Cyprus passes law restricting large cash transactions to strengthen AML efforts

Introduction

On 5 December 2024, Cyprus parliament approved a significant piece of legislation aimed at curbing large cash transactions, enhancing the country's anti-money laundering (AML) framework. The proposal, first introduced on 30 October 2024 by DISY MP Demetris Demetriou, amends the existing Law on the Prevention and Combating of Money Laundering. This move is part of Cyprus's efforts to align with EU regulations and strengthen its financial system against misuse for illicit activities.

Background and context

The need for stricter cash transaction limits was underscored by alarming cases and reports. Notably, a Ukrainian woman was caught entering Cyprus with €400,000 in cash, highlighting potential vulnerabilities in the system. Reports also revealed that, over the past three and a half years, approximately €120 million in cash had passed through Cyprus’s customs without being properly tracked or monitored, raising concerns about money laundering and financing of terrorism.

The proposed changes align with EU Regulation 2024/1624 and the European Union’s AML Directive, which mandates stringent controls to prevent the financial system from being exploited by criminals. The directive aims to protect the EU’s economy by ensuring that member states adopt consistent AML measures, including those targeting high-risk sectors prone to cash transactions.

Key provisions of the new law

The newly approved law includes several significant measures designed to enhance AML oversight:

• Transaction Cap: Cash transactions for goods, services, and real estate are limited to €10,000 or the equivalent in other currencies. Any transaction exceeding this threshold must be conducted using traceable financial methods.
• Penalties for Violations: Violators of the new regulation face substantial penalties, including fines of up to 10% of the transaction amount. In the case of real estate transactions, individuals could face imprisonment for up to five years.
• Definition of Cash: The scope of “cash” is defined broadly to include not just physical currency but also bearer negotiable instruments, high-value commodities, and prepaid cards, ensuring that various forms of liquid assets are covered.
• Temporary Suspension Clause: The law includes a clause allowing for the temporary suspension of the cap in cases of force majeure, such as disruptions to electronic payment systems.
• Alignment with EU AML Directive: The law aligns with the European Union’s AML Directive, which calls for member states to implement effective measures against money laundering and terrorist financing.

Support and concerns

The law passed with strong support, receiving 24 votes in favour and 2 against, showcasing general consensus among lawmakers and financial oversight bodies. Proponents emphasised its importance for aligning with EU standards and enhancing financial transparency, which would strengthen Cyprus’s position as a compliant and secure financial hub. The regulation was welcomed as a proactive step against money laundering and illicit financial activities.

However, concerns were raised about potential drawbacks. Critics pointed out that the law could create challenges for cash-dependent sectors and small businesses that may struggle with transitioning to digital payment systems. There were also worries about increased operational costs and potential financial exclusion for individuals who rely heavily on cash transactions. Additionally, some argued that enforcement could place an undue burden on authorities and businesses.

Despite these concerns, the consensus was that the new regulation was necessary for modernising the country's AML practices and enhancing oversight.

Sectoral impacts

The new law is expected to have varied implications across different sectors:

• Real Estate: One of the most affected sectors, as it is a common area for high-value cash transactions. The cap could lead to a shift towards electronic payments and stricter due diligence procedures for property transactions. Property developers and agents may need to revise their processes and customer engagement strategies.
• Small Businesses: Businesses that predominantly handle cash, such as local retailers and service providers, may face increased pressure to adopt electronic payment methods. This could lead to higher transaction costs, especially for those who already face thin profit margins. The move could also prompt some businesses to lobby for more flexible rules or government assistance to ease the transition.
• Financial Services: Banks and financial institutions are likely to see an increase in compliance obligations and customer inquiries regarding alternative payment methods. While this could bolster the financial sector’s role in transparency, it may also increase operational costs.

Implications for Cyprus

The new regulation aligns Cyprus’s anti-money laundering practices with EU standards, positioning the country as committed to financial transparency and oversight. The law is a proactive step in combating money laundering and reducing the potential for financing terrorism, improving both the regulatory landscape and the public's trust in the financial system. However, there are potential challenges, especially for sectors that rely heavily on cash transactions. These challenges may include higher operational costs, the need for new payment infrastructure, and potential pushback from individuals and businesses not equipped for digital payments.

Potential challenges and future considerations

While the law is an important move forward, potential challenges remain. For example:

• Adaptation Costs: Smaller enterprises, particularly in rural or underserved areas, could face significant challenges adapting to electronic payment methods. This may increase the need for government support programs or incentive plans for small enterprises to comply with the new rules.
• Financial Inclusion: The law could disproportionately affect individuals and communities with limited access to banking services. Efforts to include these groups, such as mobile banking solutions and financial literacy campaigns, could be beneficial.
• Operational Shifts: Businesses and real estate professionals will need to implement new compliance and record-keeping procedures, which could increase administrative burdens and overhead costs.

Conclusion

With the enactment of this law, Cyprus has taken a critical step to protect its financial system from misuse, aligning with EU AML directives and reinforcing its stance against money laundering and terrorism financing. As the new rules take effect, they promise to improve the tracking and regulation of cash flows, ensuring that large transactions remain within the oversight of financial authorities. The law marks a commitment to transparency and international compliance, essential for Cyprus’s continued economic integrity. To fully succeed, the law’s implementation will require effective communication and support mechanisms for businesses and individuals affected by these changes.

For more information, please send your queries to info@harriskyriakides.law.