Central Bank of Cyprus guidance on dealings with shell companies

On 2 November 2018 the Central Bank of Cyprus issued a revised circular to money laundering compliance officers of all regulated credit, payment and e-money institutions on the issue of so-called shell companies. It replaces an earlier circular issued in June 2018 and aims to provide additional clarification to reinforce the effectiveness of anti-money laundering measures and the credibility of Cyprus as a destination for foreign investors and businesses.  The revised guidance took effect immediately and will be incorporated into the new anti-money laundering directives to be issued by the CBC.

The new circular defines a shell company as a limited liability company or any other legal or business entity that has no physical presence or operations in the country in which it is incorporated or registered, and that has no economic substance in that country.  Banks must decide whether to engage in or maintain a business relationship with such companies on a case by case basis, using a risk-based approach, and must provide a fully reasoned and documented justification for their decision.

In determining whether a company has a physical presence the circular points out that the absence of business or operating premises, whether owned or rented, apart from a mailing address, and the absence of meaningful mind and management are factors which indicate a lack of physical presence. It explicitly states that a third party providing nominee services or company secretary services does not constitute physical presence. Lack of economic substance is characterized by the company having no established economic activity in its country of incorporation, little to no independent economic value and no documented proof to the contrary.

The circular sets out several mitigating factors that may indicate economic activity, including holding financial or other assets, performing corporate treasury services on behalf of a group or acting as a holding company for entities engaged in legitimate business with identifiable ultimate beneficial owners.

The circular also identifies several “red flag” characteristics. None of the mitigating factors apply to shell companies which are registered in a jurisdiction where they are not required to file independently audited financial statements and do not voluntarily prepare audited financial statements, or which are tax residents in a jurisdiction included in the EU’s or the OECD’s lists of non-cooperative jurisdictions for tax purposes, or which have no tax residence at all. Business relationships with such companies are to be avoided.

If you have any questions about this matter or require any clarification, please contact our banking and finance team or your usual contact at Elias Neocleous & Co LLC.

To view the full text of the circular please click here