The Regulatory Framework
The EU is paying significant attention to anti money laundering (AML), in light of the increasing numbers of terrorist attacks as well as the continuous revelations of the failure of the banking system to properly implement the AML laws and regulations and prevent money laundering. Cyprus has transposed into its national law the directive EU 2015/849 (4th AML Directive) in April 2018 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.
After the introduction and finalization of the 4th AML Directive, the European lawmakers were stunned by the new levels of sophistication that money laundering had attained, as well as the facilitating part that cryptocurrencies played and could potentially continue to play if this behavior remained unchecked. Political scandals like the Panama Papers that followed in the wake of 4th AML directive pushed the European lawmakers to update it further. The directive 2018/843 (5th AML Directive) was effected, which introduced new requirements for cryptocurrencies, UBO registers, and prepaid card transaction limits. The aim of these directives is to attempt to restrain the negative effects of money laundering and terrorist financing, increase transparency and provide a more stable and updated database. Also, the idea behind these is to have a clear understanding on behalf of “whom” the transactions are taking place.
While the creation of the UBO register was provided under section 61(4)(a) of the Prevention and Suppression of Money Laundering and Terrorist Financing Law of 2007 (188/2007), a subsidiary legislation was issued activating the UBO register and appointing the Registrar of Companies and Official Receiver of the Ministry of Energy, Trade and Industry as the competent authority for the UBO Register in December 2020 (13(I)/2018). Cyprus' deadline for the implementation of the 5th AML Directive was initially the 18th of January 2021 however, it was eventually passed on the 18th of February 2021 by the Parliament of Cyprus known as the Prevention and Suppression of Money Laundering and Terrorist Financing (Amended) Law of 2021.
Intended Implementation Timeframe
The initial date for the collection of data for the beneficial owners and other legal entities is the 16th of March 2021. It is expected that soon, the Registrar of Companies and other responsible organizations will proclaim the issue of relevant regulations on the maintenance and operation of the Register, as well as a manual for the operation of the system developed for this purpose. The aim of these regulations is to assist and facilitate the procedures for the introduction of the UBO Register. After the introduction of the register all service providers eligible to submit information will have a grace period of 6 months to put all the requested information in the register.
UBO Register for Corporate Entities
The UBO Register concerning corporate entities shall be created and managed by the Cyprus Registrar of Companies. Every company and legal entity incorporated in Cyprus shall be required to maintain adequate information on its beneficial owner(s). The register shall contain detailed information on the natural person(s) who ultimately controls or owns a legal entity, as well as details in regards to their rights in the specific entity.
A UBO is loosely defined as the natural person who has the ultimate control or ultimate ownership in a company. Specifically, the definition of the UBO in case of Cyprus private companies is:
- any physical person who ultimately owns or controls a legal entity through direct or indirect shareholding ownership of 25% plus one share; or
- any physical person with an ownership interest of more than 25% in the customer of the company.
It is not certain as of yet, which exact definition will be used in the upcoming regulations or whether all the UBOs should be entered in the register, no matter what their interest percentage is in an entity. Several features including the creation, the operation and the procedures of the UBO Register are expected to be defined also in the said regulations.
UBO Register for Trusts or Similar Legal Arrangements
The law provides for the creation of a UBO register for express trusts. The responsible body for the creation and operation of the UBO register for Trusts is the Cyprus Securities and Exchange Commission (“CySec”). In this register, the information to be entered shall include the identity of:
- the settlor;
- the trustee;
- the protector (if any);
- the beneficiary (or the class of people in whose main interest the legal arrangement or entity is set up or operates, as applicable); and
- any other physical person exercising effective and ultimate control over the trust.
Regulations are also expected to be issued by CySec specifying more details about the creation and operation of the Trusts register as well as the exact definition of the “express trust” and “similar legal arrangements”.
Who shall have access to the Registers?
One of the most significant changes of the 5th AML Directive is that the UBO register for corporate entities (once it is in full operation) will be made accessible to the general public and not only to the competent authorities and obliged entities in the context of performing their due diligence obligations as it was proclaimed by the 4th AML Directive, except to the Trusts. The UBO register for Trusts will be accessible only to competent authorities and obliged entities in the context of performing their due diligence obligations as well as to any physical or corporate person that can demonstrate a “legitimate interest”. The UBO register for Trusts will be accessible without restrictions by:
- Supervisory Authorities (Central Bank, CySec, CyBar, ICPAC etc.);
- the Tax authorities;
- Customs Department; and
- the Cyprus Police.
Other organizations and institutions will have to show a “legitimate interest” to be able to access the register. The term will be defined in the relevant upcoming regulations however, general AML laws define “legitimate interest” as the meaning of interest of a person with respect to the suppression of money laundering activities and the offences prescribed under applicable legislation.
When a Trust or similar legal arrangement holds or owns a controlling interest in a corporate or other legal entity through direct or indirect ownership, access to this information will be granted upon written request.
It is also duly noted that there will be some exceptions as to the access to the whole or in part of the information of the UBO or the trusts in cases that the UBO would be exposed to disproportionate deception, kidnapping, extorsion, harassment, violence, intimidation or where the UBO is a minor or incompetent.
Further significant amendments introduced by the 5th AML Directive
Member states are required to implement and introduce several mechanisms to ensure that the information inserted in the registers is updated and correct. Sanctions shall be applied in cases of any breach. One of the mechanisms proposed is a platform where any person or entity can notify the relevant authorities of any discrepancies found between the UBO registers and the information they hold. This will ensure that the information in the registers is up-to-date and it will further discourage the submission of wrong information.
In addition, member states are required to harmonize and interconnect their respective registers with the EU registers to achieve more control and harmonization within the EU.
Possible Structures for Maintaining Confidentiality
Those who are looking to limit the public access to the beneficial ownership of their structures should consider, following tax and legal reviews, the establishment of a trust as the ultimate holding vehicle of their assets. This will offer a supplementary protection to the natural person since the general public will be restricted from viewing the trust register.
The creation of the UBO register is expected to promote the stability and the integrity of Cyprus' financial institutions. Cyprus can still maintain its status as a preferred destination for productive business activity since it is aiming high to create a trustworthy business environment on which existing and new coming businesses can rely on.
We shall be providing more details soon upon the release of the relevant regulations.
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.