Compliance Event with CIBA

Niki Charilaou

Manager Group Financial Crime Compliance Department

December 2019

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Contents

1. Main AML Risks associated with Cyprus Banks

2. Sharing of our Group Policies

• Group Customer Acceptance Policy

• Group Sanctions Policy

3. Shell Companies

4. BOC Due Diligence Procedures

• KYC – The Economic Profile

• KYC – Transaction Monitoring

• KYC – Review Process

• KYC – Transactions for the purchase of real estate

5. What Banks expect from the Investment Promotion Community

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Main AML Risks associated with Cyprus Banks

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• Loss of correspondent bank relationships (especially in USD)

• Fines by Regulatory Authorities – current elevated oversight

• Reputational Risk

• Risk of complete shut down

BOC Customer Acceptance Policy

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Taking into consideration the risk level of each client category and the risk appetite of the Bank, thepolicy provides:

• A list of entities classified as High Risk Customers, for which Enhanced Due Diligence Measuresapply, including consent from the MLCO and approval by Senior Management prior to theestablishment of any business relationship.

• A list of entities classified as Significant Risk Customers (physical and/or legal) for whichenhanced due diligence measures apply.

• A list of entities, accounts or transactions classified as not accepted

• BOC CAP currently establishes risk level based on single attributes of the clients which renderthem as High risk by default. With the adoption of the 5th AMLCBCD the Bank is moving to a moresophisticated risk scoring model, where a client’s AML risk will be calculated based on anautomated scorecard incorporating a number of parameters (customer type, geography,transactional activity, products, distribution channels, etc).

Some categories will remain High Risk by default as per the 5th AMLCBCD (eg. PEPs, residents inhigh risk countries, trusts/foundations, clients with complex transactions)

https://www.bankofcyprus.com/contentassets/8a666c6ca0c34b8caa62d932e1339dd6/group-customer-acceptance-policy.pdf

BOC Customer Acceptance PolicyNot Accepted Categories

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▪ Customers who:

▪ Carry out illegal activities or convicted for a crime considered to be a predicate offence

▪ Fail to provide adequate identification/financial information

▪ Are terrorists or dealing with terrorists

▪ Are from political regimes not recognized by UN

▪ Are subject to specific sanctions (i.e. EU, UN, OFAC), including close family members, closeassociates and related entities (irrespective of % of ownership)

▪ Customers connected to Iran (with the exception of individuals with an Iranian passport whosepermanent residence is in an EEA country or a third equivalent country)

▪ Customers connected to North Korea / Crimea Region

▪ Trusts that

o are governed by the Cyprus Legal framework but are not registered in the Cyprus Register

of Trusts, or

o are established in high risk countries (ie Strict sanctions, FATF / Moneyval / EU lists), or

o their ultimate beneficial owners are not determined (discretionary trusts), or

o their purpose is not compatible with the business activity/economic profile of the account

holder, or there is no legitimate economic reason for their establishment.

BOC Customer Acceptance PolicyNot Accepted Categories

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▪ Legal entities with Bearer Shares or whose articles allow the issuance of bearer shares.

▪ Clients with Complex Structures with no legitimate reason for the complexity

▪ Shell Companies as per the provisions prescribed in the 5th CBC AML Directive

▪ Foreign government organizations outside EEA without reasonable ground for establishing abusiness relationship

✓ Not accepted Industries:

▪ Military equipment and arms

▪ Military Missions

▪ Adult entertainment

▪ Dating

▪ Virtual Currency Brokers

▪ Fortune tellers/medium▪ Online pharmacies▪ Online casinos▪ Production and/or wholesale trading of nuclear related raw materials, products and services

BOC Customer Acceptance PolicyNot Accepted Accounts / Transactions

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✓ Not Accepted Accounts:

▪ Client accounts of Online Gambling companies or Payment Institutions and Electronic Money Institutions

▪ Client accounts of a professional intermediary not approved by the MLCO

✓ No Accounts Allowed in USD or CAD for:

▪ Clients involved in Online Gambling (incl. related services)

▪ Clients connected to countries with strict sanctions (Iran, Cuba, Sudan, Syria, N.Korea)

✓ Not Accepted Transactions (wire transfers):

▪ Transactions which represent financing in the form of promissory notes.

