MONEYVAL finds Cyprus’ AML efforts wanting By Andrew Tottenham, Managing Director, Tottenham & Co February 19, 2020 at 12:30 am MONEYVAL, or more formally the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism, is the monitoring entity of the Council of Europe that assesses compliance with the main international standards to counter money laundering and the financing of terrorism. The Committee has issued a report based on its months-long visit to Cyprus. The purpose of the visit was to evaluate how Cyprus is implementing the EU AML/CFT (Anti-Money Laundering and Combatting the Financing of Terrorism) requirements of Financial Action Task Force. In Europe, the Fifth Anti-Money Laundering Directive encapsulates the latest requirements. It is all very well signing up for and legislating/regulating for them, but if they are not being applied properly, there is not much point in having them. Cyprus was hoping for a clean bill of health from MONEYVAL, considered critical for the country’s reputation as a business and banking centre. Currently, only two international banks, Citibank and The Bank of New York Mellon, provide correspondence bank services for dollar transactions. A glowing report would allow Cyprus to join the first tier and mean other mainstream foreign banks could start offering the same services. A little bit of history. Cyprus joined the EU in 2004 and the Eurozone in 2008. Prior to joining the Eurozone, Euro deposits in Cyprus banks were held as “foreign deposits” on their balance sheets and had much higher liquidity requirements than the local currency at the time. Once Cyprus joined the Euro, these assets shifted to become local currency and subject to much lower liquidity requirements, which allowed the banks to lend more. A credit glut ensued. Cyprus used to sell itself as an international tax haven, with low taxation and high rates of interest on deposits. Some of the banks did a scant job in terms of customer due diligence and sources of funds, with the result that deposits at the Cypriot banks ballooned. In 2008, the island had a GDP of just €18 billion, but bank deposits in excess of €70 billion. Almost half of this is purported to have come from Russia. Cyprus was believed to be an easy target for “round tripping”: Funds would be transferred into a “clean company’s” account at a Cyprus bank from Russia with no or few questions asked about the account owner or the source of funds. The funds were then transferred back to Russia as “foreign investment”. Proceeds of criminal activity in Russia could find their way back to Russia as “clean” money and, even more alarmingly, that same clean money could find its way into global financial system. Because of this, Cyprus became something of a pariah and recent governments have done much to clean up the country’s image as a money-launderer’s paradise. Hence the collective holding of breath from the business community in anticipation of the report. In the event, it was not a clean bill of health. The headline of the report was, Cyprus should pursue money laundering from criminal proceeds generated outside of the country more aggressively. The main thrust of the report was that the real estate and the trust and corporate-service sectors did not fully implement the AML/CFT processes. The report admitted that “significant strides” had been made, but there was much more to do. Cyprus sells citizenship to foreign investors above a certain size and trust companies and real estate have become attractive propositions for these people. Lack of transparency in both these sectors aids launderers in hiding and cleaning their money. During their investigation, the MONEYVAL team visited C2, Melco’s temporary casino in Limassol, Cyprus. In Cyprus, Melco operates three satellite casinos and one temporary casino. The temporary casino will close when the casino in the integrated resort, City of Dreams Mediterranean, opens in late 2021. The investigative team expressed its concern that AML/CFT compliance at C2 had “weaknesses” and that casino personnel did not have a good grasp of the risk of money laundering and especially terrorist financing. The concern was increased, because the intended opening of City of Dreams Mediterranean, in the words of the MONEYVAL inspectors, represented an “aggressive expansion, including significantly increasing the size of the gaming operations, attracting foreign junket operators, and attracting foreign VIP customers”. In the eyes of the MONEYVAL team, the risks will become magnified once the new casino in the resort opens. To be fair to Melco, the company had already hired compliance experts to beef up their AML/CFT processes and staff training. In response to the report, Melco issued a statement saying that it welcomed “a strong and compliant regulatory framework”, was cooperating with Cyprus authorities “to implement all AML regulations”, and was “dedicated to industry-leading and best-practice AML/CTF procedures in all our operations”. Given the international pressure on the country to improve its AML/CFT credentials, it is extremely unlikely that the Cyprus National Gaming and Casino Supervision Commission (NGCSC) will want to jeopardise those by implementing a “lighter-touch” regulatory environment as far as AML or CFT are concerned. I am sure that junket operators will be heavily scrutinised and the casinos’ AML/CFT practises will be picked over with a fine-tooth comb. Melco likely wants to attract VIPs to its latest resort when it opens, whether through personal-invitation or junket programs. The VIP sector will be an important source of revenue for the casino. The Head of the NGCSC, Nick Tofiluk, was formerly with the UK Gambling Commission (UKGC) and will be extremely aware of the deficiencies found in AML/CFT processes being utilised in the UK’s land-based casino sector and the measures put in place to improve them. However, one look at London’s high-end market will see the devastating impact that the demands from UKGC for thorough customer due diligence have had on this sector. In 2018, the high-end London market generated GGR of approximately £250 million. After fines from the UKGC for deficiencies in operators’ KYC, source-of-wealth and source-of-funds processes and demands for higher standards, the London VIP sector has collapsed. Many VIPs do not like that level of intrusion. In the year to November 2019, London’s high-end segment was worth £135 million, almost half of what it was. This will not bode well for Melco’s VIP ambitions at its new Cyprus resort.