees has been dismissed for reasons of redundancy from the date of issuance of the decree until the 31st of December 2020.
- Example of interest rate to be applied:
10.1. For small and medium sized businesses:
- For loans of up to one-year duration, 0,75% with collateral and 1,25% without collateral.
- For loans of up to 3 years duration, 1% with collateral and 1,5% without collateral.
- For loans of up to 6 years duration, 1,5% with collateral and 2% without collateral.
10.2. For large businesses:
- For loans of up to one-year duration, 1% with collateral and 1,5% without collateral.
- For loans of up to 3 years duration, 1,5% with collateral and 2% without collateral.
- For loans of up to 6 years duration, 2,5% with collateral and 3% without collateral.
The above-mentioned measures have been criticised by some political parties and have not been officially approved by the Cyprus parliament yet. The criticism is based on the arguments that the financial support should be provided directly to the public and that the banks should not be given the opportunity to take advantage of the crisis to their benefit. The lack of trust in the banking sector and the potential lack of government control for the provision of the said loans, creates scepticism by part of the public and the opposing political parties, that are yet to be convinced that the Cyprus banking sector is trust worthy and ready to assume the role of the “saviour”. However, the Minister of Finance clarified that the financial support would not be provided to the banks, but through the banks to the individuals and businesses in need. In addition, he supports that through the suggested measures the banks will be burdened with part of the risk and will be used as a transport mechanism of liquidity, without making profit.
In consideration of the controversies on the matter and the ongoing discussions, it is expected that before the approval of the scheme for government guarantees, the above measures will be amended based on recommendations from all the political parties and other relevant stakeholders, including the Auditor General.
Following the on-site visit carried out by the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (“MONEYVAL”) to the Republic of Cyprus from the 13th of May 2019 to the 24th of May 2019 for the purpose of assessing the effectiveness of the Republic’s Anti-Money Laundering and Counter Financing of Terrorism (“AML/CFT”) system as well as its level of compliance with the 2012 Recommendations of the Financial Action Task Force (“FATF”), MONEYVAL issued its Fifth Round Mutual Evaluation Report (the “Report”) on the 12th of February 2020.
MONEYVAL has issued the Report in its capacity as the permanent monitoring body of the Council of Europe which is entrusted with the task of assessing compliance with the principal international standards to counter money laundering and terrorist financing and the effectiveness of their implementation, as well as with the task of making recommendations to national authorities in respect of necessary improvements to their systems.
In general, the Report notes that even though there are some areas in need of improvement and further attention, Cyprus effectively formulates its national AML/CFT policy and strategy and implements adequate measures against money laundering and terrorist financing. That said, MONEYVAL positively assessed Cyprus’ overall level of compliance and effectiveness based on the following key findings:
- Cyprus has good understanding of the money laundering risks that it faces to a large extent and a number of measures have been effectively deployed to mitigate some of the main risks. In some aspects, particularly where the Central Bank of Cyprus (CBC) is involved, the understanding is very good.
- Cyprus has good understanding of Terrorist Financing risks with a strong counter terrorism infrastructure in place.
- There is a good level of co-operation and coordination between the competent authorities both on policy issues through the Advisory Authority and at an operational level between the various competent authorities.
- The banking sector has become more effective in mitigating risks. This is largely due to the increasingly sound supervisory practices of the Central Bank of Cyprus.
- The Financial Intelligence Unit (“FIU”) has the ability to support the operational needs of competent authorities through its analysis and dissemination functions.
- Cyprus has developed mechanisms which are capable of delivering constructive and timely assistance to other countries both on a formal and informal basis.
- The customs authorities are very conscious of risks associated with the jurisdiction’s frontiers. The authorities apply effective measures by monitoring movements including potential smurfing, by referring matters to the FIU where there are ML/TF suspicions, and by compounding offences to confiscate the amounts when the context of the case allows for it.
