Central Bank of Cyprus Cracks Down on Shell & “Letterbox" Companies
1 year ago by Wassim Antar

Central Bank of Cyprus Cracks Down on Shell & “Letterbox" Companies

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The hottest news in Cyprus recently has been regarding money laundering. A statement issued by the Central Bank of Cyprus, instructed all banking institutions not to open new bank accounts, or renew existing ones with companies that are regarded as "shell� or “letter box" companies. “The Central Bank of Cyprus shall incorporate in the forthcoming revision of the directive for the prevention of money laundering and terrorist financing, issued to credit institutions (…), certain requirements for business relationships with so called ‘shell companies`,� says Central Bank of Cyprus Supervisor. The announcement states that all trading companies that have no substance (effective place of business and management) will not be permitted to maintain bank accounts in Cyprus. Additionally, the circular stipulated that trading companies incorporated in “tax havens� such as British Virgin Islands (BVI), the Seychelles and the Marshall Islands, will be required to become tax resident in a tax jurisdiction such as Cyprus for instance, for it to be able to continue banking in Cyprus. Financing companies and holding companies, however may be exempted from these measures. Even though they do not have substance and/or are not tax resident in a tax jurisdiction. Exemptions The following exemptions have been detailed within the Central Bank of Cyprus circular:
  1. Companies that hold assets (holding companies with investments in shares or property).
  3. Companies that carry out group financing (financing companies).
These companies will be permitted to continue banking in Cyprus as long as:
  1. Their ownership is identifiable.
  1. Their economic purpose and activities are disclosed and clear.
Therefore, the Central Bank of Cyprus conveyed that credit institutions shall not engage or renew business relationships with companies that meet any of the following criteria:
  1. Has no physical presence in its country of domicile (other than mailing address).
  3. Has no established economic activity.
  5. Is registered in a jurisdiction where companies are not required to submit to the authorities independently audited financial statements.
  7. Has a tax residence in a jurisdiction recognised as a “tax haven� or has no tax residence whatsoever.
The circular which was understood to have an immediate effect on new business relationships and for existing business relationships by 31 July 2018, requested credited institutions to consider the following before taking a decision not to open or close a bank account:
  1. The 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 ship vessels.
    • To facilitate currency trades and asset transfers, corporate mergers, acts as a group treasures 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 owner or owners (UBOs).
Shell Companies It remains essential to highlight that shell companies are usually seen as legitimate entities that do not hold actual assets or drive actual business operations. They function as transactional vehicles to obtain financing, maintain control over a conglomerate company or allow firms to enjoy more favourable tax treatments. They may however, provide facilitations to money laundering schemes. Measures The above measures adopted by the Central Bank are not being implemented without context. They aim at mitigating the risks related to money laundering schemes as per Cyprus` commitment to Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism – MONEYVAL. ‌MONEYVAL is a permanent monitoring mechanism of the Council of Europe, a pan-European organisation with 47 member states, reporting directly to its principal organ, the Committee of Ministers. MONEYVAL is entrusted with the task of assessing compliance with the principal international standards to counter money laundering and the financing of terrorism and the effectiveness of their implementation, as well as with the task of making recommendations to national authorities in respect of necessary improvements to their systems. MONEYVAL also conducts thematic typologies research of money laundering and terrorist financing methods, trends and techniques. MONEYVAL was originally an observer to the Financial Action Task Force (FATF) and from June 2006 became an associate member. The above measures adopted by the Central Bank are not being implemented without context. They aim at mitigating the risks related to money laundering schemes as per Cyprus` commitment to the Financial Action Task Force (FATF) recommendations. The FATF releases various policy models and data, to help countries combat money laundering. The most influential of which is its International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferations (The FATF Recommendations). These recommendations aim at creating the most comprehensive standard with which to measure a country`s anti-money laundering (AML), counterterrorism and nuclear proliferations laws and policies. It also serves as a basic framework of laws that its members should have. In general, financial institutions should adopt AML policies and procedures detailed within the recommendations; they also need to tailor their programs to the requirements of the jurisdictions in which they operate. Solutions The disguising of the existence, nature, source, control, beneficial ownership, location and disposition of property derived from criminal activity remains the biggest headache for countries combatting money laundering. Cyprus seems to be on the right track in its fight against money laundering schemes. Business Intelligence companies such as Cedar Rose play a critical role in investigating the nature of entities and in tracing ultimate beneficiary owners (UBOs) and politically exposed persons (PEPs) via comprehensive due diligence reports. Cedar Rose`s reports (and local site visits) potentially help in unveiling any illegal practices related to fraud, money laundering or illicit sources of funding. Cedar Rose offers a variety of articles to keep you up to date and informed about the business world around you. Why not check out our most recent one here? Written by Wassim Antar, Senior Due Diligence Analyst Sourced Image: World Atlas ***** The sole purpose of the article above is to generate public discussion, it has no intention to constitute legal advice. *****

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