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Ahead of next month’s global appraisal of Cyprus’ controls against financial crime, senior bankers in Washington, D.C., attributed the financial crisis that threatened to crater their country’s economy in prior years to weak compliance with international standards.

In 2013, the government in Nicosia began overhauling the nation’s capital requirements and anti-money laundering regulations, and forced the country’s banks to impose significant losses on their depositors, to help secure a €10 billion injection of capital from the EU and International Monetary Fund and stave off economic disaster.

Cypriot officials have since made tax evasion a predicate offense for money laundering, ordered banks to subject domestic elected officials to the same enhanced scrutiny required of foreign politicians, and directed them to meet in person with the beneficial owners of legal entities they seek to onboard as clients, and on a recurring basis thereafter.

Coupled with the willingness of domestic banks to go beyond the letter of the law, the adoption of these and other measures have led to a “cultural transformation” in Cyprus and the strongest controls against financial crime in Europe, representatives of two of the country’s largest lenders claimed Wednesday.

Lax AML standards, low tax rates and EU membership made Cypriot banks before the crisis especially attractive to Russian and Eastern European nationals suspected of illicit finance, Ioannis Matsis, the chief executive of Hellenic Bank in Nicosia, said at the Center for Strategic and International Studies, or CSIS, in Washington, D.C.

From 2000 to 2008, the year Cyprus formally adopted the euro, bank deposits jumped fivefold, fueling a system of uncontrolled lending that later collapsed under the weight of nonperforming loans, according to Matsis.

“Unfortunately during that period … money and clients were accepted without the stringent standards that one would expect,” Matsis said Friday. “If you look under the bonnet, the bail-in wasn’t [because of] the NPLs, it was the increase in deposits that was due to the relaxed AML standards.”

Legal entities with obscure owners became a focus of the overhaul that followed, with Cypriot banks eventually closing the accounts of tens of thousands of shell companies.

Regulators told 35 lenders in letters dated Jun. 14 and Nov. 2, 2018 to withhold services from firms that lack a physical address in their home countries, do not appear to conduct any real business or are registered in jurisdictions that enable corporate secrecy, among other criteria, unless they can substantiate their legitimacy.

Since 2013, when the overhaul began in earnest, Hellenic Bank has severed ties with 45,000 of its previous 55,000 legal-entity clients, Matsis said Wednesday.

Combined with the loss of revenue from terminating tens of thousands of relationships, the increased cost of complying with more stringent AML standards would have posed an existential risk for the lender.

“We’ve had a significant rise in compliance staff, we had 15 … in 2013 and now we have 63. We invested in training and … systems,” Matsis said. “Thankfully [economic growth] has helped provide the banks an alternative revenue stream that balanced these losses from the international business and ensured our survival.”

Domestic and international concerns over Cyprus’ ability to fend off illicit flows remain unabated, however.

Cyprus’ national risk assessment, released in December 2018, confirmed that nonresident accounts still pose a significant threat to the Mediterranean nation, while Germany in its own assessment last month took the rare step of unilaterally naming the island, and fellow EU member Malta, as presenting a high risk of illicit finance to its economy.

The U.S. Treasury Department by that point had already concluded in a report to Congress that Cyprus remained a key transit point for suspicious funds from Russia, slated the country’s “permissive” scheme of granting citizenship to foreign investors, and criticized its alleged failure to supervise corporate services providers.

The report recognized Cypriot lenders’ voluntary compliance with U.S. sanctions and freezing of U.S.-blacklisted Russian oligarchs Oleg Deripaska and Victor Vekselberg’s assets following their designations by the department’s Office of Foreign Assets Control, or OFAC, in April 2018.

Vekselberg held a 9 percent stake in Bank of Cyprus at the time of his designation.

Marios Skandalis, the lender’s head of compliance, said Wednesday that compliance staff immediately informed the Russian that his assets had been frozen and his voting rights annulled.

“For legal persons we don’t just go for 50 percent control by an SDN [U.S. specially designated national] … we move lower … to 1 percent,” Skandalis said. “We also apply OFAC sanctions in all currencies and not just the U.S. dollar.”

Funds held by high-risk nonresident clients, shell companies and blacklisted parties at the bank have moved from Cyprus to other “prime European financial services centers” in recent years, including Germany, Luxembourg, the Netherlands, Malta and the U.K., Skandalis said.

Moneyval, the European affiliate of the Financial Action Task Force, or FATF, plans to release the results of its assessment of Cyprus’ AML regime in December.