INSTRUMENT OF GOOD PRACTICES IN

PREVENTION OF MONEY LAUNDERING

CYPRUS, 1 SEPTEMBER 2024

                    It is necessary to point out to all natural or legal persons participating in the business model known as OC DIRECT, that it is imperative that they comply with the entire body of national and community legislation on the prevention of money laundering.

               To this end, we make available to you this instrument for the prevention of money laundering.

               Money laundering can be defined in a consensual manner as a process that basically consists of giving an appearance of legality to the assets that come from a criminal activity by making them appear to be lawfully obtained; in other words, it is about incorporating into legal economic traffic the assets obtained through the commission of crimes. Similarly, there is agreement that, in order to achieve this objective, the assets go through different phases, usually accepting the definition drawn up by the Financial Action Task Force (FATF) which distinguishes three.

• The first of these, known as substitution or placement, is characterized by the transformation of some assets into others in order to avoid suspicions about their origin or to facilitate their handling.
• In the second phase, concealment or transformation, the aim is to erase the trace of the previous substitution that has taken place.
• Finally, when the assets appear to be completely disconnected from their illicit origin, we would be faced with the third of the stages, which is called reinvestment or integration and in which the assets are incorporated into the legal economic flow. It goes without saying that not all cases of money laundering involve the three stages; nor, when they do occur, do they follow the sequence described. What does seem unquestionable is that the more advanced the legitimizing process is, the more difficult it will be to pursue it.

Having said that, it is necessary to emphasize that our independent distributors are aware of the Spanish and European legislation on the prevention of money laundering:

At European Community level, the latest legislative event on the prevention of money laundering is the transposition into Spanish law of Directive (EU) 2018/843 of the European Parliament and of the Council, of May 30, 2018, amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU.

The changes to the text submitted for hearing affect numerous aspects of the regulations, so, without being exhaustive, we will review the main new features, which in many cases involve a transposition that goes beyond the minimum requirements of the Directive.

New obligated subjects

The obligated subjects are modified significantly. New obligated subjects arise, in some cases due to the requirements of the European standard, and in others by national decision, the coverage of certain sectors is clarified and the scope of others is expanded.

Between the entirely new subjects, the inclusion of service providers with virtual currencies stands out. The regulation contained in the draft goes beyond what is required by the Directive and tries to anticipate the undoubted reform that the European standard will require on this point, and which is indicated by the Action Plan itself of the Directive.

The European Commission presented this past May. In this way, not only those who provide virtual currency custody services, or those who provide virtual currency exchange services to fiduciary currency, will be obliged subjects, but it is extended to the exchange between virtual currencies.

The regulation includes an obligation to register these providers for which an expansive approach is applied, since it affects all those who provide services in Cyprus (that is, to residents in this country), regardless of the existence or not of territorial links on the part of the provider.

The truth is that doubts are raised about the real capacity of control of this type of provider. Without a doubt, this is one of the areas where a centralization of the authorization/registration function of providers would be enormously beneficial, given the disparity of solutions adopted by EU countries as a consequence of the minimum level of harmonization of the Directive. Hopefully, the new anti-money laundering regulation that was recently announced in the European Commission's Action Plan (this time a regulatory regulation, and therefore directly applicable) will include this harmonisation provision.

Although they are the most striking, providers of virtual currency services are certainly not the only ones to be incorporated into the prevention regulations. New subjects are included, such as SOCIMIs or securitisation fund management companies (a natural movement, given that the regulation already included subjects with similar characteristics). Of course, new subjects are included as a consequence of the provisions of the Directive and, in particular, intermediaries in rentals that exceed an average monthly income of 10,000 euros, intermediaries in the art and antiques trade, as well as the storage, trade or intermediation in the sale of works of art and antiques that take place in free ports.

Two peculiar inclusions also stand out due to their nature. Firstly, the controlling companies of a group that includes 2 or more obliged subjects and that do not carry out any of the activities that determine the subjection to this regulation become obliged subjects with regard to the definition and application of policies and procedures for the prevention of money laundering for the entire group. This is intended to cover those cases in which there are two or more obliged subjects that do not have a direct dependency relationship, thus making it necessary to centralize this function in a company that, however, does not have an activity subject to the regulation.

