HELSINKI/NICOSIA (Reuters) - Cyprus’s banking system, which is being restructured under an international bailout, is more vulnerable to money laundering than previously thought, a report commissioned as a condition of the rescue said.
Auditor Moneyval and financial advisory firm Deloitte found due diligence and safeguards by Cypriot banks to be insufficient in some cases, according to a summary report of their findings.
“The data included in Deloitte’s analysis exposes deficiencies in the implementation of preventative measures by the audited institutions,” said the report, dated May 10 and used in discussions by the Eurogroup of euro zone finance ministers earlier this week.
The report, marked “confidential”, was also used by the Finnish finance ministry to brief parliament and made available in response to calls from media and opposition politicians for greater transparency over European Union matters.
Accusations the island was a conduit for illicit cash had overshadowed Cyprus’s attempts to secure financial aid, partly to prop up an outsized banking sector burnt by losses on loans to crisis-hit Greece.
The International Monetary Fund, the European Commission and the European Central Bank, known as the ‘troika’ of lenders, agreed to extend a 10 billion euro ($13 billion) lifeline to Cyprus in March.
Moneyval, a Council of Europe anti-money laundering (AML) committee, had “significantly revised” its previously more favourable assessment on Cyprus’s compliance with AML regulations, according to the report.
Moneyval’s last assessment of Cyprus was in late 2011.
Unlike previous assessments, which reviewed regulations in place to curb illicit activity, the new audit covered banking in practice. It included a sample of 390 bank clients, including the top 180 depositors and 90 borrowers with more than 2 billion euros in deposits.
The Cypriot central bank said in April that Moneyval had visited the island from March 19 to 31.
Business profiles of customers, fundamental to any measures to curb potentially illicit activity, were “generally not properly established” by Cypriot banks, the report said.
Some 70 percent of the most complex ownership structures had nominee shareholders, and, on average, three layers between the customer and the ultimate or “beneficial” owners.
Thousands of non-Cypriot companies are registered in Cyprus, taking advantage of its low tax rate and network of treaties with more than four dozen countries to avoid double taxation.
Even though banks are expected to know who beneficial owners are, awareness of clients with higher-risk profiles was not robust, the report said, and many had not been detected or flagged by the banks.
Both auditors said banks failed to report a significant number of suspicious transactions to authorities.
Deloitte’s forensic analysis of customers’ transactions revealed 29 potentially suspicious transactions in the past 12 months, none of which were identified by banks as requiring scrutiny or reporting to authorities, it said. ($1 = 0.7705 euros)
Editing by Catherine Evans/Ruth Pitchford