Cyprus is not Greece, is the first thing to say about the Cyprus banking sector. Although people in Cyprus have in common with those in Greece (along with other Mediterranean countries) a regrettable habit of not paying all the tax they should, and although the government has been slow and reluctant to tackle its growing fiscal deficit, the economy grew lustily until 2008, barely shrank in 2009 (one of the best performances in the EU) and is expected to return to a growth path in 2010. The banking sector is sound, and has experienced none of the problems of the Greek or Irish banks; domestic banking assets total 800% of GDP, with little exposure to toxic sovereign debt, and the loans to deposits ratio is 114%, signalling little reliance on debt funding. If there is a potential problem, it would lie in exposure to the real estate sector, which has suffered seriously in the downturn after having been the star of the Cypriot economy for twenty years. But the fundamentals remain unchanged: Cyprus was, and will again be, a highly attractive destination for international real estate buyers, both English-speaking and otherwise. There are significant Russian and Middle-Eastern communities which will attract new entrants in due course. And underlying Cypriot real estate prices are still well below those in comparable locations around the Mediterranean. Under pressure from the European Commission and the IMF, the government has now taken some painful and necessary steps towards greater fiscal rectitude which should return the deficit to Maastricht levels by 2014.
Cyprus is also very unlike Greece, Italy or Spain in its tax regime, with what is still the lowest corporate tax rate in the EU, a factor which should not be underestimated and is highly attractive to companies - including banks - which need to establish a headquarters somewhere in the EU. If the government helps with other business-friendly measures, the island will surely attract a good flow of incoming financial services operators, who can then provide their services throughout the EU under the passporting directive. The Central Bank certainly has this as one of its objectives, and pursues policies which are very welcoming to foreign banks. Even if the domestic sector could be said to be adequately, if not over-banked, there are plenty of international opportunities both in the financial services sector itself and also in the support of non-domestic activity, notably including the maritime sector, where Cyprus has a well-established regime and very tax-friendly policies.
The days are long gone in which Cyprus, followed by Malta, was somehow involved in Russian capital flight. The Prevention and Suppression of Money Laundering Law of 1996 has been largely successful: in April 1998 a Select Committee of Experts from the Council of Europe reported enthusiastically about the island's measures to control money laundering. On December 13, 2007, the House of Representatives enacted an updated Prevention and Suppression of Money Laundering Activities Law, which consolidated, revised and repealed the 1996 law. Under the current Law, which came into force on January 1, 2008, the Cyprus legislation has been harmonised with the Third European Union Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (Directive 2005/60/C).
The present Law, as the previous one, designates the Central Bank of Cyprus as the competent supervisory authority for persons engaged in banking activities and money transfer business. Under this framework, the Central Bank of Cyprus has the responsibility of supervising and monitoring the compliance of banks and money transfer businesses with the provisions of the Law for the purpose of preventing the use of the financial system for money laundering and terrorist financing activities.
In April 2008, the Central Bank of Cyprus issued a revised Directive to the banks, in accordance with the provisions of the Law of 2007, requiring the introduction of new revised policies and procedures, as well as the upgrading and enhancement of the measures and systems for the effective prevention of money laundering and terrorist financing in line with the FATF standards and the Directives of the European Union in this sector. It is emphasized that the Law explicitly states that Central Bank of Cyprus’ Directives are binding and compulsory to all persons to whom they are addressed.
Since 1997, a special Unit for Combating Money Laundering has existed at the Attorney General’s Office which is responsible for the receipt and analysis of suspicious transaction reports and money laundering investigations. In the course of money laundering investigations, this Unit may apply to the Court and obtain an order for the disclosure of information addressed to any person, including banks, who may be in possession of information related to the investigation as well as orders for the freezing and confiscation of funds and property suspected to be derived from money laundering.
In March, 2009, Cyprus ratified the Council of Europe Convention on Money Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism (CETS No. 198). The convention opened for signature to the member states of the Council of Europe, the non-member states which have participated in its elaboration, and the European Community, in Warsaw, on May 16, 2005. It entered into force on May 1, 2008. The latest convention replaces the Council of Europe’s 1990 convention, providing legislation to take into account the fact that not only could terrorism be financed through money laundering from criminal activity, but also through legitimate activities.
