Bank Finance and Regulation Survey. CYPRUS Dr. K. Chrysostomides & Co LLC

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1 Bank Finance and Regulation Survey CYPRUS Dr. K. Chrysostomides & Co LLC CONTACT INFORMATION Chryso Dekatris and Pavlos Symeonides Dr. K. Chrysostomides & Co LLC 1, Lampousas Street 1095, Nicosia, Cyprus info@chrysostomides.com.cy www. chrysostomides.com.cy I. BANKS AND FINANCIAL INSTITUTIONS SUPERVISION 1) Applicable laws and regulations. Provide a list of the main laws and regulations that refer to the supervision and control of banks and financial institutions. Give a brief summary of the substance of each of them. a) The Banking Law 66(I) of 1997, as amended This Law contains the major provisions regarding the supervision and control of local banks and branches of international banks which are established in Cyprus. It is divided in the following Parts: Preliminary; Licensing of Banks; Use of the Word Bank and Advertisements; Establishment and Closure of Branches and Amendment of Constitution; Limitations and Prohibitions of Certain Business Activities and Transactions; Ownership and Management of Banks; Capital Liquidity; Returns and Accounts;

2 Copyright Lex Mundi Ltd Supervision and Inspection; Banking Secrecy; Powers of the Central Bank; Reorganization, Liquidation and Winding-Up; Deposit Protection Scheme; Miscellaneous; Offences, Penalties and Prosecutions; Transitional Provisions. b) The Central Bank of Cyprus Law 138(I) of 2002, as amended The above mentioned Law concerns the operation of the Central Bank of Cyprus, which is both the monetary authority and the regulator of the banking industry in Cyprus. As far as banking regulation is concerned, this Law contains provisions regarding the monetary unit and legal tender money in Cyprus, foreign exchange restrictions and transactions in precious metals and the reporting obligation of financial institutions to the Central Bank. c) The Cooperative Societies Law 22 of 1985, as amended This is the Law governing Cooperative Societies, which are non-profit organizations, providing various services to individuals and legal persons, usually within specific local communities. These services include the acceptance of deposits and the provision of credit facilities. Some of the provisions of the Banking Law 66(I) of 1997 are also applicable to Cooperative Societies. d) The Cyprus Securities and Stock Exchange Law 14(I) of 1993, as amended This Law governs the operation of the Cyprus Stock Exchange (CSE), the supervisory powers of the Council of the CSE, the listing and de-listing of securities on the CSE, the obligations and professional qualifications of brokers and other related issues. e) The Investment Services and Activities and Regulated Markets Law 144(1) 2007, as amended This Law governs the provision of investment and non-core services, the performance of investment activities on a professional basis and the operation of regulated markets in Cyprus. In effect, the said Law regulates the establishment and operation of Investment Firms and the provision of services such as the reception and transmission, on behalf of investors, of orders in relation to one or more financial instruments, the management of investment portfolios, underwriting in respect of issues of financial instruments, investment advice, etc. f) The Insurance Services and Other Related Matters Law, 35(I) of 2002, as amended The above mentioned Law governs, inter alia, the provision of insurance services, within and outside Cyprus, by Cyprus insurance companies, including reinsurance companies, the provision of insurance services within Cyprus by foreign insurance companies, the provision of insurance intermediation services, etc.