▪ Transactions relating to third party lending / assignment of loans and any other similar types of financing, between

parties who do not belong to the same group of companies and where the main activities of the party lending the

money are not related to the financial sector.

▪ Intra-group loans / assignment of loans and any other similar types of financing involving entities which are included

under the EU/OFAC Sectoral Sanctions Lists in any currency

▪ Consultancy services when there is no adequate information/appropriate documentation regarding the professional

expertise of the consultant

▪ The processing of wire transfers in USD to / from Latvia, Estonia, Georgia and Armenia.

▪ Transactions relating to the buying or selling of virtual currency.

BOC Customer Acceptance PolicyHigh Risk Categories

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▪ Politically Exposed Persons (PEPs)

▪ Private Banking Clients (with investment portfolios above certain thresholds)

▪ Resident in jurisdictions considered by (i) FATF / Moneyval as high risk or non-cooperative, (ii) EU Commission as high risk with strategic deficiencies

▪ Clients connected to countries subject to strict sanctions

▪ Clients with complex corporate structures

▪ Clients with complex and unusually large transactions or unusual types of transactions

▪ Legal Entities registered in tax haven countries or transacting with tax haven countries

▪ Charities - Non Profit Organizations*

▪ Charity Foundations*

▪ Private/Business Foundations**

▪ Clients associated with negative ML/TF media information

▪ Trust accounts

▪ Client accounts

▪ Foreign buyers who intend to invest in Cyprus in order to obtain Cyprus citizenship.

*Provided they are registered / regulated by an EEA or third equivalent country

**Provided not from sanctioned or FATF high risk /non cooperative jurisdictions

BOC Customer Acceptance PolicyHigh Risk Industries

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▪ Petroleum products, such as Oil & Petrol, energy such as natural gas, CO2 emissions and windpower

▪ Conglomerate/well established companies (substantiated through independent sources) in themining/exploration of gold and other precious metals industries

▪ Investment funds (as per internal scorecard)

▪ Online gambling, including related services*

▪ Betting Houses* / Casinos*

▪ Providers of money transmission services and currency exchange services*

▪ Precious metals/ stones*

▪ Armed Security Services*

▪ Financial, Brokerage or Insurance services cos*

▪ Art Collections*

▪ Pawn shops *

*provided they are registered / regulated by an EEA or third equivalent country

BOC Customer Acceptance PolicySignificant Risk Industries

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▪ Production and wholesale of alcoholic and tobacco products

▪ Customers providing services through the internet

▪ Sporting / hunting / antique guns*

▪ E-gaming (other than gambling / betting)*

▪ Prize Competitions*

* Provided they are registered / regulated by an EEA or third equivalent country

BOC Group Sanctions Policy

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The Group complies with sanctions issued by (i) Cyprus and other countries the Group operates in, (ii) the

European Union, (iii) the United Nations and (iv) OFAC (US Treasury)

For clients connected with:

▪ IRAN

▪ Democratic People’s Republic of Korea (North Korea)

▪ Crimea Region

➢ The inception of a new client relationship is not allowed (unless this concerns an individual with anIranian passport but resident in an EEA or third equivalent country)

➢ The few existing client relationships are in the pipeline for termination

➢ For existing clients, no accounts/transactions in USD and no outward wire transfers in any currencyare allowed

For clients connected with:

▪ Cuba

▪ North Sudan

▪ Syria

➢ The inception of a new business relationships with clients resident in these countries is not allowed;

the few existing relationships with clients resident in these countries are in the pipeline for termination

➢ For existing clients, no accounts / transactions in USD or involvement of US correspondent for any

currency are allowed

https://www.bankofcyprus.com/contentassets/8a666c6ca0c34b8caa62d932e1339dd6/group-sanctions-policy.pdf

Shell Companies

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CBC Definition

• No physical presence in the country of registration and / or

• No established economic activity

✓ Examples of established economic activity

• Holding of shares in subsidiaries with legitimate business

• Holding of intangible assets, real estate, ships, stocks, debt instruments

• Set up to facilitate FX transactions, transfer of assets, mergers

• Acts as the financial vehicle within a group of companies

• Other circumstances implying legitimate business with recognizable UBOs

✓ Business Relationship needs to be terminated if entity:

• Falls within the above definition and

❑ Is registered in a tax haven jurisdiction, or

❑ Is registered in a jurisdiction not requiring the submission of audited financial

statements and does not voluntarily prepare audit financial statements

✓ In all other cases the Bank needs to apply a risk based approach to decide on

whether or not to maintain a relationship with such clients, provided fully justification

is in place.

