..IN AN industry survey last year Cyprus was tipped to grow in importance as an offshore financial centre (OFC) by 2017, catching up with Bermuda and snapping at Jersey’s heels. Now many wonder if it has any future as a tax haven.
The island’s Russocentric banking model is badly fractured. Large depositors will doubtless look to move what’s left of their money as soon as they can. It is hard to imagine banks attracting new foreign customers. This is bad news not only for lenders, but also for the dozens of Cypriot law firms and service providers that cater to the post-Soviet market.
Less clear is the likely impact on Cyprus’s other offshore speciality: holding companies used as tax-avoidance conduits. Many Russians and east Europeans have used these for the “tax-efficient” shuffling of shareholdings and profits, making creative use of Cyprus’s network of tax treaties and its non-taxation of dividend payments or capital gains (except on property). These vehicles are also used for “round-tripping”: moving funds abroad and then back home disguised as foreign investment that is eligible for tax breaks. It remains to be seen if the reputational damage from the banking crisis affects the holding-company business. The head of a large incorporation firm expects some clients to redomicile to Malta or somewhere offering the same benefits as Cyprus (EU access, tax treaties aplenty).
Nicholas Shaxson, a tax campaigner, argues that Cyprus is a classic example of the damage wrought when a small jurisdiction is captured by the finance industry: he is hopeful that the debacle will undermine other OFCs. But Jason Sharman, of Griffith University in Australia, points out that tax havens generally benefit from turmoil.
Greeks, for example, have become great customers for OFCs; presumably Cypriots will, too. Other places are already rolling out the welcome mat for Russian users of services in Cyprus. Banks in Switzerland, Singapore, Dubai, Latvia and Andorra are reportedly trying to poach clients, some even flying in representatives to woo them in person. “If there’s instability in one holiday destination, people don’t stop going on holiday. They just choose another island. It’s the same with banking,” says Mr Sharman.
Still, the Cypriot saga has highlighted broader problems. One is a disconnect between anti-money-laundering (AML) controls on paper and in practice.
Cyprus scores better than Germany in an index produced by the Basel Institute on Governance (see chart), but that is almost certainly because it turns a blind eye to informal practices that circumvent the law. The Financial Action Task Force, which polices global AML standards, has started to pay as much attention to enforcement as to what’s on the statute books.
Large countries may also use Cyprus as an excuse to accelerate recent moves, led by America, to force tax havens to exchange client information with other countries’ tax authorities on an automatic basis.
Andrew Morriss, an offshore expert at the University of Alabama, thinks this could lead to a welter of rules that raise costs and reduce transactions in OFCs. If he is right, Russians will not be alone in bemoaning the island’s implosion.
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