Improvements in anti-money laundering
For the first time, cryptocurrencies have come under anti-money laundering (AML) law through Europe’s 5th Anti-Money Laundering Directive, which was transposed into Cypriot law in February 2021. The directive’s amendments stemmed from the European Commission’s 2016 Action Plan to tackle the use of the financial system for the funding of criminal activities, terrorist financing and the large-scale obfuscation of funds.

The revamped law imposes greater transparency on the financial sector regarding beneficial ownership of trusts and establishes the Companies Register held by the Registrar of Companies and the Trusts and Similar Arrangements Register held by CySEC.

The 5th AML Directive’s position on trusts and disclosure requirements of the ultimate beneficial owner are expected to have a positive impact and improve the Cyprus offering, according to Vasiliou.

He says: “Over the past few years there have been a lot of improvements in this area, so I would say there is now a robust process around AML in Cyprus, both in the context of onboarding new funds and investors, as well as the periodic review and due diligence of existing investors. The key elements to an effective regulatory regime are regular inspections from the regulator and oversight from the management companies as more regulated stakeholders are serving the industry.”

Every year, CySEC issues the common and recurring observations from its onsite inspections to assess compliance with the AML regulatory framework.

Koukounis notes that CySEC and other regulators such as the Cyprus Bar Association and the Institute of Certified Public Accountants in Cyprus have become proper watchdogs. “On the one hand, the 5th AML Directive has been transposed into our domestic law; on the other hand, these regulators are looking at the actual implementation of this legislation in practical terms – so the existence of a dedicated money-laundering officer, up-to-date money-laundering policies, and the fact that these policies are adhered to by the regulated entities.

“There are scheduled inspections, but we’ve also heard of raids by regulators into either small or bigger organisations to ensure that what they are reporting and say they do is actually being done and is reflected in their files.”

In the past five to six years, Cyprus has focused on further enhancing its reputation on tackling money laundering and has passed various investigations from different associations and bodies. A report by Moneyval two years ago highlighted Cyprus’s progress in this area, with the island scoring 99% on 13 AML indicators. For comparison, the UK scored 95%.

Yiasemides says: “All in all, there is a tremendous effort by all the stakeholders, including banks, fund managers, regulators, and CIFA, to restore the reputation. I believe we have made important progress, and the growth of the fund industry is a great indication because the funds industry is a highly regulated industry, so if Cyprus’s funds sector is trusted by international investors, it means that we have made good progress on the AML issues.”

Vasiliou says that Cyprus has taken a “relatively strict approach” to AML compliance to the extent that there are even “some complaints now from the market that we are sometimes losing legitimate business because we are far stricter than we are supposed to be in this regard”.

Where next for Cyprus?
Cyprus has clearly made remarkable progress in becoming an emerging fund centre in Europe, with impressive growth rates. It is also improving its reputation as a well-regulated and safe jurisdiction.

Could it grow to compete over time with fund destinations such as Ireland and Luxembourg? There is widespread agreement among the jurisdiction’s experts that this is not the aim of Cyprus, which is instead carving a niche role in the European ecosystem.

As established, mature fund destinations, Ireland and Luxembourg could provide lessons for Cyprus, says Tannousis: “Of course, we are an emerging funds destination for Europe, and we are not Luxembourg or Ireland, but yes, we want to be part of that funds ecosystem in Europe.

“That does not mean we will be Luxembourg or Ireland in a couple of years, but our aim is to use our infrastructure and build on our ecosystem to attract international asset managers and other stakeholders so we can be part of that European ecosystem.”

Yiasemides says Cyprus has found a niche market within which it can operate and is quickly developing as a cross-border fund centre.

For any fund managers that want to access the European market, being in a jurisdiction that is considered cross-border is crucial. “Cyprus can play this role, and that’s why we have seen an increasing trend from India, Israeli, Japanese fund managers to establish a structure in Cyprus. We will look to focus on this market,” he adds.