Cyprus: The Law Providing For The Imposition Of Restrictions On Transactions Under The Emergency Of 2013 ("The Capital Controls Law")

Last Updated: 8 April 2013

On 23 March 2013, The Cyprus Parliament Enacted A Law Empowering The Government To Impose Restrictions On Capital Movements On Individuals And Businesses Operating Accounts With Credit Institutions In Cyprus. These Restrictions May Be Activated By The Relevant Authorities Only "In Cases Of Emergency And Following Consultation With The Relevant European Authorities And The International Monetary Fund ("IMF").

The Restrictions That May Be Imposed Include Limits On Daily Cash Withdrawals, Restrictions On Accessing Cash In Fixed Savings Accounts (For Example By Imposing A Notice Period), Limits On Cashing Cheques And Restrictions On Movements Of Funds. The Minister Of Finance May Impose Such Restrictions For Any Time Period And For Any Sums As He Or She Considers Appropriate.

It Should Be Stressed That Any Restrictions Apply Only To Banking And Monetary Transactions Involving The Cyprus Banking System. They Do Not Affect Corporate Or Other Structures Which Do Not Use The Cyprus Banking System.

Credit Institution

The Term "Credit Institution" Is Widely Defined In Section 2 Of The Law To Include Any Bank Which Operates Under The Banking Operations Law, Any Co-Operative Society Which Operates Under The Co-Operative Societies Law And The Housing Finance Corporation Which Was Established On The Basis Of The Housing Finance Corporation Law. It Therefore Extends To Overseas Banks' Cyprus Operations.

Powers Of The Minister Of Finance

Section 4 Of The Law Empowers The Minister Of Finance To Impose Temporary Restrictive Measures, Including Restrictions On The Movement Of Capital, On Credit Institutions And Any Other Natural Or Legal Persons On The Recommendation Of The Governor Of The Central Bank Of Cyprus (The "Governor"). The Minister May Impose Restrictive Measures Over Credit Institutions Only With The Agreement Of The Governor Only When Restrictions Are Considered To Be Absolutely Necessary. Before Imposing Any Restrictions The Minister Must Consult The IMF, The European Commission, The European Central Bank, The European Banking Authority And The Relevant Regulatory Authorities Of The Home Country Of Any Overseas Credit Institution Concerned.

Scope Of Restrictions Or Prohibitions

Section 5(1) Of The Law Sets Out The Measures That The Minister May Impose, As Follows:

  • Restrictions On Cash Transactions
  • Prohibition Of The Premature Termination Of Maturing Fixed Deposits
  • Mandatory Renewal Of Maturing Fixed Deposits
  • Restrictions On Or Prohibition Of The Opening Of Bank Accounts
  • Conversion Of Funds Held In Current Accounts To Fixed Deposits; The Term "Current Account" Is Defined To Include Current Accounts And 1 Week Notice Accounts With Or Without Overdraft
  • Prohibition Or Limits On Non-Cash Transactions;
  • Restriction On Inter-Bank Transactions Or  Transactions Within The Same Banking Institution
  • Prohibition Of Or Limits On Cheque Encashment
  • Restrictions On The Use Of Credit Or Debit Or Pre-Paid Cards In Transactions With Banks
  • Restrictions On Transactions By The Public With Credit Institutions:
  • Restrictions On The Movement Of Capital, Payments And Transfers
  • Imposition Of Penalty On Deposit Withdrawals
  • Any Other Restrictive Measure As The Minister May Consider Appropriate Under The Circumstances For Ensuring Financial Stability.

Any Restrictive Measures Under Section 5(1) Of The Law May Be Imposed By An Order Of The Minister Published In The Official Gazette (Section 5(2)). The Entry Into Force Of The Restrictive Measures Is To Be Specified In The Ministerial Order (Section 6(1)). Restrictions Will Not Apply To The Republic Of Cyprus Or The Central Bank Of Cyprus Itself.

Foreign Branches Of Cyprus Banks Also Affected

Similar Restrictions May Be Imposed On Overseas Branches Of Cyprus Banks To The Extent That They Are Necessary To Protect The Financial Stability Of Credit Institutions Within The Republic Of Cyprus And On That Basis The Should Be Notified To The Relevant Authorities Of The Host Country In Which They Operate (Section 5(3)).

Restrictions Do Not Trigger Protection Under Any Depositor Or Investor Compensation Schemes

Section 5(4) Of The Law Provides That The Imposition Of Restrictions Under The Law Does Not Trigger The Provisions Of Any Compensation Scheme Such As The Depositor Protection Schemes For Customers Of Banks And Co-Operative Societies Or Schemes For The Protection Of Investors Or Clients Of Credit Institutions Or Of Cyprus Investment Firms, Pursuant To The Provisions Of Each Respective Law Applicable Within The Republic.

Restrictions Do Not Trigger Contractual Or Statutory Events Of Default Or Insolvency Provisions

Furthermore, The Imposition Of Any Restrictions Does Not Trigger Any Contractual Or Statutory Provision Which Would Otherwise Initiate Any Winding Up Or Insolvency Proceedings Or Any Event Of Default Or Any Other Equivalent Event Relating To Insolvency (Section 5(3)(D)).

Restrictions Do Not Invoke The Rights Of Secured Creditors In Respect Of The Assets Of The Affected Credit Institutions

Similarly The Imposition Of Any Restrictions Under The Law Does Not Trigger Any Rights Of Any Secured Creditors Of An Affected Credit Institution Or Foreign Branch In Respect Of Any Assets Or Rights Over Which Security Applies In Relation To Their Claims Against The Affected Credit Institution Including A Foreign Branch Of Such Institution (Section 5(3)(E)) Nor Does It Lead To Bankruptcy Or Liquidation Proceedings Or The Inclusion Of The Said Person To The Central Archive Of Information (Known As "ΚΑΠ").

Penalties And Administrative Fines

Contravention Of Any Restrictive Measure Applied Pursuant To The Law Is A Criminal Offence Punishable By A Fine Of Up To Twice The Value Of Any Transaction Which Was Realised In Contravention Of The Restrictive Measure, By Imprisonment For Up To Five Years Or Both (Section 7). If A Credit Institution Violates Any Restrictive Measure Imposed Pursuant To The Law, The Relevant Regulatory Authority May Impose An Administrative Fine Of Up To Twice The Value Of The Transaction, Or May Suspend Or Revoke The Licence Of The Credit Institution Or Both (Section 8(1)). Comparable Administrative Fines And Penalties Apply In Respect Of Any Board Members, The Chief Executive Officer Or Managers Or Employees Of The Credit Institution (Section 8(1)).

Supervisory Committee

The Law Provides For The Establishment By The Ministry Of Finance And The Central Bank Of Cyprus Of A Committee To Apply And Monitor The Application Of Any Restrictive Measures Imposed Under The Law. The Committee Will Have The Power To Exempt Certain Transactions From The Scope Of Restrictive Measures.

Conclusion

It Was Made Clear By The Parliament That The Purpose Of The Law Was To Give The Minister The Powers To Deal With Emergencies, And That The Powers Should Only Be Exercised In The Event Of An Emergency.

Measures Will Be Imposed Under The Law Only If This Is Unavoidable For The Purpose Of Ensuring The Stability Of The Cyprus Banking System, And Only For A Limited Time. Any Measures That Have To Be Imposed, Especially Those Affecting The International Business Sector, Will Be Lifted As Soon As Possible.

As Soon As Any Order Or Directive Is Issued We Will Publish A New Announcement On The Matter Together With A Commentary On How The Restrictions Affect The Operations Of Corporate Structures And Clients Who Currently Use Cyprus.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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