- Significant efforts were made by the supervisors to establish a comprehensive ASP regulatory and supervisory framework, which have resulted in an increased level of compliance by the ASP sector and improved the quality of BO information maintained by them.
Regarding the areas in need of improvements and further attention the Report goes to provide a number of recommendations that Cyprus should implement for its system to be strengthened. Some of the key recommendations provided are the following:
- Cyprus should conduct a more comprehensive assessment of the following areas:
- the vulnerability of the real estate sector;
- the Cyprus Investment Program, legal persons and arrangements; and
- a more in-depth TF assessment;
- The existing coordination framework in relation to PF should be strengthened.
- Cyprus should communicate the results of national risk assessments to real estate agents and the casino.
- The Police should continue developing its expertise to effectively handle complex analysis cases generated by the Financial Intelligence Unit (“FIU”) and should be more proactive in seeking Mutual Legal Assistance (“MLA”) in relation to ML cases involving proceeds of funds in Cyprus originating from criminal activity outside of Cyprus.
- The authorities should continue taking measures to improve the quality and quantity of both Money Laundering and Terrorist Financing suspicious transactions reports, especially in the ASP and real estate sectors.
- Cyprus should be more aggressive in proactively pursuing all types of ML and particularly regarding foreign predicate proceeds, instead of merely adopting a reactive approach to investigate ML parallel to domestic predicate criminality.
- The efforts already shown in exploring and harvesting all existing avenues of potential identification for ML, including disseminations from the FIU and incoming MLA, should continue and be enhanced further.
- Where financial investigations are to be carried out at local level, or by the separate central units such as the Drug Law Enforcement Service or the Operations Office, the authorities should ensure these units have sufficient resources and capacity for this.
- Cyprus should take steps to ensure that its legal and regulatory framework adequately addresses the ML/TF risks associated with transactions involving real estate, and that AML/CFT regulation of real estate brokers is effective. This could involve requiring the use of a real estate broker to conclude a transaction in high value or otherwise high-risk real estate, extending formal AML/CFT obligations to persons engaged in the business of real estate development, and/or extending formal AML/CFT obligations to the Department of Land and Surveys with respect to the operation of the Land Register. Additionally, Land Register information should be made available to all persons with a need to know that information, even without permission of the owner of the real property involved, to the extent consistent with data protection requirements.
- Cyprus should consider whether the casino can responsibly manage the ML/TF risk associated with its current configuration, and if not then whether the current configuration should be changed in ways that provide more certainty about AML/CFT effectiveness, such as to a membership model.
In conclusion, the Report provides a positive assessment for Cyprus considering the fact that Cyprus has achieved Compliant or Largely Compliant ratings in most of the 40 FATF Recommendations with none non-compliant rating and its AML/CFT measures have been assessed as substantially effective in three out of the eleven effectiveness pillars and moderately effective in the remaining eight.
The link to the relevant Report can be found here
The Amendment of the Transfer and Mortgage of Immovable Property Law which took effect on the 13th of July 2018 marked a significant turning point for the process of foreclosures in Cyprus as it provided the legal framework for fast track private sale of mortgaged property whilst restricting the borrower’s ability to suspend or discontinue the sale of their mortgaged property.
Remarkably, the amendment of the law stipulates that its provisions apply in every case/proceeding of a contract mortgage, registered at the Land and Surveys department, before or after the date of entry into force of the present Law. Hence, it becomes clear that the amended law is to be applied retrospectively (including both new and existing proceedings) regardless if their proceedings commenced prior to the 13th of July 2018.
The safeguard of Borrowers against foreclosure proceedings is the filing of an appeal against the announced foreclosure, asking the Court to suspend the said foreclosure proceedings. However, there is a substantial differentiation which has been brought about by the amendment of July 2018. Previously, the law provided that one of the grounds for filing an appeal against the foreclosure proceedings was the existence of a pending civil action against the mortgaged debt. Therefore, the borrower could protect his mortgaged property from foreclosure by filing a civil action challenging the mortgaged debt. In the cases where the bank had already filed a civil action against the borrower regarding the mortgaged property, the borrower could file a counterclaim challenging the banks claim and this would in turn satisfy the grounds for filing an appeal against the foreclosure proceedings.