Secondly, external experts are included, who become directly responsible for the truthfulness and accuracy of their audit reports on the procedures of the obliged subjects that the Law requires, being subject to administrative liability in the event of noncompliance.

Lastly, in the chapter on clarifications, service providers to companies are included as obliged subjects, with the intention of clearing up doubts and solving conflicts generated by the previous wording, so that it is clarified that the provision of advisory services does not imply qualification as a service provider to companies.

Finally, it is clarified that not only life insurance, , but also investment-related insurance falls within the preventive regulations.

Real ownership

              There are many, and profound, changes being made in the area of real ownership.

              Firstly, and as required by the Directive being transposed, a new obligation is created in the Law, enforceable for all legal entities created in Europe or subject to European Community legislation, which is to maintain their own real ownership data, which they must make available to the obliged subjects when they maintain business relations with them.The regulation specifies both the data that must be collected and the persons responsible for maintaining the information, which in the case of commercial companies will be the sole administrator, jointly or severally, or the Board of Directors and, in particular, the Secretary.

             This same obligation is extended to natural or legal persons resident or established in Cyprus who act as trustees of a trust or similar structure. They will be obliged to maintain the information on the beneficial ownership of the trust, and to make it available to the obliged subjects when they maintain business relations with them in the context of their function of administration and management of the assets of the trust. They will also be responsible for communicating the beneficial ownership information to the Registry of beneficial owners.

            And, without a doubt, the fundamental change is the creation of the Single Registry of beneficial ownership of legal persons and trusts. This Registry will bring together the information contained in the different existing tools and registries (mainly, the registries of beneficial owners of the Commercial Registry and the General Council of Notaries) which will be completed by directly capturing data from those entities and structures that do not have an obligation to present annual accounts or that will not perform acts before a notary that require this declaration. This regulatory option seems to be the best option for users of the Registry, who will find the most up-to-date information on beneficial ownership in a single source.

           This is undoubtedly good news, although in the case of clients or business relationships with higher risk, the regulation does not lighten the task but rather duplicates it: both the data in the Registry must be collected and additional information must be requested from the client to prove and support the content of the information obtained in the Registry.

Persons with public responsibility

Once again, the text modifies the regime applicable to persons with public responsibility (PEPs). On the one hand, the concept of a person with public responsibility is extended to cover senior management of political parties with representation in autonomous communities and political parties with representation in local entities with more than 50,000 inhabitants. On the contrary, the requirement is reduced in terms of time and thus, although the current regulation determines that enhanced due diligence measures continue to be applied to these persons for up to two years after ceasing to hold the position that qualified them as PEPs, the proposed text reduces this period to one year, in line with the provisions of the Directive.

Common compliance systems (KYC utilities)

             The proposal includes a new article 32bis that aims to recognize the possibility of obliged subjects to establish common systems (centralized or decentralized) to share customer due diligence information. These are the so-called “KYC utilities.” The truth is that the current regulations do not establish limitations that imply obstacles to the development of this type of instrument, but the regulation offers certainty about its development and operation.

             Without a doubt, the use of these tools seems to be a fundamental advance. First, for clients, who will reduce the number of times they have to provide their information to the entities with which they contract, facilitating and speeding up the processes. But it also, of course, benefits the obliged subjects, by allowing a reduction in the costs associated with obtaining and updating the basic due diligence information, and generating greater homogeneity of the data obtained, as well as a more adequate updating process.

              However, its implementation will require a significant effort to standardize these due diligence processes for all participants in the common systems that may be created. On the other hand, it seems complex that this type of instrument can replace the individualized approach by entities in relation to clients with a higher than average risk, where the risk appetite of the entities can lead to more disparate control intensities that make it difficult to standardize the criteria required by this type of system.

      Financial ownership file

             Another of the modifications, this time derived from the Directive, affects the content of the Financial Holdings File, the database managed by Sepblac where all current, deposit, savings and securities accounts opened in credit institutions in Cyprus are recorded.

            On the one hand, the assets subject to declaration are modified. Thus, safe deposit boxes and payment accounts are incorporated and securities accounts are eliminated.

