Cyprus to crackdown on shell companies

The Central Bank of Cyprus has just made it harder for brokers to set up front companies on the island, following pressure from US officials who say more needs to be done to combat money laundering.

The CBC has sent an email to compliance officers within financial credit institutions to let them know of a new directive, which basically amounts to telling banks to avoid commercial relations with clients who represent shell companies.

The new rules will make it harder for companies to do business in Cyprus if they have no physical presence or do not engage in economic activity on the island.

The directive will also expand CBC’s definition of “shell companies” which is widely viewed by outsiders as a move to point fingers directly at companies based in tax heavens or offices that have no tax residence.

The Cyprus Fiduciary Association (CFA) has criticised the CBC for lack of consultations with stakeholders, saying setting up shell companies has been a known issue for some time and there had been discussions on a new model that would focus more on business substance, in other words meaningful business activities on the island.

Cyprus has been described as a “country of primary concern” by the United States regarding international money laundering and terror funding activities, with a 2015 US State Department report calling Cyprus an intermediary between criminal enterprises seeking avenues to launder money.

The government instituted some reforms following a financial crisis that peaked in 2013, but recent observations abroad have shown that foreigners still view Cyprus’ image negatively.

A few months ago, the Cyprus government picked a public relations firm in the US to work towards improving the image aboard through lobbying and other public relations campaigns.

A number of law firms in Cyprus are known to act as brokers in setting up front companies for their clients, but the practice is widely unregulated.