In 1981, the government of Cyprus introduced a comprehensive policy regarding International Banking Units (IBUs) and their encouragement in Cyprus. This type of activity has grown steadily and there are now twenty eight (as stated in page 11) foreign banks operating from Cyprus with a banking licence and two with a representative office.
The Central Bank of Cyprus (CBC) has always been guided in its supervisory role by the recommendations of the Basle Committee on banking supervision and the EU directives on banking regulation.
Supervision is exercised by both off-site monitoring and on site examination. Off-site monitoring entails the submission by banks of an extensive range of periodic returns which cover numerous aspects of banking operations. Any areas of concern are taken up promptly with the bank involved for remedial action. On-site examinations are carried out with a view to assessing the current financial position and soundness of a bank and its future prospects at a given time.
The CBC may grant a banking licence for the following two legal types of establishments:
Cyprus incorporated bank. A Cyprus incorporated bank may take the form of:
(a) a subsidiary, being a legally independent person, wholly or majority owned by a credit institution, incorporated either in Cyprus or abroad, or
(b) a joint venture, between legally independent institutions, controlled by two or more parent institutions being either domestic or foreign and not all of which being necessarily credit institutions.
Branch of a foreign non-EU Bank
The CBC may grant a banking licence to an established overseas bank allowing it to register and operate a branch in Cyprus, an operating entity which does not have a separate legal status from that of its head office. The Cyprus branch must be registered with the Registrar of Companies under section 347 of the Cyprus Companies Law. Due to its legal status, a Cyprus branch of an overseas bank is not required to have its own minimum capital as is the case of a bank incorporated in Cyprus. In case where an overseas bank has obtained a banking business licence to establish a branch, it is entitled to operate through any number of branches in Cyprus.
The CBC may also grant an authorisation for the establishment of a Representative Office (“RO”) of a foreign bank incorporated either in the EU or in a third country. This is an office in Cyprus from which the interests of the entity to which it belongs are promoted or assisted but from which no banking business including accepting deposits is carried on. It must therefore be clarified that a RO is not granted a banking business licence by the CBC but merely an authorisation.
Application for a banking licence
The following conditions and guidelines are stipulated for the application of a banking licence:
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IBU, whether branches of foreign banks or locally incorporated legal entities, are required to be licensed under the provisions of the Banking Business (Temporary Restrictions) Law, Chapter 124. As a rule, only branches or subsidiaries of banks enjoying a good reputation internationally, established in countries where there is adequate banking supervision and lender of last resort protection, will be considered eligible for a licence
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An IBU’s head office in the case of a branch, or its parent bank in the case of a subsidiary, is expected to provide an appropriate letter of comfort in support of the IBU’s operations from within Cyprus
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IBU are expected to operate as fully staffed units and not merely as brass plate operation
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IBU are expected to comply with the provisions of the CBC and Cyprus law or regulations made thereunder, but are exempted from the maintenance of formal liquidity ratios, reserves with the CBC and capital ratios. IBUs are, however, required to supply the CBC, on request, with information about their activities, their ability to meet their obligations as they fall due, and their general adherence to sound banking practices
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IBU pay an annual supervisory fee that will be agreed with the Central Bank of Cyprus
Applications for a banking business license or an authorisation for a RO must be submitted in writing by or on behalf of the applicant to the CBC, together with any documents and information which the CBC may require. The applicant is required to provide the CBC with information on:
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Business plans, providing insights on the applicant’s proposed banking activities
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Management and organisational structures, including internal governance
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Financial standing of the applicant bank or financial institution
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Compliance procedures and systems to be used
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Identity of all directors, controllers and managers of the applicant bank/financial institution
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Procedure for obtaining an IBU licence
Applications for establishing an IBU must be submitted to the Controller of Banks who, by law, is the Governor of the Central Bank of Cyprus. The Controller of Banks, in granting a banking business licence, may attach such conditions as he may deem necessary. The Banking Business Law gives the power to the Controller of Banks to call for any books, accounts or documents of any licensed bank.
Each application is considered on its own merits and in case of established international banks the required information is considerably reduced. Set out below is the information normally required.