Shell Companies – Interpretation by Correspondent Banks

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• Geographical discrepancies between the

location of the account, operations and

the registration address

• High risk jurisdiction involvement

• Unknown beneficial owners

• Lack of legitimate business / purpose

• Lack of financial information

• Recently incorporated

• Entity has no discernible online presence

• Entity has no employees / business

activity

• Company formation services in offshore

site

• Entity information mismatch

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Know Your Customer

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Know your customer (KYC)

Our objective is to exercise such KYC procedures to enable us to understand our

customers and manage their risks prudently. KYC helps us identify and prevent theft,

financial fraud, money laundering and terrorist financing.

A complete customer profile contains detailed information about:

•The customer (KYC)

•The customer’s business (KYCB)

•The customer’s clients / counterparties (KYCC)

Know Your CustomerEconomic Profile

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The Customer and the Customer’s business

• Detailed description of Business activities

• Information on Group if applicable (the role of the customer within the group)

• Address of the main economic activities

• No of employees

• Annual Income and expected annual turnover via BOC account

• Website address of the entity and/or the group that the company is a member of

• Financial Statements

• Purpose of the account opening

• Names of business associates/ partners/employer

• Details of counterparties :

➢ Expected destination of outgoing transfers

➢ Expected origin of incoming transfers

• Source of Income/Funds

• Source of Wealth (only for high / significant risk clients)

Know Your CustomerEconomic Profile

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Source of funds Source of wealth

Source generating the funds which are expected

to be transferred in the clients’ accounts e.g.

payment of invoices from customers for wholesale

trading of agricultural machinery in Germany and

Greece

The origins of the customers’ financial standing

and total net worth i.e. the activities which have

generated the customers’ funds and property

The information to be provided on source of funds

will have to be specific and justified with

appropriate supporting documentation

• Salaries supported with pay slips

• Income from business activities supported by

invoices / Audited accounts

• Dividends supported by Audited accounts

Generic source of wealth descriptions are not

acceptable e.g. “savings”, “from family”, “from

work”, “lottery”, “profits from investments”,

“inheritance”, “business dealing”, “sale of

business” or “funds held in Banks” etc.

This information is, on its own, considered

insufficient as a proof of the legitimacy of wealth.

Know Your Customer

On Boarding Process - Common Problems

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• Not enough details / incomprehensive activities❖ Trading (Trading of what? Where? How? between who?)

❖ Forwarding and Logistics (Where? How? What kind of products?)

❖ Holding company (Which companies? Group name? Business activities of subsidiaries?Website of the group)

❖ Holding of Yacht and trading of works of art (How are these activities related? What kind ofart? Who owns the art works? Did they buy them? From where? How much? How did theypay?)

❖ Receive commission from clients investing in stocks, advisory services (License? What kindof stocks? Related experience?)

• Not enough details regarding source of funds / source of wealth

• Information about the group is not disclosed/website

• Companies offer millions of dollar of services without any employees

• The address of economic activity is not available

• Trading cos without storages, shipping or transfer docs not available

• Counterparties not declared or are not in line with the customer activities

• Anticipated turnover not in line with the economic profile

Know Your CustomerTransaction Processing

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Transactions should have

• Clear description of the transaction

• Relative supporting documentation (invoices, agreements, resolutions, shipping documents etc)

Specifically:

• Intragroup loans (third party Loans are not acceptable)

✓ Purpose and commercial reasoning of the loan

✓ Total loan amount & Interest rate (must be at arm’s length)

✓ Details about the repayment schedule

✓ Supported by financial statements of the lender to verify the economic profile

✓ If the only transactions processed for a Group relate to intragroup loans and it is not clear what is

the external source of funds of the Group, then this should be clearly established.

