On the 02 November 2018 the Central Bank of Cyprus issued a circular to all credit institutions under its supervision revising the definition of "shell companies" and the corresponding treatment of such companies under their earlier circular this year dated 14 June 2018. The rationale and objective of the original circular, said to be orchestrated by foreign correspondent banks, was to combat money laundering and tax evasion facilitated by the use offshore entities. While the underlying objective of the said circular is valid and justifiable, its practical application was viewed by many as a case of destroying the entire garden for killing some weed. The arbitrary definition set, ignorant of commercial realities, in combination with extremely risk averse, "check list" approach adopted by Cyprus banks and individual bankers has in practice led to classifying legitimate businesses as "shell companies" thus treating legitimate, high caliber businessmen as common criminals. This has an extremely adverse effect on Cyprus as an international business center, and basically unwinds what the stakeholders of the professional services industry have for decades tried to achieve, including the government and the banks. This new circular could be said to allow somewhat more flexibility for common sense, without prejudice of course to existing obligations under the anti-money laundering legal and regulatory framework.
Specifically "The term "shell company/entity" refers to a limited liability company or any other legal/business entity that (...)
- has no physical presence or operations in its country of incorporation/registration (other than a mailing address); and/or
- has no established economic activity in its country of incorporation/registration, little to no independent economic value and no documentary proof to the contrary."
The term "physical presence of a company/entity is construed as having a place of business or operations (own or rented premises) in the country of registration/incorporation. Also, absence of meaningful mind and management could be construed as lack of physical presence. The presence of a third person providing merely nominee services including company secretary duties does not constitute on its own physical presence"
In terms of economic activity, "notwithstanding the above (..) the following circumstances could indicate economic activity:
- the company/entity is established for the purpose of holding stock or shares or other equity instruments of another business entity or entities engaged in legitimate business with identifiable ultimate beneficial owner(s);
- the company/entity is established for the purpose of holding intangible or other assets including real estate, ship, aircraft, portfolio of investments, debt and financial instruments;
- the company/entity is established to facilitate currency trades and asset transfers, corporate mergers as well as carrying out asset management activities and trading of shares;
- the company/entity acts as a treasurer for companies recognised as a group or manages the activities of the group;
any other case where convincing evidence can be provided that the company/entity is engaged in legitimate business, with identifiable ultimate beneficial owner(s)."
The most important revision of the circular is the flexibility allowed to credit institutions for engaging or maintaining a business relationship for some cases despite the fact that an entity may fall under the definition of "shell company".
Specifically (...) "If an entity falls within the above definition and :
- it is registered in a jurisdiction where companies/entities are not required to submit to the authorities independently audited financial statements and does not voluntarily prepare audited financial statements by independent qualified professional accountants who are licensed or regulated; and/or
- it has a tax residence in a jurisdiction included in the EU list of non- cooperative jurisdictions for tax purposes or the OECD's list of non- cooperative jurisdictions for tax purposes or has no tax residence whatsoever,
then business relationships with such an entity shall be avoided."
In all other cases of companies/entities falling within the definition, "the institution shall decide on whether to engage in or maintain a business relationship applying a risk based approach in accordance with the legal and regulatory framework and providing fully substantiated justification of such a decision which should be appropriately documented and recorded."
While the revision is certainly a step towards the right direction, this circular (soon to become part of a CBC Directive) in combination within existing anti-money laundering framework under EU law and other international treaties create a hostile business environment for legitimate entities of true substance and cause refusal of business, substantial delays, both in account opening but also in conducting legitimate transactions, and the closing of accounts. For these reasons practitioners in the professional service industry seek alternative solutions to Cyprus banks to accommodate international business clientele, such as EU or credible offshore banks with more sophisticated anti-money laundering policies and procedures and proper implementation of such policies, applying a "risk based" rather than a strictly "check list" approach. What seems to also be the trend, is the use of licensed electronic banks and other payment solutions, which offer the same features as traditional bank accounts but which, with the use of technology, alleviate at least some the administrative burden of anti-money laundering compliance requirements and are generally more convenient. Hopefully in the near future, financial technology, whether blockchain or otherwise, will serve as a final solution with to this never ending and ever increasing administrative burden of anti-money laundering compliance.
Originally published 08 November 2018
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