Being a regulatory authority in the sphere of banking and other financial activity in this jurisdiction, Central Bank of Cyprus has issued the Directive on prevention of money laundering and terrorist financing in February 2019. The main feature of this document is full prohibition of credit institutions’ cooperation with organizations that meet criterions of shell companies.
In June and November of 2018 Central Bank of Cyprus has issued circular letters that provided definition of shell company and also ruled credit institutions of Cyprus to avoid establishing or continuation of business relationships with such companies. Corresponding decisions must be made with the use of risk-based approach and in accordance with norms of prevention of money laundering and terrorist financing.
The Directive of February 2019 contains the similar definition of shell companies that was provided by circular letters in 2018. Such company is deemed to be “limited liability company or any other legal/business entity that bears the following characteristics:
- It has no physical presence or operations in its country of incorporation/registration (other than a mailing address);
Physical presence of a company/entity is construed as having a place of business or operations (own or rented premises) in the country of registration/incorporation. Also, absence of meaningful mind and management could be construed as lack of physical presence. The presence of a third person who merely provides services as a representative/proxy person, including the duties of the secretary of the company, is not in itself an indication of physical presence and/or
- It has no established economic activity in its country of incorporation/registration, little to no independent economic value and no documentary proof to the contrary.
But in contrast with the circular letters, the Directive introduces more strict and explicit obligation of credit institutions not to establish business relationships with shell companies or not to continue it (previously the wording was designed as “avoidance” of establishment and continuation of business relationships) in following cases:
- company is registered in a jurisdiction where the companies/entities are not obliged to submit to the authorities audited financial statements by independent auditors/accountants and do not prepare financial statements voluntarily from independent approved auditors/accountants and/or
- company has tax residency in a jurisdiction which is included in the EU list of non-cooperative jurisdictions for tax purposes or in the list of non-cooperative jurisdictions of the Global Forum on Transparency and Exchange of Information for Tax Purposes or any other list issued by a reputable organization in relation to harmful tax practices, tax havens or has no tax residency,
In order to comply with the requirements of the Directive banks and all other credit institutions must in all cases make a decision “by applying a risk-based approach in accordance with the legal and regulatory framework and providing fully substantiated justification of such a decision which should be evidenced/documented and duly recorded”.
The Directive of Central Bank of Cyprus is a normative document and is applicable to all credit institutions in Cyprus. Unlike circular letters, it provides such wordings and such general meaning that it is possible to state that after banks in Cyprus detect correspondence with criterions of shell company they will be obliged to stop servicing such companies in order to avoid violation of mentioned Directive.