3 g) The Open-Ended Undertakings for Collective Investment in Transferable Securities Law 200(I) of 2004, as amended This Law governs the Undertakings for Collective Investment in Transferable Securities (UCITS), their management companies (in case that the UCITS is a Mutual Fund), the depositaries and the organizations offering units as representatives. h) The Payment Services Law 128(I) of 2009 The above mentioned Law regulates the provision of payment services in Cyprus. The definition of payment services is quite wide and it includes services which enable the deposit of cash in a payment account, the withdrawal of cash from a payment account, the execution of payments, etc. i) The Electronic Money Institutions Law 86(I) of 2004 The above mentioned Law regulates the issuing of means of payment in the form of electronic money, that is a monetary value represented by a claim on the issuer, which is stored in an electronic means, has been issued pursuant to the receipt of a sum of money at least equal to the issued monetary value and is accepted as a means of payment by persons other than the issuer. Banks, Co-Operative Societies and other companies specifically licensed for this purpose by the Central Bank may provide the services of an institution of electronic money. j) The Directive for the Regulation of Money Transfer Services 659 of 2003, as amended The above Directive regulates the provision of money transfer services from and to Cyprus and sets out the conditions for the granting of a license by the Central Bank for the establishment and operation of a business to provide money transfer services. k) The Liberalization of Interest and Related Matters Law 160(I) of 1999, as amended As a result of the enactment of this Law, the interest rate is no longer regulated. 2) Entities/Authorities in charge of the control and supervision. Purposes, powers and functions of each of them-their organization and structure (i.e. public or private, independency or body of the Government to which they belong, size, etc.) i) Central Bank of Cyprus The Central Bank s main purpose is to ensure price stability, while in its role as the regulator of the banking industry in Cyprus its purpose is to regulate and supervise banks, payment services, electronic payment institutions and other relevant matters as well as to prevent and suppress money laundering activities. The Central Bank has wide powers in all these fields, whereas in relation to banks in particular it has the power to issue and revoke licenses, issue directives and guidelines, impose penalties, etc. The governing body of the Central Bank is its Board of Directors which consists of an executive Chairman and five non-executive Directors, who are all appointed by the Council of Ministers. Nevertheless, the Central Bank and its Board of Directors

4 are independent from the government of Cyprus and its independency is safeguarded in both the Constitution and the Central Bank of Cyprus Law. ii) Cyprus Security and Exchange Commission (CYSEC) CYSEC is responsible for the general supervision of the capital market and the stock exchange market and the transactions taking place in Cyprus, including securing the smooth operation and development of these markets, the protection of the investors, the monitoring of transactions. CYSEC may take measures to prevent and suppress acts which contravene the provisions of any law for which it is responsible (e.g. in relation to (a) the provision of investment services, the exercise of investment activities and the operation of regulated markets, (b) transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, (c) conditions for making an offer to the public of securities and on the prospectus required to be published when securities are offered to the public, (d) market abuse, (e) UCITS, (f) public takeover bids for the acquisition of securities of companies and (g) the prevention and suppression of money laundering activities), study and suggest measures to other competent authorities and secure the integrity of the transactions, the public interest, the protection of the investors and the effectiveness and just operation of the capital market. The governing body of CYSEC is its Board which consists of a Chairman, a Vice- Chairman and another three members, who are all appointed by the Council of Ministers. CYSEC and its Board are independent from the government of Cyprus. iii) Council of the CSE The Council of the CSE is responsible for the management of the CSE and the implementation of its policy. It supervises the operation of the CSE, approves the listing of securities, determines the working hours of the CSE and has exclusive authority over the management and administration of its assets. The Council of the CSE consists of seven members, including its Chairman and Vice-Chairman, who are all appointed by the Council of Ministers. The overall supervision of the CSE is assigned to the Minister of Finance and is carried out by CYSEC on its behalf. iv) Cooperative Societies Supervision and Development Authority The said Authority is responsible for the supervision and development of cooperative societies and is effectively a department of the Ministry of Commerce, Industry and Tourism. Its governing body is the Commission of the Authority, which consists of five members, including its Chairman, who are all appointed by the Council of Ministers. The main powers of the Commission are the supervision and regulation of cooperative authorities, the determination and implementation of the Authority s policy and the adoption of secondary legislation regarding the regulation of cooperative societies. v) Superintendent of Insurance The Superintendent of Insurance is the head of the Insurance Companies Control Service. The said Service is responsible for the supervision and operation of insurance undertakings and the implementation of the Insurance Services and Other Related Matters Law, 35(I) of 2002, as amended and is effectively a department of the Ministry of Finance. The Service examines applications for the licensing of insurers, examines and analyses the financial statement of insurance undertakings in order to establish their solvency and their ability to pay their debts,

