On 14 June 2018 the Central Bank of Cyprus has sent a Circular Letter to all financial institutions of this jurisdiction with requirement to restrict servicing of so called shell companies and letterbox companies.
This Circular Letter defines shell companies and letterbox companies by establishing 4 criteria, meeting at least one of which will allow the bank or other financial institution to qualify any client that is a legal entity as a shell company. It is important that the entity of any legal form may be recognized as a shell company.
Legal entity may be qualified as a shell company if:
- It has no physical presence in its country of domicile apart from a mailing address;
- It has no economic activity, or such activity does not result in any significant value and there is no documentary proof of such activity;
- It is registered in a jurisdiction where there is no requirement to file independently audited financial statements with the competent authorities;
- It is resident in jurisdiction recognized as a “tax heaven” or does not have a status of resident in any jurisdiction at all.
Physical presence is understood as a meaningful mind and management located within a country of registration of a company. However, presence of any third person such as a lawyer, accountant or corporate service provider acting as an agent of the company or providing nominee services (including secretary services) does not constitute physical presence. Also, an insignificant number of employees in the territory of country of domicile (including nominal presence of single employed person) will constitute a lack of physical presence.
If a company corresponds to any of 4 criteria mentioned above, the financial institution must neither engage in new business relationship with it, nor renew the existing one. The financial institution that makes such decision must necessarily take into account the following circumstances irrespective of money laundering and terrorist financing risk category of the client:
- A company was incorporated for purposes of holding of stock or shares of other legal entities with recognizable activity and ownership;
- A company was incorporated for purposes of holding of intangible property and other property, including real estate or ship vessels.
- A company was incorporated for purposes of organization of currency trading, asset transfers, mergers, acting as a group treasurer, or such company can prove that it has other legitimate activity and the information about its beneficial owner has been disclosed.
The Circular Letter is not a regulatory instrument and was sent to financial institutions of Cyprus in order to inform them in advance that soon the regulatory instrument, namely Directive of Central Bank of Cyprus, will be adopted and establish the final definition of shell companies, as well as obligations of financial institutions not to engage in business relationships with new shell companies and to provide explanations of engaging in or maintaining of business relationships with such companies.
In light of mentioned above, all financial institutions of Cyprus that have received the Circular Letter of 14 June 2018 are obliged to:
Organize monitoring of client database to indicate those legal entities that correspond to criteria of shell companies;
Assess the possibility to maintain business relationships with such clients;
Inform the Central Bank of Cyprus on the results of monitoring of client database in aspect of detection of shell companies before 31 July 2018.