The Central Bank has always stoutly denied culpability for the events of the early '90s, and it is certainly true by now that the banking sector is super-clean, with tight local and EU regulation and supervision, which is due to become even more stringent (as in all EU countries) with new prudential directives emanating from Brussels.
For the offshore investor, Cyprus banking law provides a reasonable but not outstanding level of non-disclosure. Offshore entities must disclose beneficial ownership to the Central Bank on formation, but Central Bank employees are bound to secrecy by Section 3 of the Central Bank Law 37 of 1975 (now Section 29 of the Banking Laws 1997 to 2009). Normally speaking, local banks apply about the same standards of confidentiality as apply in English law. In December, 2003, the Government announced plans to breach banking confidentiality, allowing the tax authorities access to residents' bank accounts. This made it possible for the government to run a tax amnesty scheme targetting those with undeclared bank accounts.
The rules for exchange of information with foreign states are a complex mixture of the local taxation laws, the network of double-tax treaties, and international agreements for mutual legal assistance and the exchange of information to which Cyprus is a signatory, now further complicated by the EU acquis communitaire which substantially worsens the position of individuals and corporations as regards secrecy. However Cyprus law does provide for normal judicial appeal procedures against treaty requests for information and cooperation.
As part of its support for international banking, the Central Bank has followed a policy of entering Memoranda of Understanding with other countries' financial regulators. Typically, such Memoranda define a general framework of mutual cooperation and exchange of information between the two supervisory Authorities, with a view to facilitating the consolidated supervision of cross-border establishments, and ensuring the safe functioning of credit institutions in their respective countries, in accordance with their national laws and regulations. Such Memoranda have been signed with Austria, The Dubai Financial Services Authority, the Central Bank of the Russian Federation, the Bulgarian National Bank, the National Bank of Ukraine, the National Bank of the Republic of Belarus, the National Bank of Serbia, the National Bank of Romania, the Financial and Capital Market Commission of the Republic of Latvia, the National Bank of Slovakia, the Bank of Tanzania, the Central Bank of Jordan, the Bank of Greece, the Banque du Liban, the Central Bank of Armenia, De Nederlandsche Bank N.V. and the Jersey Financial Services Commission, all of these being countries with financial interests in Cyprus. A number of further Memoranda are under negotiation.
Also not to be forgotten in assessing the attractions of Cyprus as a financial center is its network of double tax treaties, particularly with the ex-member countries of the USSR. Cyprus figures high up on the list of 'conduit' countries for FDI into Russia and other Eastern European countries, and the flows of investment in one direction and tax-privileged dividends in the other must of necessity pass through Cyprus-resident banks.
The Central Bank's list of financial institutions under its sway currently includes 44 entities, four of them being publicly-listed in Cyprus, with a further four local banks, nine being subsidiaries of foreign banks, eight being branches of other EU banks, seventeen being branches of non-EU banks, and two being representative offices.
The banking sector doesn't only look outwards, of course, and in mid-2009 the European Investment Bank inaugurated unprecedented cooperation with three Cypriot banks, the Bank of Cyprus, Marfin Popular Bank and Hellenic Bank, to provide additional support in the financing of entrepreneurial activity in Cyprus. The agreement will provide facilities totalling EUR228m from the European Investment Bank; EUR120 will go to Bank of Cyprus, while Marfin Popular Bank and the Hellenic Bank will receive EUR50m and EUR58m, respectively.
The funds will be used to provide finance to small- and medium-sized enterprises (SMEs) in the fields of industry, commercial services and tourism in Cyprus. The lending facilities signed with the Bank of Cyprus and Hellenic Bank will also be able to fund SMEs located in Greece.
The Cypriot Minister of Finance, Charliaos Stavrakis commented: “The new EUR228m EIB financing facility will offer enhanced possibilities for meeting the liquidity needs of Cypriot SMEs in the current economic crisis. The funds will be used for financing enterprises in industry, tourism, trade and, more generally, services. I am sure that these funds will be used for the benefit of our enterprises. We are interested in considerably improving financing opportunities for smaller companies, by increasing the amounts available and offering greater flexibility as well as new financial products. Our objective, which is also our obligation, is to utilise all available development tools, such as those offered by the EIB to the European economies. We therefore signed recently with the EIB Group a EUR20m funding and management agreement for the implementation here in Cyprus of the Joint European Resources for Micro- to Medium-Enterprises initiative, known as JEREMIE. Today we take a further big step forward."
