Following the fifth anti-money laundering directive, the Central Bank of Cyprus has defined offshore shell companies and later advised local financial institutions to terminate the accounts that offshore shell companies hold at financial institutions in Cyprus. A communique was sent out to the money laundering compliance officers of all credit institutions in Cyprus in June 2018 and an updated version containing new requirements regarding shell companies and special entities was distributed early November 2018.
To understand the reasoning behind the sharpened supervision, the European AML directives deliver clarity on the regulatory intervention of illicit financial transactions. These directives provide the EU member states with a sustainable framework to combat money laundering and terrorist financing. Due to the rapid and through innovation in the financial industry, the AML framework is flexible and can be adjusted or amended when required.
The focal points of the recent AML directives designate customer due diligence, transparency in ultimate beneficial ownership of (offshore) companies, the risk of virtual currencies, limitations on the spending limit of pre-paid cards, and scrutiny of transactions involving high-risk non-EU countries.
Although not discussed in the AML directives as such, the financial crisis disclosed the risk of non-resident deposits for local economies. Such deposits are often held by offshore shell companies by foreign beneficial owners. Therefore, the relation of the beneficiary with the country where the banking relationship is held is limited. This can result in a capital outflow of large deposits in case of crisis triggering the absorption of the regulatory capital cushion banks are required to keep.
The shutdown of several banks in Cyprus and the consequential write-down of account balances by bank customers urged the central bank to mitigate customer risk. One of the measures to avoid taxpayer input when banks fail was taken right after the debt crisis and bailout of the country in 2013. The second phase to limit bank customer risk and further depreciation of wealth is to organically strengthen the capital position of financial institutions. One of the consequences of this strategy is that central banks across Europe instruct local banks to terminate the relationship with offshore shell companies.
What is an offshore shell company?
The central bank of Cyprus defined a shell company as a non-publicly traded, limited liability company, or any other business entity that fulfills any one of the following criteria:
- The company has no physical presence in its country of domicile (other than a mailing address);
- The company has no established economic activity, little or no independent economic value and no documentary proof to the contrary;
- The company is registered in a jurisdiction where companies are not required to submit to the authorities independently audited financial statements;
- The company has a tax residence in a jurisdiction recognized as a ‘tax haven’, or has no tax residence whatsoever.
If a company fulfills any of the above criteria, financial institutions in Cyprus should avoid engaging into or renewing a business relationship with the entity. Financial institutions in Cyprus have been commissioned to review their client base, assess the future of the business relationship and inform the central bank about the outcomes of the assessment.
Is your offshore bank account in Cyprus about to close?
The main banks in Cyprus, such as Bank of Cyprus, Hellenic Bank, National Bank of Greece and Alpha Bank started in the summer of 2018 with the review of their customer portfolio. Other financial institutions followed their example and lately thousands of bank customers have received account termination letters or requests for further information. Although account closure seems an easy task and the outgoing transfer can go anywhere, there is considerable risk involved in such a transaction. Specifically, because actions taken cannot be turned back.