5 supervises the investments of insurance undertakings in approved assets, generally ensures that insurance undertakings operate on sound insurance principles and examines applications for the registration of insurance intermediaries. All the powers of the above mentioned Law are conferred upon the Superintendent of Insurance, who is assisted by two Assistant Superintendents of Insurance. These persons are public officers who are appointed by the Council of Ministers. 3) Describe briefly the activities under supervision and give a list of the different types of licenses available. A banking license is granted by the Central Bank for the carrying out of the business of lending of funds acquired from the assumption of obligations to the public, in the form of deposits, securities or other evidence of debt. The activities for which a cooperative society may be licensed are widely defined and include the promotion of the economic interests of its members. In practice, cooperative societies are licensed to accept deposits from the public and to lend funds to its members. A company may be licensed as an investment firm by CYSEC for the provision of investment and non-core services and activities. The activities under supervision are the following: Investment services and activities - Reception and transmission of orders in relation to one or more financial instruments; - Execution of orders on behalf of clients; - Dealing in financial instruments on own account; - Portfolio management; - Investment advice; - Underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis. Non-core services - Safekeeping and administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management; - Advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings; - Foreign exchange services where these are connected to the provision of investment services; - Investment research and financial analysis or other forms of general recommendation relating to transactions in financial instruments. The Superintendent of Insurance supervises insurance, reinsurance and insurance intermediation services and issues licenses for the carrying out of these services accordingly. A UCITS may be licensed by CYSEC for the collective investment in transferable securities and may take either the form of a company or a mutual fund. An institution may be licensed by the Central Bank for the provision of payment services.

6 An electronic money institution may be licensed by the Central Bank for the issuing of means of payment in the form of electronic money. 4) Describe briefly non-regulated financial and banking activities. The main kind of financial and banking activity which is not licensed is the lending of funds otherwise than from the assumption of obligations to the public. In other words, the provision of loans and other credit facilities by an institution or individual who uses its/his own funds is not regulated. 5) Describe briefly non-permitted financial and banking activities and/or government monopolies. In general, there are no financial or banking activities which are either not permitted or subject to government monopoly. II. BANKING ACTIVITIES 6) Different types of banking licenses. Activities permitted under each of them. Activities prohibited. The following types of banking licenses are available: A) License to carry on banking business This is the most common type of banking license. It permits the engagement in banking business, i.e. lending of funds acquired from the assumption of obligations to the public, whether in the form of deposits, securities or other evidence of debt. On the other hand limitations and prohibitions are imposed on: i. the total value of the credit exposures granted to any one person, large credit exposures, credit exposures granted to directors of the bank, etc; ii. the acquisition and purchase of any immovable property or the holding of any right therein, subject to certain exceptions; iii. subject to the Central Bank s prior written approval and subject to any conditions imposed by the Central Bank as well as certain specified exceptions: (a) (b) the acquisition or holding, directly or indirectly, of more than 10% of the share capital of any other company or having the control over such company, and in the case of a bank incorporated in Cyprus, the value of any share capital held in any other company and for all companies in aggregate, which shall not exceed 15% and 60% of the bank s capital base, respectively;

