AML Watcher’s Data Shapes Compliance Week’s Analysis of Derisking in Cyprus Banks

How much is too much when it comes to de-risking for AML compliance? Can the necessity to comply with sanctions and AML Guidelines sometimes lead to misguided de-risking practices that unjustly impact businesses that shouldn’t be targeted

Cyprus an island nation with strong economic links to Russia, finds itself at the center of this discussion. The country’s efforts to de-risk and comply with EU Sanctions have unintentionally impacted both its economy and banking industry.

Recently, AML Watcher, the renowned AML Compliance Solution provider, was approached by a journalist from Compliance Week looking for updated AML data on the issue of de-risking in Cyprus, particularly in the context of sanctions compliance and Cyprus AML law.

According to AML Watcher’s findings, there is a notable disproportionality: Cypriot banks de-risked between 60,000 and 120,000 accounts, while the EU sanctioned nearly 1,900 Russian businesses. This gap raises the crucial question of how much de-risking was actually required, and what percentage of it unintentionally harms reputed financial institutions.

Let’s read further to find out how AML Watcher played a key role in shaping Compliance Week’s analysis of de-risking in Cyprus providing real-time AML data that reveals whether the island’s de-risking initiatives aligned with AML laws Cyprus and international sanctions goals or unintentionally affected the financial institutions they were meant to protect.

De-Risking: A Necessity or a Liability for Financial Hubs?

Cyprus: An Analysis of Over-De-Risking

Cyprus has long served as a financial hub for Russian business leaders and oligarchs due to its favorable tax structure and comparatively lax AML Cyprus laws to transfer capital.

In the wake of Russia’s invasion of Ukraine in 2022, the European Union and its Western allies imposed sweeping sanctions on Russia and its organizations.

Cyprus, which had historically fostered close financial ties with Russia, was under increasing pressure to break those ties.

To comply with these international standards, Cypriot banks then started de-risking, canceling hundreds of accounts linked to Russian people and businesses as well as other high-risk jurisdictions.

The Association of Cyprus Banks (ACB) reports that Cypriot banks closed ties to more than 72,000 customers associated with high-risk jurisdictions such as Russia, Belarus, and Ukraine in the period leading up to 2024.

Other important statistics include:

• Cypriot banks de-risked between 60,000 and 120,000 accounts from 2014 to 2024.
• In 2023, inward transfers to Cypriot banks from Russia, Ukraine, and Belarus were €1.5 billion, down from €40 billion in 2014.
• Outward transfers fell from €32 billion in 2014 to €1 billion in 2023.

Similar decreases were noted in transfers with customers from other regions.

Even though these steps were taken to ensure sanctions compliance and AML in banking, it is highly likely that those de-risked accounts may not have belonged to Sanctioned Russian entities.

This calls into question how much de-risking or misguided derisking has been done and how it has affected Cyprus’s economy.

Economic Repercussions of Excessive De-Risking: The Ripple Effect

These de-risking initiatives have had significant economic repercussions, even if Cyprus’ AML Compliance with the EU sanctions was crucial.

Cyprus’ GDP has suffered significantly as a result of lower foreign deposits and investments, mainly from Russian and Ukrainian clients. Bank deposits decreased from eight times the GDP in 2014 to barely three times the GDP in 2023.

“Deposits from Russian account holders in Cypriot banks decreased by 76% between 2014 and 2022, while deposits from Ukrainian account holders decreased by 67%. Furthermore, the number of Russian clients using Cypriot banking services decreased by 82%, while Ukrainian clients saw a 54% decline during the same time,” reported Euronews.

The International Monetary Fund report states that the withdrawal of capital from high-risk jurisdictions has a significant impact on major industries such as real estate and tourism.

Additionally, as a direct result of the de-risking measures, revenues from Russia and Ukraine fell from €440 million in 2021 to almost nothing in 2022, which amounted to 450% of GDP, before the war.

These numbers show how excessively Cyprus’ economy was impacted by over-de-risking, especially in areas that weren’t engaged in illegal financial activity.

De-Risking Effects on Reputable Financial Institutions

Although de-risking is intended to reduce potential threats associated with high-risk enterprises, it may unintentionally harm financial institutions that are not connected to illegal activity.

At the request of a renowned journalist for real-time data on the case, AML Watcher provided insights on the de-risking trends in Cyprus and assisted the ComplianceWeek team in uncovering an unexpected pattern.

AML Watcher data suggests that between 2014 and 2024, Cyprus de-risked up to 60,000 to 120,000 accounts, despite only 1,900 Russian individuals and businesses being sanctioned.

Based on AML Watcher’s analysis, it is highly likely that many of these de-risked accounts were not connected to sanctioned Russian entities.

This suggests that de-risking initiatives may have accidentally impacted a huge number of legitimate clients, including investors and enterprises with no ties to illegal activities.

Georgina Demetriades, an expert from AML Watcher, said that “this disproportionality draws attention to a serious concern: This implies that not every de-risked account was linked to Russian organizations that were subject to sanctions. These measures may have unintentionally impacted businesspeople who were not associated with sanctioned industries or corporations”.

Financial Leakage and the Risk of Losing Legitimate Clients

The over-de-risking trend in Cyprus has resulted in a situation known as “financial leakage,” in which high-net-worth individuals (HNWIs) and legitimate businesses seek financial services in countries with more relaxed anti-money laundering legislation.

As a result, these people and enterprises are increasingly migrating to nations with laxer AML regulations, notably those in Central Asia, to avoid sanctions enforcement.

The Basel Institute on Governance cautions that corporations may migrate to countries with less severe rules, reducing the efficacy of sanctions and worsening the problem of “financial leakage.”

Cypriot financial institutions are now confronted with the challenge of finding a balance between complying with AML regulations and maintaining a stable economy. The overreliance on blanket de-risking measures has made striking this balance challenging.

A Customized, Risk-Based Compliance Strategy Is Required

As the Cyprus instance illustrates, over-de-risking is a genuine problem that has to be addressed through more targeted, data-driven approaches.

Financial institutions worldwide should take note of Cyprus’ over-de-risking problem: one-size-fits-all compliance strategies can cause needless harm.

Adopting a data-driven, risk-based strategy that not only ensures sanctions compliance but also offers the protection of legitimate clients is the way forward for AML compliance.

Policymakers and financial institutions may make well-informed decisions that contribute to the development of a fair and efficient sanctions compliance environment, as long as they consult reliable AML data.

AML Watcher is not just helping financial institutions avoid fines and penalties; it also assists banks in avoiding unnecessary de-risking, supports economies affected by de-risking, and provides valuable insights to academia, journalists, and think tanks.

AML Watcher being a trustworthy AML compliance solution provider assists financial institutions with the updated risk-based screening and real-time data they need to tackle this complex issue.

It offers comprehensive  AML screening by continuously updating sanctions data to detect high-risk transactions and entities, enhancing global compliance efforts, and helping businesses stay ahead of emerging risks.