Cyprus Moves to Deny Shell Company Banking Services

In a much-anticipated move last week, the Cyprus Central Bank began drawing up a directive for the island’s banks. The document sets down instructions that new accounts should be automatically refused for so-called “shell” or “letterbox” companies. Financial services across Cyprus have been aware of this intended move since 14th June at the release of an informal circular. The June guidelines will now go forward into a directive.
 

Placing Limits on Shell Companies

Shell companies are those with no operations, premises or management structure. They are set up in places like Cyprus because they are not required to file audits or other financial documentation and deliberately registered in a known tax haven. These companies are often nothing more than a mailing address in the country where they are registered. No shares are bought or sold, and they have no economic value or activity.
 
Businesses suspected of being shell corporations will now have to prove that they are operational by providing evidence of “substance” including capital and management. This will not be accepted easily as there will be a requirement to demonstrate sufficient governance in the form of directors and managers with decision-making responsibilities and an employee base. It will also be necessary to demonstrate they are capable of running a business.
 
These new measures do not apply to holding companies (share investors), those handling currency or asset trades, merger handling, or treasury companies (group financing).
 

Increased Scrutiny

The level of scrutiny will not just be towards such businesses to prove they are operational and operationally sound, but to Cypriot banks too. Banks are not obliged to comply with the directive and may still offer banking services to organisations suspected of being Shell Companies but must, in future, justify doing so in the formal client file and fully understand the risk of doing so.
 
Furthermore, banking services in Cyprus have been requested to carry out a wide-scale review of all their customers for the purpose of identifying such companies and state their intentions – continue to trade or cease operations. The deadline was the beginning of August.