Sanctions Compliance in Cyprus: Meeting CySEC and EU Standards in Client Onboarding
Table of Contents
Introduction
Category: AML & Compliance
Sanctions compliance stands as a leading obligation for regulated entities in Cyprus, from Cyprus Investment Firms (CIFs) to Crypto-Asset Service Providers (CASPs), auditors, and lawyers. EU sanctions, UNSC regulations, and directives of the CySEC require that the firms conduct due diligence checks upon client onboarding so that no business relationships are set up with sanctioned persons or entities against the sanction lists.
Being an investment, shipping, and financial-service center, Cyprus is one of the prime jurisdictions likely to be used for sanction evasions. Hence, regulators expect firms to develop the most stringent of frameworks for identifying and refusing transactions with restricted parties.
This article attempts to briefly describe the regulatory framework, challenges in the industry, actionable measures, and supervisory expectations concerning sanctions compliance in client onboarding so that Cyprus firms may keep themselves compliant and safeguard themselves against any reputational or financial risk.
Why Sanctions Compliance Matters in Client Onboarding
Client onboarding is the very first line of defense in a firm's compliance framework. Investigating and monitoring prospective clients against EU and UN sanction lists are crucial to preventing travelers from passing on illegal acts such as terrorist financing or the proliferation of weapons-of-mass-destruction or dealings with a "Politically Exposed Person" (PEP) from high-risk jurisdictions.
Sanctions compliance is more about money than fines. It is about protecting firms from reputation diminution and preserving the purity of the Cypriot financial system and investor trust. Hence, regulators, including the CySEC and the Central Bank of Cyprus (CBC), consider onboarding failures to be a glaring breach of AML and Sanctions laws.
EU and Cyprus Regulatory Context
EU Sanctions Framework
The European Union Sanctions Regime is legally binding across all member states, including Cyprus. Firms must comply with measures such as:
- An Asset freeze: The limitation on the funds and assets of persons or entities listed for sanctions.
- Transaction bans: The engagement in financial transactions with persons under sanctions is prohibited.
- Sectoral restrictions: Encompassing sectors like defense, energy, and technology.
The implementation of EU sanctions changes on a regular basis with Official Journal of the European Union releases, meaning that firms do need to keep pursuance to such updates.
Cyprus Supervisory Bodies
In Cyprus, the enforcement of sanctions compliance is carried out by various authorities. These are:
- Cyprus Securities and Exchange Commission( ySEC): Supervision on CIFs, CASPs, and funds for sanctions compliance in investment and fintech.
- Central Bank of Cyprus (CBC): It oversees banks and payment institutions to ensure compliance with EU and UN sanctions.
- Institute of Certified Public Accountants of Cyprus (ICPAC): The monitoring authority over auditors and accountants.
- Cyprus Bar Association (CBA): Observes fraud lawyers' compliance with AML and sanctions obligations.
- National Sanctions Implementation Unit (NSIU): Coordinates Cyprus’s implementation of EU sanctions.
Firms are expected to align onboarding practices with circulars and directives from these bodies.
Yet, despite the clearly set requirements by the regulators, Cyprus firms have to endure some recurrent hindrances:
Constantly Changing Lists of Sanctions
Sanctions by the European Union and United Nations are issued and updated quite often, and ensuring full compliance without automation is practically impossible for a firm.
Remote Onboarding Risks
CASPs and fintech companies operating over digital channels are higher-risk for the use of false documents and identity fraud.
Overlapping Frameworks
Firms find themselves trying against each other to implement AMLD 6, FATF Standards, directives issued by CySEC, and EU sanction measures, which create potential compliance gaps.
Resource Constraints
Smaller firms cannot afford to install real-time screening technology or keep staff allocated for monitoring sanctions on a full-time basis.
These illustrate the importance of structured compliance training to close gaps in knowledge and operations.
Practical Guidance for Cyprus Financial Firms
In order to meet expectations, put forth by CySEC and the EU, firms will have to conform to a more active and risk-based approach to sanctions compliance during client onboarding.
Client Due Diligence and Screening
- Screen all clients and beneficial owners against EU, UN, and OFAC sanctions list.
- Integrate automated tools for real-time name matching.
- Document all screening outcomes to demonstrate compliance.
Ongoing Monitoring
- Compliance with sanctions ends not at onboarding; continuous screening of clients is necessary.
- Establish alerts for sanctions-list update.
- Periodic re-screenings to be conducted for long-term clients.
Handling Politically Exposed Persons (PEPs)
- Apply enhanced due diligence (EDD) to PEPs and to their family members and close associates.
- For clients that are high-risk, verify the source of funds and source of wealth.
Remote Onboarding Risks
- Employ biometric verification and secure video KYC tools.
- Require secondary documentation (such as utility bills or tax returns) to verify the digital client.
- Implement AI-based fraud detection to expose forged or falsified documents.
Supervisory Expectations and Case Examples
Cyprus regulators have already sanctioned firms for failures in sanctions compliance.
Case Study 1 – CIF Sanctioned by CySEC
A CIF failed to update its client database after new EU sanctions were issued, resulting in transactions with a restricted entity.
Lesson: Firms must implement real-time monitoring and update screening systems promptly.
Case Study 2 – CASP Remote Onboarding Failures
A CASP onboarded clients using only scanned IDs, missing forged passports tied to sanctioned persons.
Lesson: Remote onboarding requires robust verification and secondary checks.
Case Study 3 – Audit Firm Oversight
An accounting firm failed to detect beneficial ownership links to a sanctioned company. ICPAC issued disciplinary action.
Lesson: Beneficial ownership screening is as important as client identity checks.
These examples highlight the supervisory expectation that sanctions compliance must be integrated into daily operations, documented, and backed by staff training.
Conclusion
Sanctions compliance serves as a foundation for the integrity of the Cypriot financial sector. With EU sanctions being extended and CySEC fine-tuning its enforcement measures more than before, the firms cannot fling away with weak onboarding procedures.
Full-scale screening, post-onboarding monitoring, and additional due diligence shall assist the Cypriot firms in the deterrence of fines, much damage to reputation, as well as operational risks.
Centre 8's Sanctions Compliance Training aims at endowing a compliance officer, AML officer, auditor, and lawyer with knowledge, tools, and case studies for the development of onboarding procedures in line with expectations from the EU and CySEC. Enroll today to strengthen your firm’s compliance framework.
References
- EU Sanctions Map – europa.eu
- CySEC Announcements – cysec.gov.cy
- CySEC Circulars – cysec.gov.cy
- Central Bank of Cyprus AML – centralbank.cy
- ICPAC AML Directives – icpac.org.cy
- Cyprus Bar Association AML – cba.org.cy
- FATF Recommendations – fatf-gafi.org
- MONEYVAL Reports – coe.int/moneyval
- United Nations Sanctions – un.org/securitycouncil/sanctions
- OFAC Sanctions List – home.treasury.gov/policy-issues/financial-sanctions