             As a result of the above, and specifically the inclusion of payment accounts, the number of reporting entities is expanded, so that, together with credit institutions, payment institutions and electronic money institutions must also report the payment accounts of their clients.

            Finally, the access regime is modified, incorporating new authorities and expanding the access capacity of others that already had access recognized (the requirement of prior judicial or fiscal authorization for police access is eliminated). In all cases, however, the restricted purpose for access remains: investigation of money laundering and terrorist financing, which is only extended in the case of the tax authority that has recognized access for the prevention and fight against fraud actions.

WHAT IS OUR POSITION ON THIS MATTER?

        We understand that for the success of the business model called OC DIRECT, all participating legal entities must know and be respectful of the regulations on the prevention of money laundering that we have just explained, given the importance of building a solid, sustainable and credible business model.

         In relation to the above, it is important to know that the current legislation in Europe on the prevention of money laundering provides that all those individuals who, acting on their own behalf or on behalf of a third party, carry out any of the following movements must submit a prior declaration:

a) Entry or exit into or exit from national territory of means of payment for an amount equal to or greater than 10,000 euros or its equivalent in foreign currency.

b) Movements of means of payment within the national territory for an amount equal to or greater than 100,000 euros or its equivalent in foreign currency.

For its part, the Law specifies what is understood by means of payment:

a) Paper money and metallic currency, both national and foreign. In the case of foreign currency, it can be understood that the equivalent value will be set at the time of its declaration by reference to the official exchange rates of the euro established by the European Central Bank.

b) Bearer bank cheques denominated in any currency. Therefore, nominative cheques are excluded from the obligation.

This exclusion is logical: nominative cheques are identified at all times by the issuing and receiving entity.

With regard to bearer cheques, although it is possible to identify who issues them and who collects them, they nevertheless present a risk in terms of the "chain of operations that the instrument serves between issuance and collection".

c) Any other physical means, including electronic means, designed to be used as a means of payment to the bearer.

With this enumeration, it seems that the legislator intends to leave the door open to possible payment instruments that may arise in the future within the obligation to declare, hence the very broad concept used, which (it should be stressed) affects any physical or electronic means that can be used as a means of payment.

Likewise, certain types of goods (such as jewelry, precious stones and metals) are accepted as a means of payment.

stamps or old coins, or certain works of art or antiques that can be physically transported or moved), the subject could consider that he is affected by the obligation to declare whenever these goods exceed said value. However, such goods are not legally considered means of payment. In this point, the FATF Recommendations of February 2012 are followed.

d) Certain negotiable bearer effects that are not strictly means of payment. Art. 34.3 of Law 10/2010 extends (exclusively with respect to the exit or entry of the national territory) the obligation to declare to certain negotiable effects that, without being strictly means of payment, are equated to them for the purposes of the obligation to declare.

Thus, this provision specifies that the movements of negotiable instruments to the bearer, including monetary instruments such as traveler's checks, negotiable instruments, including checks, promissory notes and payment orders, whether issued to the bearer, endorsed without restriction, issued to the order of a fictitious beneficiary or in another form by virtue of which the ownership of the same is transferred upon delivery, and incomplete instruments (including checks, promissory notes and payment orders, signed but with the name of the beneficiary omitted) will also be subject to the obligation to declare.

It is necessary to point out that the complete Spanish and European legislation on the prevention of money laundering can and should be consulted on the website indicated below:

https://eur-lex.europa.eu/ES/legalcontent/summary/12_cyprus.html

As a conclusion, and referring to a reality of the new times, it is necessary to note that a particularly relevant role in the prevention of money laundering is to be played by: the responsible treatment of transactions carried out using crypto-assets, in respect of which diligence must be maximum in order to prevent situations constituting possible money laundering. For these purposes, particular attention will be paid to the provisions of the Proposal for a REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on markets in crypto-assets and amending Directive (EU) 2019/1937, as well as to the regulatory provisions that in the future regulate the crypto-asset market, as well as to Regulation (EU) 2022/858 of the European Parliament and of the Council of 30 May 2022 on a pilot regime for market infrastructures based on decentralised ledger technology and amending Regulations (EU) No 600/2014 and (EU) No 909/2014 and Directive 2014/65/EU.