In turn, this meant that the banks faced significant delay as they often had to wait for the adjudication of the pending civil action before proceeding with foreclosure and many borrowers strategically filed civil actions and counterclaims challenging the mortgaged debt in order to gain time and evade foreclosure proceedings.
In an attempt to nullify this safeguard which had led to floodgates of civil actions concerning nonperforming loans and mortgaged debts, the amendment of July 2018 was introduced to provide speed and efficacy for the Mortgage Creditors. As a result, the amendment of the law on July 2018, abolished the borrowers right to file an appeal against the foreclosure process on the grounds of the existence of a pending civil action regarding the mortgaged debt.
On which grounds can a borrower file an appeal to suspend the foreclosure proceedings?
Since July 2018 the existing grounds for filing an appeal against the foreclosure process include:
(a) that the foreclosure notice does not comply with the required form and content, requirements.
-The Mortgage Creditor is obliged to serve a certain written notice to the borrower informing them that the mortgaged property will be sold by auction, this notice has the title and form «Type IA». This notice has to be sent, not less than thirty (30) days in advance of the scheduled date and follow a certain for and content as set out by the Transfer and Mortgage of Immoveable Property Law.
(b) that the notice was not duly served;
-Certain legal requirements regarding the service of Notice «Type IA» were not met.
(c) that the time period to make payment given to by the mortgage creditor had not ended at the time this notice was sent;
-Before scheduling the date and time of the auction, the borrower is given a period of not less than 30 days to make payment of the whole debt, by written notice.
(d) that an interlocutory injunction has been issued in favour of the mortgage debtor in accordance to Article 32 of The Courts of Justice Law;
– In certain cases the borrower may apply to the Court for an injunction suspending the foreclosure proceedings. These orders are issued only in special circumstances and there is still limited case law on the matter. However, some of the grounds on which the borrower may apply for such an injunction include (and are limited to) instances where the mortgage creditor is clearly acting in bad faith, where the mortgage creditor and the borrower were in the process of substantive efforts for restructuring of the loan or material efforts for some settlement, where the borrower has evidence that challenge the debt claimed by the mortgaged creditor etc.
(e) that a protective decree has been issued in favour of the mortgage debtor under the provisions of The Insolvency of Natural Persons (Personal Repayment Schemes and Debt Relief Orders) Law;
(f) the mortgage debtor whose participation is approved to the plan ESTIA for dealing with non-performing loans and supporting vulnerable social groups” or to any other State aid plan for credit facilities, provided that, he/she accepts and complies with the agreement and his/her credit obligations resulting from that plan.
How can one know if they run the risk of foreclosure?
If you are an interested person or the borrower of a nonperforming loan which is secured by mortgage, then you must pay attention to the written notices sent by the mortgage creditor.
Notice «Type Θ»
The process of foreclosure begins with the service of Notice «Type Θ». This notice informs the borrower or the interested persons that in case of difficulty in the payment of their debt then they are invited to contact the mortgage creditor in order to examine if they meet the socioeconomic conditions for restructuring.
Notice «Type I»
The next notice served by the mortgage creditor to the interested persons or the borrower is Notice «Type I» accompanied by a statement of account which indicates the total debt, interest and any other expenses. This notice invites the borrower to repay the total debt within a deadline not less than 30 days from the date of service of Notice «Type I». The notice also informs the borrower or interested person that in case of failure to repay the total debt within the given deadline, then the mortgage creditor may exercise the right to sell the mortgaged property.