7 iv. the engagement, whether on its own account or on a commission basis, in any trading activity or enterprise save in so far as may be necessary in the ordinary course of banking operations for the satisfaction of debts due to the bank; v. the acquisition or dealing for its own account in its own shares, vi. the granting of credit facilities to persons other than the employees of the bank in excess of Euro for the purpose of enabling the purchase of its own shares or the shares of its holding company or the shares of any subsidiary of the bank or of its holding company. B) License for the establishment in Cyprus of a representative office of an institution which is entitled under the laws of another country to carry on business which substantially corresponds to banking business A representative office is the office from which the interests of the entity to which it belongs are in any way promoted or assisted but at which no banking business or the business of accepting deposits is carried on. C) Provision of cross border services and establishment of branches by a bank licensed in another EU member state. This does not require the issue of a license by the Central Bank to carry on banking business. The competent supervisory authority of the member state which licensed the bank wishing to establish a branch in Cyprus communicates to the Central Bank a number of details related to the bank. The Central Bank shall then supervise the branch and, if necessary, indicate the conditions under which these activities must be carried on in Cyprus. 7) Procedures to be followed and requirements to be met to obtain each of the different licenses. Formalities to be fulfilled, documentation to be submitted, guaranties requested, time estimation, etc. Applications for a license to carry on banking business shall be presented by the applicant to the Central Bank together with the memorandum and articles of association and other constitutional documents of the applicant, as well as the programme of operations setting out, inter alia, the types of business envisaged and the structural organisation of the bank and any other documents and information which the Central Bank may require. The policy with respect to the granting of licenses to carry on banking business is determined by the Central Bank. The maximum time for a decision to grant or refuse to grant a license is one year from the receipt by the Central Bank of the application for a bank license. With respect to the license for the establishment in Cyprus of a representative office of a non- Cypriot institution the prior written approval of the Central Bank is required. The Central Bank may grant its approval subject to any conditions which it may consider proper to impose.

8 8) Legal structure admitted/requested for each of the different licenses. a) Different types of legal structures that may be used, i.e. corporations, limited liability partnership, branches, subsidiaries, etc. A license to carry on banking business shall be issued only to a legal person established in Cyprus under the Companies Law or under any other law or established in a country other than Cyprus under comparable laws of the country concerned. b) Capital requirements and own fund rules. A bank incorporated in Cyprus shall have at all times minimum own funds of not less than Euro or such other higher amount that the Central Bank may determine, while it shall maintain a capital adequacy ratio at such minimum level as may be determined by the Central Bank from time to time. c) Transfer of control and ownership regime. Is it regulated? The transfer or partial transfer of the ownership and/or control of banks is regulated by the Central Bank pursuant to the Banking Law, while there is also a specialized legislation in this area (Transfer of Banking Business and Securities Law 64(I) of 1997, as amended). If the relevant bank is a public company listed in the CSE, the transfer of its control and ownership will also be subject to regulation by the CSE and CYSEC. d) Personal requirement and restrictions that may apply in each case for officers, directors, shareholders, etc. The prior written approval of the Central Bank is required for any person to act as director, chief executive or manager of banks. This requirement is especially relevant to any person who is bankrupt or has been convicted in any country of an offence involving fraud or dishonesty or has been convicted of an offence under the Banking Law. The prior approval of the Central Bank is required for any person, either alone or in conjunction with any associates, to acquire control or increase its participation beyond the one initially approved, over any bank incorporated in Cyprus or its holding company. e) Special requirements/restrictions for foreigners either individual or legal entities (including short description of WTO/GATS commitments and exemptions). No special requirements or restrictions are imposed on foreigners (either individuals or legal entities) with respect to the issuing of a license. It is noted that a banking license may only be issued to legal persons.

