CBC introduce sharper rules against the so-called “Shell and Letterbox Companies”, KNEWS

CBC introduce sharper rules against the so-called 'Shell and Letterbox Companies'

13 DECEMBER 2018 - 09:30

CBC introduce sharper rules against the so-called “Shell and Letterbox Companies”

The central bank of Cyprus has redefined the definitions of the so-called “shell and letterbox companies”, in an attempt to tighten the directive for the prevention of Money Laundering and Terrorist Financing.

With the introduction of the new directive, credit institutions will have to include the definition of a shell company in their anti-money laundering and terrorist financing policy and procedures “with immediate effect and application to all new business relationships.”

To this effect, and as per the revised circular issued by the Central Bank of Cyprus on the 2^nd of November 2018, the following definition of shell companies will be adopted.

The term “shell Company” refers to a non-publicly traded, limited liability company (LLC) or any other business entity that maintains the following characteristics:

a) has no physical presence or operations in its country of domicile (other than a mailing address)

b) has no established economic activity, little to no independent economic value and no documentary proof to the contrary

c) is registered in a jurisdiction where companies are not required to submit to the authorities independently audited financial statements and does not voluntarily prepare audited financial statements by independent qualified professional accountant who are licensed or regulated

The revised circular also reminds institutions of their obligations under all applicable legislation and directives to conduct all necessary due diligence measures and checks

d) has a tax residence in a jurisdiction recognized as a “tax heaven” or no tax residence whatsoever

It was also clearly stated in the revised circular letter issued by CBC on the 2^ndof November 2018, that physical presence is construed as a meaningful mind and management located within a country. The presence of a third person such as a lawyer, an accountant, or a TCSP (trust or company service provider), acting merely as an agent of the company and/or providing nominee services including company secretary duties does not constitute physical presence. Also, the lack of employed personnel (including the nominal presence of one single person as a staff member) is construed as lack of physical presence.

Notwithstanding the above, Credit institutions may accept such kind of companies as their clients, whereas the below apply:

a) The Company is established for the purposes of holding stock or shares of another business entity or entities with identifiable activities and ownership

b) The Company is established solely for the purposes of holding intangible or other assets including real estate, aircraft, ship vessels, portfolio of investments, debt and financial instruments

c) The Company is established to facilitate currency trades and asset transfers, corporate mergers, acts as group treasurer or in any other case where convincing proof can be provided that the company is engaged in legitimate business

With the introduction of the new directive, credit institutions may still choose to maintain /to engage in business relationship with a shell-company client, however they must be able to justify their decision. They must record this justification in their customer’s file as well as the Money Laundering Compliance Officer’s opinion on the management decision should also be appropriately documented.Credit institutions also had to review their existing clientele base to identify customers which may have beendescribed as shell companies. The results of this review had to be reported at the beginning of August 2018, including a decision as to whether the business relationship wouldbe terminated.

The revised circular also reminds institutions of their obligations under all applicable legislation and directives to conduct all necessary due diligence measures and checks, among others concerning the identity of the ultimate beneficial owners, the source of funds and the transactional behavior of their customers.

Currently, credit institutions have already started closing bank accounts of companies that may consider, violate the new guidelines,with the ulterior motive to strengthen confidence and transparency in the banking system.

Lastly, it is worth mentioning that credit rating institutions such as Moody’s have seen the new directive as a positive signfor the Cyprus Banking Sector since under the specific definitions of shell companies will help eliminate suspicious transactions and further strengthen banks’ anti-money-laundering (AML) practices.

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