Notice «Type IA»
In the event that the mortgage borrower fails to comply with the deadline of Notice «Type I» then the mortgage creditor may proceed and serve Notice «Type IA» with which the borrower is informed that the mortgaged property will be auctioned. This notice must be served at least, 30 days before the scheduled date and time of the auction of the mortgaged property.
Notice «Type IB»
Notice «Type IB» is usually served simultaneously with Notice «Type IA». This notice invites the borrower to appoint an evaluator within 10 days from the date of receipt of the said notice and conclude his/her own evaluation of the mortgaged property if he wishes to do so. Failing to appoint your own independent evaluator will not affect or delay the process of foreclosure. On the contrary, the mortgage creditor will appoint two evaluators, one on the behalf of the creditor and one on behalf of the borrower.
Upon first attempt to sale the mortgaged property via private auctioning, the price is set to correspond to 80% of the market value of the mortgaged property. (As explained above, the market value of the property is decided based on the evaluations of two independent evaluators and a specific formula).
In the event of unsuccessful auctioning at 80% of the market price, then 3 months later, the mortgage property may be auctioned at 50% of its market price.
In conclusion, it is important to highlight that the deadlines for appealing against the foreclosure proceedings are very tight and often the borrowers do not have the necessary time frame to react and seek legal assistance. It is advised that in such cases one should seek legal assistance as soon as possible and definitely upon receipt of Notice «Type Θ» and Notice «Type I».
For further assistance legal assistance and enquiries as to whether you have grounds for appeal against the foreclosure proceedings of your mortgaged property please contact a member of our team.
The recent decision of the European Court of Justice in the case C-26/13, Árpád Kásler and Hajnalka Káslerné Rábai versus OTP Jelzálogbank Zrt combined with the empowerment and almost equation of the exchange rate of Swiss Franc and Euro, has spurred the issue of the conclusion of loans in Swiss Francs in a crucial issue for many borrowers – not only in Cyprus. In this respect, the conclusion of loan agreements in Swiss Francs has already received a huge social and political dimension.
What is, however, important and worth having knowledge about, especially for those who have concluded loan agreements with Banks in Swiss Franc, is the decision in the Kásler case.
According to the case in question, Kásler and Káslerné Rábai have concluded a loan agreement with a hungarian bank, which provided, among others, that: «the lender [namely the bank] is to determine the amount in HUF of each of the monthly instalments due by reference to the selling rate of exchange for the foreign currency applied by the bank on the day before the due date».
The European Court of Justice, relying on the Directive 93/13/EEC, held, inter alia, but most importantly that the above-mentioned clause of the loan agreement is unfair due to its vague and incomprehensible wording. More specifically, the Court has established the principle that:
«as regards a contractual term such as that at issue in the main proceedings, the requirement that a contractual term must be drafted in plain intelligible language (article 4.2 of the Directive) is to be understood as requiring not only that the relevant term should be grammatically intelligible to the consumer, but also that the contract should set out transparently the specific functioning of the mechanism of conversion for the foreign currency to which the relevant term refers and the relationship between that mechanism and that provided for by other contractual terms relating to the advance of the loan, so that that consumer is in a position to evaluate, on the basis of clear, intelligible criteria, the economic consequencesfor him which derive from it».
Furthermore, the European Court of Justice acknowledged to the Hungarian Court the ability to replace the unfair and invalid clause with a national default provision, provided that the national legislative order permits so. On this ground, the Hungarian Court decided that the instalments falling due would be paid to the bank on the basis of the Euro – Swiss Franc exchange rate applicable on the day of the conclusion of the loan agreement.
The Directive 93/13/EEC has been incorporated in the Cypriot legislation by the Unfair Terms in Consumer Contracts Act 1996.
It is worth noting that both the aforementioned legislation and the decision of the European Court of Justice are not applicable to all loan agreements. The Act in question only applies in relation to such contractual clauses that have been concluded between a bank and one or more consumers and which has not been individually negotiated, in the sense that the clause and/or the contract to which the clause forms part, has been drafted in advance and the consumer has therefore not been able to influence the substance of its content, even if he made an effort to do so.
