Cyprus: International Law

As a candidate for EU membership from 2000 until 2004 (when it joined the Union), Cyprus was under the watchful eye of Brussels, and the government pledged full compliance with the OECD's harmful tax initiative, undertaking to set up a programme to exchange information on taxation, transparency and other issues to meet the OECD deadline of 2005. Despite avoiding the OECD's final list, Cyprus was still given a poor rating on financial supervision. The government showed its determination to crack down on money laundering and improve supervision, and made an effort to close down any dubious institutions.

On a visit to the US in March 2001, Cyprus's then Finance Minister Takis Clerides was faced with a report published in the Washington Post, which implicated Cyprus in money laundering activities. Mr Clerides presented a series of documents as evidence of Cyprus's efforts in preventing money laundering in the jurisdiction.

Clerides told the media that the documents were taken from reports by international organisations such as the Council of Europe, FATF and IMF. All concluded on a positive note and declared that Cyprus met their international standards against money laundering and financial crimes.

The report had been prompted by allegations by the governor of the former Yugoslav Central Bank, Mladjen Dinkic, who claimed that the ex-Yugoslav President Slobodan Milosevic had used Cyprus as a transit point for money totalling US$4bn. Clerides argued that the Cyprus Central Bank has consistently denied that it knowingly played any part in the money laundering and has cooperated fully with the authorities in the former Yugoslavia in helping them with their investigations into the illegal siphoning of Yugoslavian funds out of the country.

With regard to accusations that money laundering had taken place through investments in Russia, Mr Clerides confirmed that Cyprus was one of the top five foreign countries investing in Russia, but he said that most Cypriot investors in the country represented foreign and not domestic interests, such as America, Canada and Western Europe. These investors, he added, used Cyprus to make investments so they could take advantage of the country's double tax treaty with Russia.

In July 2001, a delegation from the European Union's Peer committee began an inspection of Cyprus's financial sector to determine if Cyprus had sufficiently aligned its laws with EU directives governing banking, the stock exchange, offshore institutions, the insurance industry and co-operative credit institutions.

Then in August of that year, the International Monetary Fund visited Cyprus to undertake the first in a series of planned reviews of offshore financial centres (OFCs). Starting with Cyprus, an IMF staff assessment programme, designed to help strengthen financial supervision of OFCs and to promote greater cooperation among supervisory authorities, reviewed and analysed the extent to which the Island's OFC met international banking, securities, and insurance standards, and to determine if further action was required for those standards to be met.

The IMF's report: 'Cyprus - Assessment of Implementation of the Basel Core Principles for Effective Banking Supervision in Respect of the Offshore Sector - July 30, 2001', was an informal review of the supervision of the Cypriot banking sector which indicated that supervision was 'generally effective and thorough.'

However, the review pointed to a level of supervision that was 'less than desirable' due to the scarcity of some resources.

In addition the review highlighted the fact that regulators and financial institutions depended, to a degree, on accounting and legal firms which were not regulated by any external authorities. 'It is clear that the provision of company services through limited liability companies owned and managed by accounting and law firms is not effectively regulated,' it stated.

After the terrorist attacks of 11th September, the government of Cyprus responded swiftly and angrily to allegations made by the former head of the CIA, James Woosley, that Cyprus was used by the Saudi dissident Osama Bin Laden to launder funds later used for terrorist activities.

In December 2001, the government showed its determination to wage war against terrorism as then President Glafcos Clerides officially signed the International Convention to Combat the Financing of Terrorism. Cyprus was the 15th country internationally to ratify the convention.

During the gradual process of adoption of the EU's 'acquis communautaire', Cyprus fell into line with international standards of anti-money laundering legislation and financial transparency with little dissension or controversy. Included among the measures taken in 2002 and 2003 was the adoption of a fiscal 'level-playing field' for companies, with the introduction of a harmonised 10% tax rate (the lowest in the EU). Offshore companies officially ceased to exist in Cyprus as a result.

When the EU finalised its Savings Tax Directive in 2003 the Cypriot Finance Ministry confirmed that Cyprus would adopt the package in full by 2005.

Many observers believed that the directive would not have a significant impact on the island, given that a large proportion of money held in bank deposits comes from non-EU sources. Also, the legislation does not apply to companies, allowing much of the Cypriot offshore business sector to remain relatively unaffected.

It was the banking sector which provided the only substantial ripple in the run-up to EU accession, and the Government ran into a storm of opposition when it proposed late in 2003 to lessen banking confidentiality in an attempt to reduce tax evasion.

Cypriot Finance Minister at the time, Marcos Kyprianou defended the government’s decision to partially lift banking confidentiality after critics argued that the measures were too severe. George Hadjianastasiou, chief of the Commercial Bankers Association, said that the government’s policy was too heavy-handed and warned that capital will eventually flee the island as a result.

