Although the new, stricter rules cost banks more they are largely happy to pay the added cost because it eventually helps save money that could be lost to fraudulent clients, fines and brand-tarnishing reports Angelos Anastasiou
Central Bank directives issued in recent years in a bid to address every possible loophole in the know-your-customer and due-diligence processes during lenders’ client onboarding threaten to turn banking into a more cumbersome and red tape-ridden field, even as Cypriot banks have struggled to recover from the nearly-fatal blow the island’s banking system sustained three years ago. As with most things in life, striking a balance necessarily requires trade-offs between competing interests, but the timeless question posed is where effective regulation protecting the system ends and over-regulation that stifles it begins.
The latest in a string of tougher banking rules issued by the CBC came in April in the form of an amendment to anti-money laundering rules, mandating that banks, in addition to the required paperwork, need to have face-to-face meetings – physically or electronically – with every customer they take on through a third party, within three months of onboarding. The intermediary business is huge in Cyprus, with law and audit firms undertaking the opening and management of bank accounts on behalf of clients, mostly foreigners. But what’s more, the CBC directive requires banks to arrange such meetings with all existing referred clients, too, or exit the relationships. That’s a lot of work.
“Such directives are typically in compliance with decisions of international bodies like [Council of Europe committee] Moneyval and the Financial Action Task Force [FATF],” Supervision Division chief at the CBC Yiangos Demetriou told the Sunday Mail.
“They are certainly measures in the right direction.”
Hellenic Bank, one of the largest banking groups on the island, agrees. “Based on the CBC’s directives, Hellenic Bank has fully complied with the new procedural requirements, with a view to increasing the quality of both the information gathered, as well as services offered to clients,” spokesman Yiorgos Sklavos told the Sunday Mail.
As for the added work, it’s totally worth it, the bank said. Although acknowledging some challenges, it noted that these were manageable through the fusion of cooperation and technology.
“As Hellenic Bank, we have proceeded to fully implement the [CBC’s] April 2016 amending directive, and any problems or challenges cropping up are addressed with the cooperation of the bank’s departments and units,” Sklavos said.
“In the modern world, technology offers numerous alternatives, which the bank routinely employs.”
Of course, if the right direction is eliminating the possibility of banks establishing relationships with bogus or shady clients, the CBC’s argument is perfectly reasonable. But there are other ‘right directions’, not least of which are the need to avoid subjecting banks’ customers to undue hassle and bureaucracies, as well as the additional operating cost for Cypriot banks and the need for them to remain competitive internationally in the field of ease of doing business.
Earlier this year, despite Cyprus’ improved performance evaluation in the World Bank’s annual Doing Business report for 2015, undersecretary to the president Constantinos Petrides said he found the scores “shocking”.
Still, the added checks, hassle and paperwork are a necessary evil, the banks say, and even customers appreciate this.
“Naturally, all bank customers will need to help the banking system in this process [of strengthening service quality], which will result in the upgrading of Cyprus’ banking offering,” Sklavos said.
“Any added cost, whether it comes in the form of new systems, the upgrading of existing systems, or the creation of new procedures across the bank’s operations has been undertaken by the bank in order to incur the least possible inconvenience to our customers. We are satisfied with the positive response by both individual and corporate customers, as well as foreign ones, to our effort.”
Translation: although the new, stricter rules cost us more, we are happy to pay the added cost because they eventually help us save money that could be lost to fraudulent clients, and certainly in fines and brand-tarnishing if our AML firewalls are found wanting. This makes sense – for the banks. Hence why they agreed to the measures.
“All of these decisions are made following consultation with the banks themselves,” Demetriou said.
“The final directives are either agreed in their totality, or, where the banks might disagree, we explain the reasons the introduction of some provisions is required.”
The value of effective controls on KYC – and KYT; ‘know-your-transactions’ – rules is obvious. They form one of the pillars supporting a healthy and safe banking system, which, as proven by the unprecedented banking crisis that culminated in the 2013 fiasco, Cyprus didn’t have. Although not directly attributable to due-diligence practices, substantial international chatter did suggest weaknesses in Cypriot banks’ AML procedures, particularly on foreign-held accounts. Cypriot officials repeatedly denied accusations of systematic money-laundering, but the need to further strengthen AML rules was included as a requirement in the memorandum of understanding between the government of Cyprus and international creditors back in mid-2013.
“What we’ve always said is that we were, and remain, stricter than many other countries,” Demetriou argued.
We’re just small, he added, suggesting that the real reason Cypriot banks got attacked was because they had grown too big for their own good. But the response to their eventual collapse might be spiked with some overcompensating, as Cypriot banks seem to be held to a higher standard.
“Now, we introduce even stricter rules in hopes that everyone realises we are clean.”
Asked whether history might have turned out differently, had Cyprus regulators imposed these tougher regulations on banks pre-2013, Demetriou said “this isn’t something I would like to comment on”.
