Cypriot Banks Say They're Complying With All US Sanctions, but Facing Legal Risks

After initially facing scrutiny for helping to facilitate Russia-related transactions, Cypriot banks have made significant progress in improving their compliance programs in recent months and are now adhering to all U.S. sanctions rules, the country’s top banking industry officials said this week. They also said they face hurdles implementing some of the sanctions, including potential legal challenges from customers.

Both the U.S. and the EU have historically pinpointed Cyprus as a country with lax adherence to international financial and trade restrictions, but Marios Skandalis, the Bank of Cyprus Group's chief compliance officer, said that reputation is changing. Cypriot banks recently began complying with all designations and sanctions rules issued by the Office of Foreign Assets Control and the U.K.’s Office of Financial Sanctions Implementation, he said, also noting they “adhere” to export controls issued by the Bureau of Industry and Security.

Skandalis, speaking during a Sept. 16 event hosted by the Wilson Center, said the banks aren’t legally “required” to follow many of those rules, but they chose to do so because they wanted to reverse Cyprus’ reputation as a place that doesn’t ask questions about foreign money. He also said the country risked being named by the U.S. and others as a “high-risk” jurisdiction for sanctions violations, which could jeopardize Cypriot banks’ relationships with U.S. correspondent banks.

“We as banks have a huge legitimate interest in adhering to the U.S. and U.K.’s sanctions,” he said, adding that Cypriot financial intuitions “cannot operate” without the U.S. dollar.

“We were at the crossroads of survival and extinction,” Skandalis said. “And that's why we have chosen the path of survival.”

George Apostolides, head of compliance at Eurobank Cyprus, specifically said his bank and others are also complying with an executive order President Joe Biden signed in December that gave the Treasury Department broader authority to sanction foreign financial institutions involved in shipments to Russia (see 2312220023).

He said complying with the order “was rather easy for us” because Cypriot banks had already ended business with a host of customers that had ties to Russia-related transactions. He and other banking officials said they recently revised their “customer acceptance policies” to stop operating accounts for a range of new client “categories,” including customers operating in military sectors, in virtual currencies and with “non-transparent shell company activity,” along with Russian clients operating in “restricted sectors” of the country's economy.

“We see it as a blessing,” Apostolides said of the U.S. executive order. “To see OFAC’s programs being more enforceable in third countries [gives] us the ability to cut off” customers that may be involved in Russia-related trade violations.

“The new executive order makes it very, very clear that if we don’t abide to OFAC sanctions, we are losing our correspondent lines,” he said, and the banks don’t “want to jeopardize those relationships.”

But complying with all U.S. sanctions rules also exposes Cypriot banks to legal risks, they said. They said a potential customer could argue that Cypriot banks are unjustly refusing them service based on the laws of a foreign country, not the laws of Cyprus.

“We decided to voluntarily take that risk,” Skandalis said.

Maria Aristidou Demetriou, chief compliance officer with Hellenic Bank Cyprus, said the country’s banks have begun inserting language in contracts with new customers outlining the banks’ “obligation to abide by the U.S. sanctions.” She said she believes this gives the financial industry some legal “coverage for what we are doing.”

“Up to now, nobody has dared to proceed legally,” Demetriou said. “But you never know.”

Apostolides added that the country’s financial industry has had “close collaboration” with U.S. sanctions authorities, including both the Treasury and State departments. He said U.S. officials trained them on sanctions compliance last week, and the State Department is specifically “delivering training” on sanctions to senior Cypriot industry executives, including banking board directors.

The State Department didn't respond to a request for comment.

Apostolides said the country’s banks are most commonly seeing Russia-related dual-use trade coming from companies with ties to mainland China, Hong Kong and Turkey. “We don't see Cyprus being involved in such transactions,” he said.

Asked specifically how the banks handle accounts owned by Russian oligarchs, Apostolides said “we have zero appetite for those persons and entities. I believe the Cyprus financial system is not being used for those persons anymore.”