However, addressing the House Finance Committee, Kyprianou criticised the banks for being uncooperative towards the Inland Revenue when the latter requested information on accounts for tax purposes, and assured them that the information sought by the tax department was being used solely for purposes of investigating tax evasion. The minister also suggested that a proposed tax amnesty, offering a reduced 5% tax for those revealing details of undeclared accounts, would be impossible without at least a partial lifting of bank confidentiality.

“Taking into consideration the need for various exceptions that concern foreign capital which does not concern us since it is not taxed here, two measures must be taken: a special arrangement to tax secret accounts and end their existence, but, to avoid their re-occurrence, there must be access to accounts,” announced the Finance Minister.

In the early months of 2004 various compromise proposals were discussed, although in the excitement of EU accession and the failed referendum over the Annan plan for reunification of the island the issue seemed to be on the back-burner, if only temporarily.

In March, 2005, the Cyprus Unit for Combating Money Laundering (MOKAS) signed a Memorandum of Understanding with the US Department of the Treasury Financial Crimes Enforcement Network (FinCEN).

In June 2007, in a measure affecting Cyprus in its role as an EU member, it was announced that travellers entering or leaving the European Union would have to declare cash movements of more than EUR10,000, as new customs laws designed to thwart money laundering and terrorist financing took effect.

Under the new rules customs authorities were empowered to undertake controls on people and their luggage and detain cash that has not been declared. They are required to initiate proceedings against people who fail to declare cash of an amount of EUR10,000 or more. The rules also required the declaration of the equivalent amount in other currencies or easily convertible assets such as non crossed cheques.

Returning to tax matters, later that year, in October 2007, the OECD published a report entitled 'Tax Co-operation: Towards a Level Playing Field – 2007 Assessment by the Global Forum on Taxation', which compared the legal frameworks for international tax co-operation of 82 OECD and non-OECD economies.

The Organisation observed that:

"Many financial centres, both onshore and offshore, are making progress in improving transparency and international co-operation to counter offshore tax evasion, but some still fall short of international standards that have been developed over the last seven years."

It went on to suggest that significant restrictions on access to bank information for tax purposes remained in three OECD countries (Austria, Luxembourg and Switzerland) and in a number of offshore financial centres (e.g Cyprus, Liechtenstein, Panama and Singapore).

It further argued that a number of offshore financial centres that committed to implement standards on transparency and the effective exchange of information standards developed by the OECD’s Global Forum on Taxation had "failed to do so".

In January 2008, meanwhile, it was reported that Cyprus had been placed by the Russian government on a blacklist of uncooperative territories designed to deter Russian companies from setting up offshore and repatriating income back to Russia tax free.

According to the Cypriot media, the blacklist was part of an amendment to the Russian tax code which came into effect on January 1, introducing a tax exemption on the repatriation of dividends from foreign subsidiaries of Russian companies under certain circumstances. Subsidiaries based in territories and countries on the so-called blacklist were not included in the exemption.

Initially, this blacklist was said to contain 59 jurisdictions, and included offshore territories such as the Cayman Islands and the British Virgin Islands, which, according to Russia, had shown reluctance in agreeing to information exchange agreements with Moscow. The list also contained some European Union countries, but it has since shrunk to about 40 countries after many governments reportedly lobbied the Russian authorities to be excluded from the blacklist, including, among others, Ireland, Luxembourg and Switzerland.

Cyprus however, remained on the list, and given the fact that the Mediterranean island is one of the largest sources of investment into Russia, thanks in large part to a favourable bilateral tax treaty and Cyprus's own attractive tax regime, this caused concern.

In April, 2009, however, Russia and Cyprus have signed a new double taxation avoidance agreement which should finally secure Cyprus's removal from the notorious Russian 'blacklist'.

The protocol, the result of several years of hard bargaining, was signed in Nicosia by Finance Minister Charilaos Stavrakis and Ilya Trunin, a senior tax official in the Russian Finance Ministry.

Many European countries such as Ireland, Luxembourg and Switzerland successfully lobbied the Russian government to be removed from the blacklist, but Cyprus remained on the list due to its apparent failure in the past to fulfil requests for information from the Russian tax authorities in certain cases. According to Stavrakis, Cyprus's name will be erased from the blacklist once the new protocol is fully ratified by both parties, thanks in large part to a commitment by Nicosia last year to improve exchange of information provisions.

Stavrakis said that the new agreement maintains "the very low and competitive factors Russians are enjoying today concerning investments through Cyprus" although he conceded that Russia succeeded in winning "a significant number of concessions" that they had been asking for.

A major concession won by Russia will see capital gains made by Russian subsidiaries of Cypriot holding companies with more than 50% of their assets in Russian property taxed at the prevailing rates in Russia.

Trunin remarked that the amendments ensure that the double tax agreement will not be used "in an inappropriate way" by residents and investors in Cyprus and Russia, but would nevertheless result in Cyprus's removal from Russia's "list of offshore jurisdictions" which he stopped short of calling a "blacklist."

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