EIB Vice-President Mr Sakellaris commented at the signing ceremony: “The signature today marks a milestone in our activity in Cyprus: quantitatively as it is the biggest-ever for SMEs, qualitatively, as it is a new product and involves a wide alliance with Cypriot partners, and, in terms of timing, it coincides with the fifth anniversary of Cyprus’s accession to the European Union. Now is the time to work together to restore the growth that can only come from strong and flourishing enterprises that harness innovation and advance opportunity.”
“The success of the Cypriot economy is inextricably linked to small businesses, so we are therefore acting boldly in favour of Cypriot SMEs. Our action is amplified by the synergy with our partner banks Bank of Cyprus, Marfin Popular Bank and Hellenic Bank. Further synergies to benefit Cypriot SMEs have been sought within the framework of JEREMIE, for which we held a working session here yesterday, involving most banks working in Cyprus as well as representatives of SMEs. Our future action, though, will not be limited to SMEs,” he further added.
Mr Shiarly, Bank of Cyprus Group General Manager Domestic Banking stated: “SMEs are undoubtedly the backbone of the economy of Cyprus. Throughout our 110 years of history we recognised their importance and consistently, through good times and bad, at times of peace or war, we stood by and supported Cypriot SMEs, which comprise almost 100% of all businesses in Cyprus. In today’s troublesome times and in the midst of an international financial crisis, these loans from the EIB will enhance our lending liquidity and our ability to continue our support for and offer competitively priced loans to SMEs.”
Mr Efthymios Bouloutas, Chief Executive Officer of Marfin Laiki Bank said: “Marfin Laiki Bank puts special emphasis on the financing of SMEs, which form an important part of our customer base in Cyprus. Some months ago, when the crisis was seen as a serious threat, the management of the bank took the decision to strengthen our presence in this sector, and we are very pleased that this aim will now have the support of the European Investment Bank. I would like to take this opportunity to underline that the capital provided for under the present agreement will be directed exclusively towards supporting SMEs in Cyprus, since we have signed another agreement with the EIB for the Greek market.”
Mr Keravnos, CEO of the Hellenic Bank Group welcomed the signing of the agreement with the European Investment Bank: “These new funds of approximately EUR 250 million drawn from the EIB will enhance our ability to help small and medium-sized enterprises with loans on favourable terms, a grace period and on much improved terms than the ones offered today.” Mr Keravnos emphasised that “Hellenic Bank, being a socially responsible organisation, predicted at a very early stage the adverse effects the global financial crisis would have on both the real economy and SMEs. For this reason, Hellenic Bank was the first Cypriot bank to apply promptly to the European Investment Bank for lending facilities regarding the funding of SMEs, in an effort to provide effective help and support both its customers and the entire business world of Cyprus."
Cyprus is also very unlike Greece, Italy or Spain in its tax regime, with what is still the lowest corporate tax rate in the EU, a factor which should not be underestimated and is highly attractive to companies - including banks - which need to establish a headquarters somewhere in the EU. If the government helps with other business-friendly measures, the island will surely attract a good flow of incoming financial services operators, who can then provide their services throughout the EU under the passporting directive. The Central Bank certainly has this as one of its objectives, and pursues policies which are very welcoming to foreign banks. Even if the domestic sector could be said to be adequately, if not over-banked, there are plenty of international opportunities both in the financial services sector itself and also in the support of non-domestic activity, notably including the maritime sector, where Cyprus has a well-established regime and very tax-friendly policies.
The days are long gone in which Cyprus, followed by Malta, was somehow involved in Russian capital flight. The Prevention and Suppression of Money Laundering Law of 1996 has been largely successful: in April 1998 a Select Committee of Experts from the Council of Europe reported enthusiastically about the island's measures to control money laundering. On December 13, 2007, the House of Representatives enacted an updated Prevention and Suppression of Money Laundering Activities Law, which consolidated, revised and repealed the 1996 law. Under the current Law, which came into force on January 1, 2008, the Cyprus legislation has been harmonised with the Third European Union Directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (Directive 2005/60/C).
The present Law, as the previous one, designates the Central Bank of Cyprus as the competent supervisory authority for persons engaged in banking activities and money transfer business. Under this framework, the Central Bank of Cyprus has the responsibility of supervising and monitoring the compliance of banks and money transfer businesses with the provisions of the Law for the purpose of preventing the use of the financial system for money laundering and terrorist financing activities.
