Central Bank of Cyprus: Cyprus sets shell companies under scrutiny.

The Central of Cyprus (CBC) informed last week the commercial banks of the island that it will amend the Anti Money Laundering Directive to include a new definition of shell companies.

The aim of the CBC is “force” commercial banks to cease any business relationship with companies coming from zero tax jurisdictions like Seychelles, Belize and the BVI and introduce more transparency and reliability in the Cypriot banking system.

The CB chose to inform commercial banks in advance of its intentions by way of a letter that outlines the forthcoming changes.

What is a Shell Company according to the new definition?

The term “shell company” shall refer to a non-publicly traded limited liability company or any other business entity that fulfils at least one of the following criteria:

• It has no physical presence in the country of its incorporation (except mailing address) ;
• It conducts no significant economic activity and has no documentary proof of such activity;
• It is registered in a jurisdiction imposing no obligation to submit financial reports audited by independent auditors to the state authorities ;
• It is a tax resident of a jurisdiction recognised as a “tax haven” or has no tax residence.

As it is noted in the letter that was sent to commercial banks the  presence of a third person such as a lawyer, an accountant, or a TCSP (trust or company service provider), acting merely as an agent of the company and (or) providing nominee services including company secretary duties does not constitute physical presence.

In addition , “the lack of employed personnel –including the nominal presence of one single person as a staff member– is construed as lack of physical presence”.

“If a company fulfils any of the above criteria, engaging into or renewing a business relationship should be avoided.”

Exceptions to the new rule.

In certain cases commercial banks may accept shell companies as clients..

So, if a company is established for the purpose of holding stock or shares of another business entity or entities with identifiable activities and ownership, solely for the purpose of holding intangible or other assets, including real estate or ships and to facilitate currency trades and asset transfers, corporate mergers, acts as group treasurer or in any other case where convincing proof can be provided that the company is engaged in legitimate business and substantiated information is provided about its ultimate beneficial owners.

As a result there are certain exceptions to the general rule but it is expected that the exceptions will be applied very strictly and only in clear cut situations.

Effect of the decision on the Cypriot banking system.

Commercial banks have already started closing bank accounts of companies that consider that they violate the new guidelines. This , despite the fact ,that there are still many grey areas and the amending directive has not yet been implemented.

Even though any regulation that strengthens the transparency in the banking system is to be welcomed, yet it should be noted that sudden, unilateral, piecemeal approaches , that are the result of political pressure, that do not take into account the tax environment, system and practice in Cyprus are likely to create instability and confusion rather than solve problems.

Cyprus sets shell companies under scrutiny. The intentions of the Central Bank of Cyprus.

Source: Christophoros Christophi