Few weeks ago it was announced that some service providers in Cyprus and some physical persons have been assisting sanctioned persons bypassing them. They have been called enablers by the USA and the UK.
As a result, Bank of Cyprus freezed 4 thousand bank accounts. In addition, 400 Companies are frozen by the bank, Cyprus Registrar of Companies and can not operate.
The purpose of this article is not to explain what happen, it is all over the press. The purpose of this article is to assess how these companies can be helped.
The purpose of this article is to assess how these companies can be helped.
Affected Companies - Can New Service Providers Service Them?
This is a very crucial question, with high impact on the regulated and unregulated service providers (accountants, auditors, lawyers) that service such companies but the answer should be simple; and we believe the answer is a Yes.
The first sanction list, contained only 2 main offices and a handful of individuals has resulted to the freeze of appro. 400 companies in Cyprus because of their connections with these service providers; in other worlds 400 companies can not operate not because they were illegal, not because they have bypassed any laws and offcourse not because their Ultimate Beneficial Owners were sanctioned but because their management and structure composition contained these offices in their capacity as fiduciary service providers (directors, secretary and possibly nominee shareholders - in some other instances maybe ).
In other words, in Cyprus at present, at least 400 companies are blocked from performing any trading or banking activities and are in "freeze mode" until the Cyprus government and Cyprus Registrar of Companies decide what to do with them (this will be a political decission) as the management of these companies, in its fiduciary role, are the sanctioned Cyprus service providers mentioned above.
Which brings the next question in line.
Can other service providers service them?
Our opinion and approach to the matter
It is clear that substance over form, these affected companies are victims of their service providers which, as it appears - this is yet to be proven, have not been complying with the sanctions. These companies have not been involved in illegal activities nor have they bypassed any laws and regulations. Rather, they were unfortunate to collaborate with these service providers.
Should they be penalised?
No, if they have nothing to do with the sanctioned office other than receiving their services for standardised fiduciary or compliance purposes (accounting, audit, tax, nominee services) and as long as their UBOs and any controlling parties (Ultimate Beneficial Owners) are not in any sanction list these companies should not be destroyed (financially and literally).
It is simply not fair nor legal.
So what is the solution?
Change the Service Providers and Start on a Clean Sheet!
The only solution to this situation is to change the composition of the board and to find alternative, clean, service providers who will not entail them in such adventures again.
Choosing your service providers is like choosing your bank!!!
How to Choose Service Providers
Like the selection of banking institutions (this decade has shown that banks do fall and we do need to do our homework before deciding to which bank to deposit our money) the same applies, even for the regulated, audit and assurance firms, regulated fiduciary service providers and lawyers.
The UBOs and their management team should assess if these service providers, popular as they may appear within their inner circles are the right ones for them. What is their risk appetite and can they pose any risk to their clients, unintentionally?
Characteristics of Service Providers to take into consideration
We list below some basic characteristics of the service providers which we believe will minimise the exposure to sanctioned service providers and / or any troubles in this respect.
The bigger the size of a service provider the more liekly it is that one or some of their clients may have slipt the sanctions assessment net! In other words, when you have thousands of clients it is easer to make a compliance mistake; it is mathematically and statistically more probable than when you handle smaller portfolio of clients.
Reputation & Clientele base
If the service provider is popular amongst a specified jurisdiction, in our case Russians, it means it is possible it has ties to this juristiction and its political representatives. Again this could pose a future risk to its clients. In addition it is possible that maybe some existing clients run into troubles with the sanctions (same as size above).
Risk Appetite of the Office
How strict are the Service Providers following the AML regulations and overall compliance with local and EU laws and directives?
Do they take pride being adherent or is it the other way around?
Skills, Knowledge & Size
All service providers that are regulated locally and internationally (ICAPC, ACCA, ICAEW for Auditors and Accountants, Bar Association for Lawyers and ICPAC and Bar Association for fiduciary service providers) do have the expected knowledge and expertise to assist you as the Cyprus Regulators are strict with their admissions.
What about the Size. Does it matter in this case? Yes it does.
If you choose to switch to a small office you will not be able to receive the service you need especially if you are a large client with complex operations, translation requirements, multicurrency transactions amongst others. On the other hand if you choose a very big office you could be exposed to the first risk mentioned mentioned above; as if you are one in a thousand Russian companies, one of them may be sanctioned and again your operations will freeze.
You aim to be looking at medium sized service providers with > 10 employees who are not focussed, in this instance, in the Russian market so that the majority these risks are mitigated.
You never know, you may even be surprised by the quality and high attention you will be receiving!
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.