In April 2008, the Central Bank of Cyprus issued a revised Directive to the banks, in accordance with the provisions of the Law of 2007, requiring the introduction of new revised policies and procedures, as well as the upgrading and enhancement of the measures and systems for the effective prevention of money laundering and terrorist financing in line with the FATF standards and the Directives of the European Union in this sector. It is emphasized that the Law explicitly states that Central Bank of Cyprus’ Directives are binding and compulsory to all persons to whom they are addressed.
Since 1997, a special Unit for Combating Money Laundering has existed at the Attorney General’s Office which is responsible for the receipt and analysis of suspicious transaction reports and money laundering investigations. In the course of money laundering investigations, this Unit may apply to the Court and obtain an order for the disclosure of information addressed to any person, including banks, who may be in possession of information related to the investigation as well as orders for the freezing and confiscation of funds and property suspected to be derived from money laundering.
In March, 2009, Cyprus ratified the Council of Europe Convention on Money Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism (CETS No. 198). The convention opened for signature to the member states of the Council of Europe, the non-member states which have participated in its elaboration, and the European Community, in Warsaw, on May 16, 2005. It entered into force on May 1, 2008. The latest convention replaces the Council of Europe’s 1990 convention, providing legislation to take into account the fact that not only could terrorism be financed through money laundering from criminal activity, but also through legitimate activities.
The Central Bank has always stoutly denied culpability for the events of the early '90s, and it is certainly true by now that the banking sector is super-clean, with tight local and EU regulation and supervision, which is due to become even more stringent (as in all EU countries) with new prudential directives emanating from Brussels.
For the offshore investor, Cyprus banking law provides a reasonable but not outstanding level of non-disclosure. Offshore entities must disclose beneficial ownership to the Central Bank on formation, but Central Bank employees are bound to secrecy by Section 3 of the Central Bank Law 37 of 1975 (now Section 29 of the Banking Laws 1997 to 2009). Normally speaking, local banks apply about the same standards of confidentiality as apply in English law. In December, 2003, the Government announced plans to breach banking confidentiality, allowing the tax authorities access to residents' bank accounts. This made it possible for the government to run a tax amnesty scheme targetting those with undeclared bank accounts.
The rules for exchange of information with foreign states are a complex mixture of the local taxation laws, the network of double-tax treaties, and international agreements for mutual legal assistance and the exchange of information to which Cyprus is a signatory, now further complicated by the EU acquis communitaire which substantially worsens the position of individuals and corporations as regards secrecy. However Cyprus law does provide for normal judicial appeal procedures against treaty requests for information and cooperation.
As part of its support for international banking, the Central Bank has followed a policy of entering Memoranda of Understanding with other countries' financial regulators. Typically, such Memoranda define a general framework of mutual cooperation and exchange of information between the two supervisory Authorities, with a view to facilitating the consolidated supervision of cross-border establishments, and ensuring the safe functioning of credit institutions in their respective countries, in accordance with their national laws and regulations. Such Memoranda have been signed with Austria, The Dubai Financial Services Authority, the Central Bank of the Russian Federation, the Bulgarian National Bank, the National Bank of Ukraine, the National Bank of the Republic of Belarus, the National Bank of Serbia, the National Bank of Romania, the Financial and Capital Market Commission of the Republic of Latvia, the National Bank of Slovakia, the Bank of Tanzania, the Central Bank of Jordan, the Bank of Greece, the Banque du Liban, the Central Bank of Armenia, De Nederlandsche Bank N.V. and the Jersey Financial Services Commission, all of these being countries with financial interests in Cyprus. A number of further Memoranda are under negotiation.
Also not to be forgotten in assessing the attractions of Cyprus as a financial center is its network of double tax treaties, particularly with the ex-member countries of the USSR. Cyprus figures high up on the list of 'conduit' countries for FDI into Russia and other Eastern European countries, and the flows of investment in one direction and tax-privileged dividends in the other must of necessity pass through Cyprus-resident banks.
The Central Bank's list of financial institutions under its sway currently includes 44 entities, four of them being publicly-listed in Cyprus, with a further four local banks, nine being subsidiaries of foreign banks, eight being branches of other EU banks, seventeen being branches of non-EU banks, and two being representative offices.