• Consulting services

✓ Professional expertise of the consultant (such as educational qualifications / relative working

experience)

✓ The project for which consulting has been provided (location, size/value etc)

✓ The adequacy of the agreement between the parties and their relationship

✓ The reasonableness of the fee

Know Your CustomerTransaction Processing

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Difficulties encountered during the execution of transactions

Incomplete Economic profile at the on-boarding

• Not enough details / incomprehensive activities

• Intragroup financing

• Trading and financing

• Holding company and also consulting services

• Companies offer million of dollar of services without any employees

• The address of economic activity is not available

• Counterparties not declared (name, website) or not in line with the customer activities

• Anticipated turnover not in line with the economic profile

ALL OF THE ABOVE COULD MAKE TRANSACTION PROCESSING

FASTER IF AVAILABLE AT THE ON BOARDING

Customer Review Process

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Periodic reviews are conducted:

• to ensure that existing customer information is kept updated.

• to confirm that each customer’s assigned risk rating continues to reflect

the appropriate AML risk rating.

• to capture any material change in the customer’s profile or any

potentially suspicious activity that was not detected by the firm’s

real-time transaction monitoring platforms.

• to comply with the relevant requirement of the CBC AMLD

Frequency: Once a year for high risk clients, every two years for significant risk clients,every three years for medium risk clients, every five years for low risk clients

A review is also performed when an unusual and/or significant transaction takes place,when the customer documentation changes substantially or when there is a materialchange in the way the account is operated. Events for review may include changes inthe legal/ownership structure, changes in risk category, negative alert/information(internet, press, regulator, MOKAS, correspondent bank inquiries) etc.

Customer Review Process

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Transactional behaviour of the client during the period reviewed:

Need to ensure that the transactions processed in the period examined:

• Are in line with the nature of transactions that relate to the declared

business activities

• Are supported with adequate documentation

• Involve counterparties, both for in/out funds, that match the declared ones and, if not,

discuss with the clients to seek explanation, and, if necessary, update their profile accordingly

• Involve reasonable amounts that can be expected for the kind of business activities that the clients are engaged in

• The actual turnover is in line with declared / expected / historic turnover/ audited f/s

or properly justified

Keeping our client’s data updated ensures the smooth operation of the account.

Transactions for the purchase of real estate

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• Still need to perform DD even if the purchaser is not a client

(funds deposited directly in developer’s bank account)

• DD on non-client investors:

✓ Corporate documents

✓ Structure leading to UBOs

✓ Identity documents for directors, shareholders, UBOs

✓ Establishment of source of funds

✓ Filtering against sanctions/ PEP lists, negative media lists

✓ Alternative DD through correspondent bank sending the funds

• In case client / non-client purchases property to obtain Cyprus Passport:

✓ Client is considered high risk as per 5th AML EU Directive

✓ Transaction needs to be through an Approved / Registered Provider of Services under the Cyprus Investment Program

http://cipregistry.mof.gov.cy/gr/

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What Banks expect from you….

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• More coordinated initiatives when entering new markets to properly assess risks

• More sophisticated assessment of investors / clients targeted. We see many cases

where clients / investors ready to invest millions have no established source of funds / wealth.

• Better communication with potential investors / clients on the requirements of the AML legislation and

the level of due diligence which needs to be performed.

• Proactive submission of necessary information / documentation for due diligence purposes.

• Special attention on improving quality of information provided on:

✓ Business activities

✓ Declared turnover to be justified

✓ Assessment of shell company status

✓ Assessment of counterparties (in the same line of business, and legitimate businesses)

✓ Source of funds / wealth

✓ Comprehensive documentation and justification of transactions

• More cooperation with respect to DAC 06

ALL THE ABOVE WILL LEAD TO BETTER AND SPEEDIER SERVICE TO CLIENTS!

Thank you for your attention!

Group Compliance Division

Key Information and Contact Details

Contacts

Group Compliance Division

Tel: +357 22123225, Email: groupcompliance@bankofcyprus.com

Manager, Group Financial Crime Compliance Department

Niki Charilaou, Tel: +357 22123152, Email: niki.charilaou@bankofcyprus.com

Visit our website at: www.bankofcyprus.com

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