Branches
If the proposed IBU is branch of an overseas bank, the following particulars are required:
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Audited financial statements for the last three financial years
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Short history of the applicants, reflecting gradual and constant achievement of new and improved levels of financial capability
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The extent to which the applicants envisage contributing towards the improvement, expansion or diversification of banking and financial services offered
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List of major and/or controlling shareholders with their respective percentage shareholding and a short description of their financial outlook
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Experience, qualifications, reputation, nationality and address of persons who are expected to assume the local direction and management
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Feasibility study of the proposed IBU’s operations, incorporating projected profit and loss accounts, balance sheets and statements of source and application of funds for the first five years of operation
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Present geographical representation of the applicants
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Copy of the applicant’s memorandum and articles of association, translated where necessary into English
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Present organisational chart of the applicant’s head office, together with the profiles of executive directors and senior management
Subsidiaries
If the proposed IBU is a local subsidiary of an overseas bank, the above information, as applicable, is again required. In addition, the following should be included:
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Complete list of the proposed shareholders of the subsidiary company with their respective percentage shareholding and a short description of their economic and financial outlook
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Draft of the proposed subsidiary’s memorandum and articles of association
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Written undertaking to provide and set apart the proposed fully paid up capital before or at the time the subsidiary commences business
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A letter of comfort from the applicant
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A certified copy of a decision by the board of the parent company to establish the IBU in Cyprus
Minimum requirement
The minimum statutory criteria for licensing which must be fulfilled with respect to an applicant, in order that the CBC grants a banking business licence, as set out in the Banking Law of 1997 as subsequently amended, are the following:
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“Fitness and properness” of directors, chief executives and managers
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Directors, chief executives and managers of the prospective bank or the prospective branch, have to satisfy the CBC that they are “fit and proper” persons to be involved in the provision of banking services. The law prescribes the considerations which the CBC must take into account when determining “fitness and properness”. These include the persons’ integrity, sound judgment, honesty, diligence, competence, capability and adequate experience.
The “four eye” principle
At least two persons are required to participate and concur in the effective direction and management of the business of the bank. The CBC expects, in the case of Cyprus incorporated banks, that the individuals concerned are either Executive Directors or persons granted executive powers by and reporting immediately to the bank’s Board of Directors.
Minimum capital
A bank incorporated in Cyprus must have at all times a minimum capital of not less than €5.1 million or other higher amount that the CBC might determine. A branch is not required to have its own minimum capital as is the case for a bank incorporated in Cyprus although an “assigned capital” arrangement will be looked favourably by the CBC.
Suitability of controllers
The CBC places particular emphasis on the “fitness and properness” of prospective controllers of the bank (both natural and legal persons) as well as their financial soundness in order to grant its approval. The suitability of controllers is determined, to the extent possible, by means of detailed questionnaires to be completed by directors, chief executives and managers.
Ongoing requirements
Minimum reserve requirements
Banks, whether incorporated in Cyprus or operating as branches of foreign banks, are required to maintain minimum reserves with the CBC, in pursuance of monetary policy objectives, in accordance with section 41 of the Central Bank of Cyprus Law of 2002 as subsequently amended.
Annual financial statements
According to section 24 of the law, banks, whether incorporated in Cyprus or operating as branches of foreign banks, are required to prepare annual accounts and submit them, after they have been audited, to the CBC within four months of the end of each financial year. These financial statements are required to be audited in accordance with the International Standards on Auditing, issued by the International Federation of Accountants, by external auditors appointed by the applicant bank and approved by the CBC.
Investor Compensation Fund for Clients of Banks and Deposit Protection Scheme
All banks which are incorporated in Cyprus as well as Cypriot registered branches of banks incorporated outside the EU which intend to provide investment services are required to become members of the Cyprus Investor Compensation Fund for Clients of Banks and Deposit Protection Scheme, unless the bank is specifically exempted.
Anti Money Laundering measures
Banks operating in Cyprus are required to implement strict procedures for preventing the use of their services for money laundering in accordance with the provisions of the Prevention and Suppression of Money Laundering Activities Law of 1996 as subsequently amended and the Guidance notes issued thereunder by the CBC.
Payment of fees
The CBC is empowered, under section 26 of the law, to require banks to pay fees as reimbursement of the expenses incurred for their supervision and inspection.