Is excessive regulation burdening the Cyprus banking sector? Compliance officers weigh in

The December 2023 edition of GOLD magazine saw bank compliance officers share their insight on how the local sector—and their corporate and individual clients- are being impacted by stricter regulation and compliance requirements.

More specifically, in its cover story, GOLD asked the officers to consider the following: “Lately, there have been complaints that the banking sector in Cyprus has become increasingly burdened by what many perceive as excessive regulation and compliance requirements, making it challenging for both corporations and individuals to complete transactions. What is your perspective on this matter?”

See their responses below:

Marios M. Skandalis, Chief Compliance Officer, Bank of Cyprus: It is obvious that recent externally driven developments, like the Cyprus Confidential report, have superseded the need to explain the necessity of being ultra-sensitive about regulatory conformity and adhering to a strict governance protocol. It is now understood by everyone that the banking sector in Cyprus has not only assured its viability via the strict measures adopted in recent years but also safeguarded the country’s basic reputation! We have to admit that Cyprus' economic model, as it operated more than a decade ago, has failed. Unless we publicly accept this and follow a difficult path of honest and real remediation with painful reforms, our country will remain the target of accusations and we shall never be able to persuade our external stakeholders that they are undeserved. There is a huge difference between adopting strict remediation measures and reforming the business culture. The latter is the path that the Cyprus banking sector has followed over the last decade, driven and led by the compliance functions of the banks, and clearly, it is the path that all other stakeholders of the financial services industry in Cyprus need to follow as soon as possible.

Maria Aristidou Demetriou, Chief Compliance Officer, Hellenic Bank: Following the 2013 crisis, the banking sector faced several challenges, including reputational damage, regulatory scrutiny and financial losses emanating from regulatory fines and loss of business. The industry was forced to become more vigilant in its operations, revise its risk appetite and revisit its business model by limiting international exposure, restricting business from high-risk countries and industries, and limiting its reliance on third parties for customer due diligence. The challenging sanctions environment has also increased the need for further transactional scrutiny. Another reason why the banking sector has become more demanding when profiling customers or monitoring transactions concerns the expectations of all stakeholders in the service chain – regulatory authorities, the Government, accountants, lawyers, tax advisors, etc. – that the banks will act as the chain’s gatekeepers. If all the providers in the service chain were to exercise the same level of vigilance, the risks would decrease for everyone and services could be offered smoothly, without imposing excessive responsibility and risks on a single sector, which would also have a positive impact on the country’s reputation.

George Apostolides, Head, Compliance/AMLCO, Eurobank Cyprus: I would generally say that the difficulty or delay in executing transactions is not driven by compliance requirements per se but largely by persons/entities that wish to engage in complex transactions with high-risk countries or with high-risk entities/persons. Such transactions are considered inherently riskier and enhanced due diligence should thus be applied. On the contrary, I consider that increasing regulation, as well as additional compliance requirements, have enhanced the compliance framework of credit institutions in Cyprus, making it one of the most robust compliance systems internationally. The lessons learned from previous years, as well as the technical expertise and awareness among Cyprus compliance professionals, have improved the level of understanding in the application of Know Your Transaction (KYT) requirements. De-risking is an easy way to streamline operations and reduce challenges but such a decision must be taken with due care, taking into consideration the relevant European Banking Authority guidelines.

Symeon Symeou, Head, Compliance and AMLCO, AstroBank: We need to split the regulatory environment into two parts: (1) AML laws and Central Bank of Cyprus (CBC) directives focused on AML/CFT, Know Your Customer (KYC) and Customer Due Diligence (CDD), and (2) other regulations governing banking, investments (MiFID), and credit exposures. Most customers’ complaints stem from the former, which merits further explanation. Despite six years of negative FDI in Cyprus, 2022 saw a US$4.9 billion net inflow, mainly in the financial and insurance sectors. Cyprus has proved to be an attractive destination to foreign investors, with the banking sector having the knowledge, ability and capacity to facilitate large and complex transactions. Yet, past complaints revolved around Cypriot banks’ opening, servicing and retaining of international customers, peaking from 2018 to 2021, when banks underwent the de-risking of international business due to the CBC’s introduction of the “shell company” definition. This shift demanded a learning curve for all market players – in my opinion, it was a game changer for international business. Russian sanctions in 2014 and 2022 have further complicated matters, affecting both Cyprus-based customers dealing with Russia and the general banking landscape. However, these issues are now in the past, with banks adapting to the new practices and market participants becoming educated on new regulatory requirements. The Al Jazeera revelations and the recent Cyprus Confidential report reinforced the CBC's decision to introduce the “shell company” definition, aiding market acceptance of the new norms.

George Markides, Head, Compliance, cdbbank: First of all, let’s clarify that the regulation and compliance requirements are the same for all European countries. Therefore, the burden is not just for Cypriot customers. These regulations and requirements are the result of the market failures and the scrutiny that Cyprus is still under as regards Anti-Money Laundering (AML) issues. New regulations and closer monitoring by the regulators have increased the burden on banks and, indirectly, on their customers. This burden is translated into additional cost and time. In the short term, many people may perceive it excessive and unnecessary, but, in my opinion, it will prove to be valuable and necessary in the long run. The objective of these regulations and requirements is to protect the system, the banks and customers from risks they don’t realise that they are exposed to. There might be some corrective actions to mitigate the burden, such as the outsourcing of customer information from third parties or the sharing of information among financial institutions, but I am confident that these regulations and requirements will benefit consumers and society in the end.

Maria Demetriou, Manager, Compliance and Corporate Governance Division, and MLRO, National Bank of Greece (Cyprus): In recent times, the Cyprus banking sector has faced a surge in legal and regulatory requirements, reflecting a broader trend within the EU and globally. Despite the challenges posed by regulatory requirements, it’s crucial to highlight the advantages of adherence, which establishes trust and confidence among clients, signalling a commitment to prioritising their financial wellbeing. Consumer protection, mandated by regulatory measures, protects clients from unfair practices, fraud and financial misconduct. Through clear and comprehensive information, transparency empowers clients to navigate the financial landscape with confidence. It not only aligns with regulatory mandates but also cultivates an open and honest relationship between banks and their clientele. Moreover, security measures designed to prevent fraud and money laundering, and enhanced cybersecurity directly benefit clients, assuring that their transactions and personal information are held in the highest regard. National Bank of Greece (Cyprus) aims for a direct alignment with our business goals, our customers' journey and satisfaction through simpler processes in line with the local and European compliance framework and international standards.

Marianna Akkidou Mamantopoulou, Head, Compliance/Anti-Money Laundering Compliance Officer, Ancoria Bank: More and more regulations and compliance requirements are being imposed on the banking sector but, at the same time, the aim is to enhance financial stability, protect customers and prevent illegal activities such as money laundering and terrorist financing. While these measures are essential to safeguard the financial system and to ensure overall integrity, they can indeed pose challenges for both banking institutions and customers. These challenges include the need for significant investment in staff, automation and technology, staff training and more detailed administrative processes. Furthermore, increased compliance measures that help banks protect the Cyprus financial system can sometimes lead to more stringent customer due diligence procedures, potentially causing longer processing times and additional documentation requirements. It is important to note that a balance between regulation and promoting a beneficial environment for economic activity is a complex challenge that banking institutions are facing. This requires expertise enabling the implementation of a risk-based approach that also allows for a better operating environment for both financial institutions and customers.

The full cover story can be viewed in the December 2023 edition of GOLD magazine. Click here to view it.