Learning the hard way from US-UK sanctions

On 12 April, around 10 Cypriot professionals and others woke up to the shock of being sanctioned by the US and the UK and then losing access to their Cypriot bank accounts. Since there is very little that one can do without a bank account these days, they have essentially been thrown indefinitely into financial jail. I am not going to write about the merits of the case here. Instead, I will write about what other professionals in Cyprus should be doing to ensure that it never happens to them.

Lesson 1: The arm of the US Treasury is long

The first point is that this is just the latest demonstration of the power of the US Treasury. Remember FBME? It lost its licence in 2015 because the US Treasury Department found it to be of primary money laundering concern.

Remember RCB? It lost its licence in late 2022, despite trying to switch shareholders, because its largest shareholder as of February 2022 was sanctioned by the US and UK after Russia invaded Ukraine.

One might even add Laiki. I have a number of reasons to believe that the US actually prevented eurozone members from kicking Cyprus out during the crisis of 2013, as it is in US interests to have Cyprus inside the EU and therefore closer to the “Western camp”.

But sometimes I wonder whether the price of the “political rescue” was to close a bank that the Milosevic court case in The Hague showed was instrumental in busting UN sanctions.

It is also worth noting that, for a certain period, the Bank of Cyprus (BOC) had only one correspondent bank for US dollar transactions, conceivably because of the second indictment against Paul Manafort, which included a $1m transaction conducted as late as 2015.

BOC now has three correspondent banks. But as the Latvian-based ABLV bank found in 2018, if you lose US dollar correspondent banking, your bank cannot survive.

What lessons should a professional in Cyprus draw from these episodes?

The first lesson is that the arm of the US Treasury is long.

Some professionals in Cyprus have pursued business with individuals or organisations who are sanctioned but outside the EU, assuming that they will be safe to continue doing so.

The past week’s events have underlined that this is an extremely risky assumption.

Lesson 2: US friends and foes

Another lesson to draw is to pay attention to evolving US views on which countries are considered friend and foe.

I say this because, as Russian clients became more cumbersome to find or retain, some Cypriot professionals pursued business elsewhere: in the Gulf (mainly Saudi Arabia and the United Arab Emirates), in South Asia (mainly India) and south-east Asia (mainly China).

This had already embroiled Cyprus in several scandals, for example, when passports were given to the families of autocratic Cambodians or fugitive Malaysians, among others.

The US is now actively suspicious of China, and we are entering an era of frosty relations, broadly between the “West and the rest”.

It is, therefore, worth keeping a close eye on who is edging out of the US good books to ensure that your shiny new client doesn’t land you in financial jail.

A quick check is who voted against throwing Russia out of the UN Human Rights Council (like China) and who abstained.

Abstainers included Saudi Arabia, which recently irked the US with an agreement with Iran; India, where there are also signs that its neutral stance is not favoured by the US; and South Africa, which has remained close to Russia.

Lesson 3 More case studies, less memorising

A third lesson I would like to propose is for the recently installed government and the regulators.

It involves smartening up how we learn about anti-money laundering (AML) and related subjects in Cyprus. What do I mean?

In 2020 I passed what is known as the Advanced Exam for the Cyprus financial regulator, the Cyprus Securities and Exchange Commission (CySEC).

I did learn a great deal from the training, and I continue to learn because of the continuing education that is obligatory if you want to keep your certificate.

However, I also found that the exam relied a lot more on memorising chunks of legislation than on applying that knowledge, for example, by looking at case studies on how things can go wrong.

I suggest that professionals would be better equipped to spot problems if we had 50% learning the rules and 50% real Cypriot case studies of how a fugitive like Jho Low, for example, could have gotten through the system.

Lesson 4: Cyprus has enough resources

The final lesson, and admittedly this is more of an opinion borne of well over 20 years of closely examining the Cyprus economy, is that professionals in Cyprus can be confident enough in their qualities to know that they will survive without having to run after risky clients.

There are all of the usual qualities that you will see in promotional material – highly educated cheaper-thanIreland workforce, common law system, low crime rate, sunny climate.

But there are also other intangibles.

Cypriots are highly resourceful, as I have written about here.

I also find Cypriots naturally helpful, which is important for clients navigating highly regulated sectors.

And last but not least, Cypriots are also incredibly friendly, which matters for everything from winning over crotchety tourists to retaining business clients.

We have a new government in Cyprus with a lot of new faces. It is a good opportunity to communicate that Cyprus has turned over a new leaf.

The move by the president, Nikos Christodoulides, to call an emergency meeting on how to safeguard Cyprus as a business centre is a good start.

Let’s have more of it.