Shell Companies per Central Bank of Cyprus

Shell Companies per Central Bank of Cyprus

On the 2nd of November 2018, the Central Bank of Cyprus issued a Circular Letter to its members with reference number BS 6020 addressed to the Money Laundering Compliance Officers or all Credit, Payment and E-Money Institutions (the “Circular”). The Circular related to the classification of shell companies in Cyprus and prohibiting the provision of any banking services.

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This is a topic of primary importance lately since it is estimated that almost 100.000 bank accounts have been closed in the last 6 months by Cypriot banks and Credit Institutions due to the previous circular on shell companies issued by the Central Bank of Cyprus.

The Circular is with effect as of the date of publications and sets out revised definitions for shell companies. Should a company fall within the definition, as provided by the Circular, then a business relationship with such company is avoided.

So what is are Shell Companies

The Circular provides a two-part test. Each part has two sub-tests of its own. Success in the Materiality Test does not automatically define a company as a shell for the purposes of the Circular except to the extent that the Jurisdictional and Mandatory Reporting Test is also satisfied.

Materiality Test

The Materiality Test is effectively a test to establish whether the company has the required substance and this is assessed by taking into account the physical presence or operations in the country of incorporation as a first part and as a second part whether the company has any economic activity.

In accordance with the Circular, a Company must fail on both parts of the Materiality Tests for it to be classified as a Shell. In all other cases, the company is excluded from the definition of a Shell company as per the Circular.

The Circular provides that physical presence is interpreted to mean rented offices and economic activity such as the holding of shares, other assets and the instance that the company was incorporated for the purpose of a specific transaction.

Jurisdictional Test

The Jurisdictional Test is constructed to capture shell companies from jurisdictions included in the EU List of non-cooperative jurisdictions or the OECD’s list of non-cooperative jurisdictions for tax purposes and company without a tax residency whatsoever.

Mandatory Reporting Test

The Mandatory Reporting Test captures shell comapnies registered in a jurisdiction where companies/entities are not required to submit to the authorities independently audited financial statements and do not voluntarily prepare audited financial statements by independent qualified professional accountants who are licensed or regulated

Interpretation of Shell Company Circular

Furthermore interpreting the circular it can be understood that the Jurisdictional Test and the Mandatory Reporting Test are not meant to be collectively met but, rather, solely. If one of them is satisfied along with the Materiality Test then the company is treated as a shell company. 

As of 21 June 2019, the EU list of none cooperative jurisdictions includes

• American Samoa
• Belize
• Guam
• Marshall Islands
• Oman
• Samoa
• Trinidad and Tobago
• United Arab Emirates
• US Virgin Islands
• Vanuatu

Since May 2009 no jurisdiction is currently listed as an uncooperative tax heaven list of the OECD.

Company’s without a tax residency may be those that are incorporated in a country which treats management and control as the decisive factor for taxation but at the same time, the person exercising mind and management is not a tax resident in any country.

Discretion to Compliance Officers

The Circular provides a certain degree of discretion to the Money Laundering Compliance Officers of Credit, Payment and E-Money Institutions so as to decide on whether to engage in or maintain a business relationship applying a risk based approach in accordance with the legal and regulatory framework and providing sufficient justifications.

Scenarios

I have prepared a few scenarios so as to try to capture the effect of the Two Part Test in accordance with the Circular and to give some more guidance as to how to classify existing companies or how potential companies should approach the establishment of a professional relationship with a banking or credit institution:

Scenario 1 – Economic Activity without Physical Presence

Company Z, is a private company limited by shares incorporated under the laws of the Republic of Cyprus, its purpose is to act as a shareholder of operational business in the CEE region. Company Z requires a banking relationship with a Cypriot Banking Institution in order to pay for administration expenses, receive dividends, pay taxes and other running expenses. Company Z does not require an office since it’s director works remotely. 

Is Company Z a shell Company in accordance with the Circular?

Scenario 2 – Physical Presence without Economic Activity

Company Y, is a private company limited by shares incorporated under the laws of the Republic of Cyprus, its purpose is not determined yet however in order to be ready for when the decision is taken the directors require that a banking relationship with a Cypriot Banking Institution should be sought. Company Y has even rented a luxurious office of 150sqm in a prestigious high-rise and employed the first employee. 

Is Company Y a shell Company in accordance with the Circular?

The Circular comes as a welcome message to professionals and banking institutions in Cyprus who have in the last few months underwent a rigorous process to clarify which of their existing clients may fall under the previous definition of shell company.

For any further information please do not hesitate to contact me directly.

The above are the views of the author and the Circular is subject to interpretation by each banking institution in accordance with the risk profile and risk appetite of each banking institution.