New directive on shell companies improves anti-money laundering practices

Moody’s rating agency says that Cyprus Central Bank’s (CBC) new directive on shell companies is credit positive for Cypriot banks, because the specific definitions of shell companies will help eliminate suspicious transactions and further strengthen banks’ anti-money-laundering (AML) practices.

In its Credit Outlook published on Monday the agency quotes CBC head of banking supervision Yiangos Demetriou who on 5 November said that a new Central Bank of Cyprus circular that formally and narrowly defines what constitutes a shell company “...is more clear with specific directions regarding what banks should be doing” with respect to shell companies.

“The implementation of the circular, which was initially sent to the banks for consultation in June 2018, eliminates room for interpretation from individual banks regarding what constitutes a shell company, and establishes uniform practices across the Cypriot banking system”, says Moody’s.

It also points out that the circular defines a shell company as an entity that has no physical presence other than a mailing address, no established economic activity in the country of incorporation, or has little to no independent economic value. Not defined as shell companies are holding companies of entities engaged in legitimate businesses and that have identifiable ultimate beneficial owners.

According to Moody’s Cyprus’ framework and the banking system’s AML practices have been strengthening through the years following greater scrutiny from international and domestic financial authorities. As part of the country`s bailout programme, the Moneyval Committee of the European Commission and Deloitte Italy in 2013 conducted an assessment to establish Cypriot banks’ compliance with the legislative and regulatory framework for customer due diligence. Although these assessments did not have major findings, the authorities took certain actions to strengthen AML practices. The Moneyval Committee plans to conduct another assessment next year.

It is added that Cypriot banks continue to be scrutinized in the international press, mainly because of their international banking business centers, which cater to offshore entities registered in Cyprus for tax reasons. Given the low corporate tax rate of 12.5% and Cyprus’ double-tax   treaties with more than 60 countries, offshore entities benefit from lower taxes when they channel their investments to any of these 60 countries via Cyprus. Cyprus is one of the largest foreign direct investors in Russia, mainly because of these offshore companies.

Although reduced, says Moody’s, a large chunk of Cypriot banks’ funding continues to come from the transactional deposits of these offshore companies, which elevates funding risks for the banks given these deposits` short-term nature.