The banking sector doesn't only look outwards, of course, and in mid-2009 the European Investment Bank inaugurated unprecedented cooperation with three Cypriot banks, the Bank of Cyprus, Marfin Popular Bank and Hellenic Bank, to provide additional support in the financing of entrepreneurial activity in Cyprus. The agreement will provide facilities totalling EUR228m from the European Investment Bank; EUR120 will go to Bank of Cyprus, while Marfin Popular Bank and the Hellenic Bank will receive EUR50m and EUR58m, respectively.
The funds will be used to provide finance to small- and medium-sized enterprises (SMEs) in the fields of industry, commercial services and tourism in Cyprus. The lending facilities signed with the Bank of Cyprus and Hellenic Bank will also be able to fund SMEs located in Greece.
The Cypriot Minister of Finance, Charliaos Stavrakis commented: “The new EUR228m EIB financing facility will offer enhanced possibilities for meeting the liquidity needs of Cypriot SMEs in the current economic crisis. The funds will be used for financing enterprises in industry, tourism, trade and, more generally, services. I am sure that these funds will be used for the benefit of our enterprises. We are interested in considerably improving financing opportunities for smaller companies, by increasing the amounts available and offering greater flexibility as well as new financial products. Our objective, which is also our obligation, is to utilise all available development tools, such as those offered by the EIB to the European economies. We therefore signed recently with the EIB Group a EUR20m funding and management agreement for the implementation here in Cyprus of the Joint European Resources for Micro- to Medium-Enterprises initiative, known as JEREMIE. Today we take a further big step forward."
EIB Vice-President Mr Sakellaris commented at the signing ceremony: “The signature today marks a milestone in our activity in Cyprus: quantitatively as it is the biggest-ever for SMEs, qualitatively, as it is a new product and involves a wide alliance with Cypriot partners, and, in terms of timing, it coincides with the fifth anniversary of Cyprus’s accession to the European Union. Now is the time to work together to restore the growth that can only come from strong and flourishing enterprises that harness innovation and advance opportunity.”
“The success of the Cypriot economy is inextricably linked to small businesses, so we are therefore acting boldly in favour of Cypriot SMEs. Our action is amplified by the synergy with our partner banks Bank of Cyprus, Marfin Popular Bank and Hellenic Bank. Further synergies to benefit Cypriot SMEs have been sought within the framework of JEREMIE, for which we held a working session here yesterday, involving most banks working in Cyprus as well as representatives of SMEs. Our future action, though, will not be limited to SMEs,” he further added.
Mr Shiarly, Bank of Cyprus Group General Manager Domestic Banking stated: “SMEs are undoubtedly the backbone of the economy of Cyprus. Throughout our 110 years of history we recognised their importance and consistently, through good times and bad, at times of peace or war, we stood by and supported Cypriot SMEs, which comprise almost 100% of all businesses in Cyprus. In today’s troublesome times and in the midst of an international financial crisis, these loans from the EIB will enhance our lending liquidity and our ability to continue our support for and offer competitively priced loans to SMEs.”
Mr Efthymios Bouloutas, Chief Executive Officer of Marfin Laiki Bank said: “Marfin Laiki Bank puts special emphasis on the financing of SMEs, which form an important part of our customer base in Cyprus. Some months ago, when the crisis was seen as a serious threat, the management of the bank took the decision to strengthen our presence in this sector, and we are very pleased that this aim will now have the support of the European Investment Bank. I would like to take this opportunity to underline that the capital provided for under the present agreement will be directed exclusively towards supporting SMEs in Cyprus, since we have signed another agreement with the EIB for the Greek market.”
Mr Keravnos, CEO of the Hellenic Bank Group welcomed the signing of the agreement with the European Investment Bank: “These new funds of approximately EUR 250 million drawn from the EIB will enhance our ability to help small and medium-sized enterprises with loans on favourable terms, a grace period and on much improved terms than the ones offered today.” Mr Keravnos emphasised that “Hellenic Bank, being a socially responsible organisation, predicted at a very early stage the adverse effects the global financial crisis would have on both the real economy and SMEs. For this reason, Hellenic Bank was the first Cypriot bank to apply promptly to the European Investment Bank for lending facilities regarding the funding of SMEs, in an effort to provide effective help and support both its customers and the entire business world of Cyprus."
