ICC SOVEREIGN GROUP

Central bank of Cyprus tightens the requirements for “shell companies”

15 Jun 2018

Under pressure of regulators, the control of the inflow of capital into various countries is further sharpened. Money laundering and terrorist financing is a growing concern inside the European Union and outside. The United States recently took drastic measures in an effort to clean their financial system from the inflow of suspicious money.

The central bank of Cyprus invokes domestic credit institutions from the 14th of June 2018 to adopt a new definition of shell companies, mailbox firms, and letterbox enterprises. To define shell companies and mailbox firms or letterbox enterprises, the regulator looks deeper into the substance and presence of the legal entity. It basically wants to avoid that non-resident deposits and floating money is stashed on bank accounts without purpose.

The definition of a shell company refers to a non-publicly traded, limited liability company or any other comparable business entity that fulfils any of the following criteria:

It has no physical presence in its country of domicile;
It has no established economic activity, little to no independent economic value and no documentary proof of the contrary;
It is registered in a jurisdiction where companies are not required to submit to the authorities independently audited financial statements, and;
It has a tax residence in a jurisdiction recognised as a ‘tax haven’ or no tax residence whatsoever.

Business relationships with companies that fall under the above criteria should be avoided and terminated by credit institutions and service providers registered and licensed by the Securities and Exchange Commission in Cyprus. Credit institutions are required to a) review their customer base, b) assess the future of the business relationship with specific clients, and c) inform the central bank about the outcome of these reviews and assessments.

Certain types of business entities however, do not seem to need too much substance (like holding companies or asset holding companies) or the companies that facilitate currency trades, assets transfers, corporate mergers, or act as group treasurers may avoid being a target of the above measures.

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