9 9) Is there a Deposits Insurance? Is it mandatory or based on self-regulations? Provide a brief explanation of how it operates. The Central Bank, in exercise of the powers vested in it under the Banking Law has issued the Regulations on the Establishment and Operation of the Deposit Protection System for the purpose of providing protection to depositors. Under the said Regulations, the Deposit Protection Fund (a separate legal entity) has been established. The purpose of the Fund is to provide protection and pay compensation to depositors in case a member bank is unable to repay the deposits of its customers. Participation in the said scheme is compulsory for all banks licensed by the Central Bank, which accept deposits from the general public including, in the case of banks incorporated in Cyprus, their branches operating in other European Union countries. The Management Committee of the Fund may exempt a Cyprus branch of a foreign bank incorporated outside the European Union from joining the Fund provided that it is covered by an equivalent Fund in its country of origin. 10) Interest rate. Is it regulated? Should the answer be affirmative, explain briefly its regulatory framework. Pursuant to the Liberalization of Interest and Related Issues Law 160(I) of 1999, the interest rate is no longer regulated, but an obligation is imposed on all the credit institutions not to compound interest more than twice a year. 11) Sanctions (civil, administrative, or criminal) for violations of the legal and regulatory dispositions. In the exercise of its supervisory powers pursuant to the Banking Law or the secondary legislation issued there under, the Central Bank may, after calling the bank to state its defence, impose an administrative fine ranging from Euro to Euro , which in the case of a continuous contravention may be supplemented by a daily fine ranging from Euro 100 to Euro for each day during which the contravention continues. The infringement of certain of the provisions of the Banking Law 66(I) or any secondary legislation issued by the Central Bank under the said Law, is an offence punishable by a fine not exceeding Euro and in case of a continuing offence by a further fine not exceeding Euro for each day during which the offence continues. The infringement of certain other provisions of the Law is also punishable by imprisonment not exceeding two years. Any director, chief executive, manager, partner or other officer or employee of the bank or of the organization, who authorizes or knowingly permits such infringement shall be guilty of an offence and in case of conviction shall be liable to the above mentioned penalties. III. BANK SECRECY LAWS 12) Is clients information protected? Are there any restrictions for its use? The clients information is protected, in that it is generally confidential and privileged.

10 13) Should answer to number 12) be affirmative, please describe the legal framework, i.e. scope, limitation, exceptions. The Banking Law and the Cooperative Societies Law provides that no director, chief executive, manager, officer, employee or agent of a bank or a cooperative society and no person who has by any means access to the records of a bank or a cooperative society, with regard to the account of any individual customer of that bank or cooperative society shall give, divulge, reveal or use for his own benefit any information whatsoever regarding the account of the customer, except where: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) the customer or his personal representative gives or give his or their written permission to do so; or the customer is declared bankrupt or if the customer is a company, the company is being wound up; or civil proceedings are instituted between the bank (or cooperative society) and the customer or his guarantor relating to the customer s account; or the information is given to the police under the provisions of any law or to a public officer who is duly authorized under that law to obtain that information or to a court in the investigation or prosecution of a criminal offence under such law; or the bank (or cooperative society) has been served with a garnishee order attaching moneys in the account of the customer; or the information is required in the course of his duties by a colleague in the employment of the same bank (or cooperative society) or its holding company or the subsidiary of the bank (or cooperative society) or its holding company or an auditor or legal representative of the bank (or cooperative society); or the information is required to assess the creditworthiness of a customer in connection with or relating to a bona fide commercial transaction so long as the information required is of a general nature and in no way related to the details of a customer s accounts; or the provision of the information is necessary for reasons of public interest or for the protection of the interests of the bank (or cooperative society). It should be borne in mind that the Processing of Personal Data (Protection of Individuals) Law 138(I) 2001, as amended applies and imposes various obligations in relation to the processing, storing and disclosure of data in relation to natural persons whose identity is known or may be ascertained from such data. The said Law applies to controllers (i.e. banks and other financial institutions) established in Cyprus and to controllers not established in Cyprus but who, for the purposes of processing personal data, make use of means, automated or otherwise, situated in Cyprus, unless such means are only for the purposes of transmission of data through Cyprus. 14) Sanctions (civil, administrative, or criminal) for violations. In the case of banks, disclosures in breach of banking secrecy may be sanctioned with (i) an administrative fine ranging from Euro to Euro , depending on the seriousness of the contravention and/or (ii) imprisonment not exceeding two years or a criminal fine not exceeding Euro or both.

11 In the case of cooperative societies, disclosures in breach of the required secrecy may be sanctioned with (i) an administrative fine not exceeding Euro depending on the seriousness of the contravention and/or (ii) imprisonment not exceeding two years or a criminal fine not exceeding Euro 8.543or both. The entity in breach could also be liable for damages, if the customer could prove that the negligence of the bank or cooperative society caused damage to him.