Under pressure of regulators, the control of the inflow of capital into various countries is further sharpened. Money laundering and terrorist financing is a growing concern inside the European Union and outside. The United States recently took drastic measures in an effort to clean their financial system from the inflow of suspicious money. The Fifth Special Measure is used to invigorate findings from the Financial Crimes Enforcement Network (FinCEN). Different banks across Europe had to stop their activities because of the FinCEN notice that announced to withdraw permission for the specific bank to engage in US Dollar transactions.
The central bank of Cyprus invokes domestic credit institutions from the 14th of June 2018 to adopt a new definition of shell companies, mailbox firms, and letterbox enterprises. To define shell companies and mailbox firms or letterbox enterprises, the regulator looks deeper into the substance and presence of the legal entity. It basically wants to avoid that non-resident deposits and floating money is stashed on bank accounts without purpose.
From an economic perspective, non-resident deposits and deposits from shell companies strengthen the balance sheet of the bank. The risk of such deposits is that the lack of a short-term purpose in combination with limited ties to the deposit-taking country can trigger a serious capital outflow in unpredictable events, creating a dangerous situation for the core capital requirements of the domestic bank.
The definition of a shell company refers to a non-publicy traded, limited liability company or any other comparable business entity that fulfills any of the following criteria:
- It has no physical presence in its country of domicile;
- It has no established economic activity, little to no independent economic value and no documentary proof of the contrary;
- It is registered in a jurisdiction where companies are not required to submit to the authorities independently audited financial statements, and;
- It has a tax residence in a jurisdiction recognized as a ‘tax haven’ or no tax residence whatsoever.
Business relationships with companies that fall under the above criteria should be avoided and terminated by credit institutions and service providers registered and licensed by the Securities and Exchange Commission in Cyprus. Credit institutions are required to a) review their customer base, b) assess the future of the business relationship with specific clients, and c) inform the central bank about the outcome of these reviews and assessments.
The new regulation does not necessarily result in a termination of the business relationship between credit institutions, corporate service providers or agents, and the offshore companies they manage. Documentation, the legitimacy of transactions and the level of understanding of business activities are predominant. Individual clients should understand that the usability of offshore companies in relation to standard banking facilities is subject to change.