The European Commission's first EU Anti-Corruption Report released on Monday identifies weaknesses and gaps in the Cyprus system despite efforts by the authorities to prevent and address corruption.
Cyprus - which ranks 16th among 28 European countries while Greece is in last place - has demonstrated commitment to prevent corruption by amending legislation and establishing a coordinating body, the report said.
But the small number of prosecuted cases indicates a need to strengthen the enforcement system, it added.
"The European Commission suggests that Cyprus streamlines procedures to ensure effective investigations of corruption within the police. Codes of conduct for elected and appointed officials should also be introduced, in order to declare assets periodically," Brussels said.
"Furthermore, the Commission is suggesting that Cyprus restrains the possibility of state-owned companies to sponsor political events, regulates donations to election candidates, and obliges parties to publish financial information online," it added.
In addition, an extensive opinion poll presented in the report showed that 57% of Cypriots and 26% of Europeans overall, state that they are personally affected by corruption in their daily lives.
Four percent of Europeans, and 3% of Cypriots, say that they have been asked or expected to pay a bribe in the past year.
And 83% of Cypriots - the highest percentage in the EU - say that the only way to succeed in business is through political connections.
Furthermore, 85% of Cypriot entrepreneurs think that favouritism and corruption hamper business competition.
Monday's report clearly shows that corruption continues to be a challenge for Europe - a phenomenon that costs the bloc's economy around €120 billion per year, a Commission press release said.
Europeans are deeply worried about corruption - Eurobarometer survey results show that three quarters (76%) of Europeans think that corruption is widespread.
And that more than half (56%) think that the level of corruption in their country has increased over the past three years, it also said.