Cyprus attempts to withdraw banking facilities from shell companies

Cyprus’s Central Bank is drafting a directive stating that financial institutions should no longer open new accounts or maintain existing accounts for shell or letter-box companies.

Advance warning of the move was given in a circular issued to regulated financial institutions on 14 June, advising them against offering accounts to shell companies. These guidelines, to be incorporated into the new directive, stipulate that trading companies with no effective place of business and management, and hence no substance, will not be permitted to maintain bank accounts in Cyprus, says Nicosia law firm Elias Neocleous & Co.

The circular defines a shell as an entity that is not publicly traded, and which satisfies one of the following conditions:

  • it has no physical presence in its country of domicile apart from a mailing address;
  • it has no established economic activity, little or no independent economic value, and no documentary evidence to the contrary;
  • it is registered in a jurisdiction in which companies are not required to file independently audited financial statements; or
  • it is resident in a jurisdiction ‘recognised as a tax haven’, or has no tax residence at all. Trading companies incorporated in jurisdictions recognised as tax havens must become tax resident in an appropriate tax jurisdiction in order to continue banking in Cyprus.

To escape the ‘shell’ designation, the essential property that companies must demonstrate is ‘substance’, meaning sufficiency of management and capital. ‘Sufficient management’ means having adequate corporate governance arrangements and directors with the skills, knowledge and experience to run the business, who demonstrably make the important business decisions in Cyprus. They must spend adequate time on the business of the company and must have real decision-making powers. They must not be directed by company shareholders, but rather should act independently in the interests of the company. Depending on the size of the business, the existence of an office in Cyprus, facilities, and employees can be key to enhancing substance, says Elias Neocleous & Co.

Banks can still choose to engage in a business relationship with a shell-company client, but they must be able to justify their decision. They must record this justification in the client file, and must deal with them on a risk-based approach.

The Central Bank has ordered all commercial banks to carry out a review of their customers to identify such companies. The results of this review were to be reported back at the beginning of August, including a decision as to whether the business relationship would be terminated.

The new restrictions do not apply to holding companies that own investments in shares, intangibles or other assets, including real estate or ships; to ‘treasury’ companies undertaking group financing activities or acting as group treasurer; or to companies set up to handle currency trades, asset transfers or corporate mergers, provided that their beneficial ownership is identifiable and they demonstrate that they are engaged in legitimate business.

Source: Step

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