In order to assess the unfairness of such a contractual clause, the Court takes into account the nature of the offered services, the prevailing circumstances at the time of the conclusion of the loan agreement and all the other clauses of the contract in question.
Of course, another factor of major importance that the Court takes into account is whether and, if so, at what extent the consumer/borrower has been induced by the bank to conclude the loan agreement in Swiss Franc (as it is the case in the majority of loan agreements.)
Referring back to the decision of the European Court of Justice in the Kásler case, it is important to mention that the Court has not established a principle on unfairness of absolute and universal application and has neither suggested that all contractual clauses, included in loan agreements, providing for the calculation of instalments falling due on the basis of the exchange rate applicable on the day of the payment of the instalment or, in any case, on the basis of an exchange rate different from the one on the day of the conclusion of the contract, should be considered as invalid.
Nevertheless, the decision clearly and rigorously defines that a clause in a loan agreement providing for the calculation of the instalments must present, in a transparent, clear and comprehensible to the borrower way, the conversion mechanism of Swiss Francs in Euros, the way of its operation and also the relationship between that mechanism and the release mechanism of the loan so that the borrower to be able to weigh the potential risks and assess in a clear and comprehensive way the financial effects and the meaning of concluding a loan agreement in Swiss Francs.
Certainly, although a clause, which merely provides that the monthly instalments for the repayment of a loan will be paid in Euros on the basis of the exchange rate of Euro – Swiss Francs or the selling price of Swiss Franc on the day of payment of the instalment, is grammatically correct and thus understandable, it is regarded as unfair. This mainly occurs since there is no mechanism of clear and comprehensive explanation to the borrower of the way of calculation of the financial impacts, positive or negative, which are involved in a decision to conclude a loan agreement in Swiss Francs.
Admittedly, the aforementioned decision of the European Court of Justice has equipped the borrowers with a strong negotiating means against the banks. Therefore, the borrowers are advised to use it properly in order to take full advantage of it.
Apart from that European decision, our law firm, through an in-depth study, has reached a series of decisions of foreign national Courts applying to the Common Law legal system. In these cases, the Court indicated that a bank, which has provided a loan agreement in a foreign currency (namely Swiss Franc for our purposes), is obliged to act using reasonable skill and care for the protection of the interests of the consumer who does not possess the special knowledge of how the monetary system and the exchange rate fluctuation work neither is informed about any of the mechanisms for protection against such fluctuations. Although the foreign Court decisions are not binding since they are only used as guidance to the Cyprus Courts, the Cyprus courts tend to be guided and follow foreign decisions, particularly in the absence of respective national decisions.
Taking all the above into consideration, it is our advice to the borrowers and also to the potential borrowers to make use of the decision of the European Court of Justice while negotiating a loan agreement with the bank. Of course, it would be better for the borrowers, at first instance, to obtain legal advice in order to be informed as to whether they can proceed on the basis of that decision. In any case, however, the borrowers must be extremely careful before signing any of the documents presented to them by the bank. Obviously, banks will attempt to convert all the loan agreements concluded in Swiss Francs in Euros in order to avoid the possibility that the borrower may require, through negotiations or through civil actions, the application of the exchange rate of Swiss Franc – Euro on the day of the conclusion of the loan agreement.
A. Karitzis & Associates LL.C is sufficiently informed and remains always at the disposal of the borrower for legal advice in relation to the extent of his individual rights against the bank and also for guidance on the way of negotiating a loan agreement with the bank. At this point of time, except for providing legal advices, our law firm, following instructions from its clients, has already initiated preparing and filing civil actions against banks for loan agreements concluded in Swiss Francs.
Having in mind that the general concern regarding the loan agreements concluded in Swiss Francs, our lawyers are at your disposal for any questions and/or clarifications concerning the issue in question without any commitment from your side.