UPDATE 1-Cyprus watchdog raps cash-for-passport process

(Adds Interior Ministry statement)

By Michele Kambas

NICOSIA, Sept 24 (Reuters) - Cyprus's audit office said on Thursday thousands of passports could have been granted without proper authorisation under the island's citizenship-for-investment scheme - a programme critics fear could be used by money-launderers and other criminals.

For a minimum 2 million euro investment, Cyprus gives passports that guarantee visa-free travel through the European Union, which it joined in 2004.

Panned by critics as opaque and fraught with the risk of money- laundering, the scheme is popular with Russians, Ukrainians and, more recently, Chinese and Cambodians.

Cyprus's audit office, an independent body, said its own investigation suggested the cabinet overstepped its authority in approving citizenship not only to individual applicants but to family too.

"The authority given to the Council of Ministers applies to foreign businesspeople and investors, and not family members," it said in a report.

The issue, it said, could potentially concern thousands of cases. It should be addressed by a commission tasked to review and strip citizenship where necessary, it said.

The Interior Ministry, which handles applications, responded by saying the watchdog had addressed the issue "in isolation" focusing only on a specific period of time. It also accused the regulator of overstepping its authority with the probe.

It said it would await the outcome of a separate inquiry commissioned by the island's attorney-general and then take any action deemed necessary.

The citizenship-for-investment scheme has come under scrutiny both in Cyprus and in the European Union. Nicosia, which acknowledges past flaws and says they have since been rectified, defends it.

Reuters reported in Oct. 2019 that Cambodian nationals in the inner circle of long-time leader Hun Sen, plus family members, had acquired passports, leading authorities to a review of the programme.

Another report by Al Jazeera in August this year reported that at least 60 individuals who acquired citizenship between 2017 and 2019 were high risk, and would probably not have qualified with new tighter rules since introduced.

Cyprus's Auditor-General, Odysseas Michaelides, has often clashed with the government over jurisdiction and competency issues. The latest intervention was in the wake of the Al Jazeera report. (Reporting By Michele Kambas; Editing by Andrew Cawthorne and Angus MacSwan)