Back in 2012, organisational change and leadership expert Marina Theodotou and I co-authored a reportfor PwC entitled ‘Professional services: driving growth and jobs in Cyprus’. We analysed the sector’s (very positive) impact on jobs and economy growth and benchmarked Cyprus both as a place to do business and as an innovator. We also conducted a ‘SWOT’ analysis (identifying strengths, weaknesses, opportunities and threats) and followed up with recommendations for the government, the private-sector players and the sector representatives.
One of the key risks we highlighted was ‘loss of favourable tax regime’. We cited the risk, roundly denied at the time, that the troika would force an increase of the corporate tax rate from 10% to 12.5% (as it promptly did just a few months later); the proposed introduction of an EU-wide common tax base, which the European Commission revived in mid-2015; and the risk of a financial transactions tax.
We also highlighted the risk of over-concentration in one market (Russia) and said: “In future Cyprus may have to distinguish itself not by its tax system but purely on the basis of the quality of its service”.
Fast forward to 2016 and we can add the global fallout from the Panama Papers leaks as another major risk to the sector, for two key reasons.
The first relates to global voter appetite. There is clearly public support not only for a crackdown on money laundering and tax evasion but on what has to date been perfectly legal tax management, too. This could be the next target by the UK prime minister, David Cameron, after hosting the anti-corruption summit this week.
Combine difficulties in creating tax structures with a harmonised corporate tax base (pushed through if the UK quits the EU, perhaps) and this will be a major setback for professional services in Cyprus.
The impact on the wider economy cannot be ignored. The two sectors combined account for almost 16% of GDP in 2015. That makes them bigger than the direct contribution of tourism.
Risk-averse international banks
The second risk relates to how international banks are responding to the Panama Papers.
Only this week the Financial Times reported that Barclays, Deutsche Bank and UBS had decided to close 25,000-30,000 accounts in their corporate and investment banking divisions.
The FT said that the closure of corporate accounts showed banks were becoming more aggressive “either because they are considered too risky under anti-money laundering rules or because they have become uneconomic in light of new regulations”.
Last month Deutsche Bank also stopped being a correspondent bank for euro transactions with RCB Cyprus. The decision was reportedly taken before the Panama Papers leaks and RCB Cyprus “categorically denies” any connection with the Panama Papers.
But Deutsche Bank was already becoming extremely cautious. Its own internal enquiry this year (following questions raised by a Cypriot bank presumably doing its due diligence properly), found a “systemic” failure of internal controls and a “suspected money-laundering pattern”.
Other major banks are also grappling with reputational issues. UBS was charged by a Belgian court in February of money-laundering and serious and organised tax fraud (it denies the charges). Barclays paid a £72m penalty late last year when the UK’s Financial Conduct Authority found that it risked being used to launder money.
Faced with this onslaught, one can imagine what the mantra is like in international banks these days: “If it looks risky, dump it”.
The opportunity for Cyprus
This brings me to the opportunity for Cyprus and the need for a national champion.
In this new world order, only the squeaky clean will survive. Cyprus has done a great deal in the past few years to improve its compliance record, both in letter and in practice.
Out of the 10 areas covered by the OECD in its strict ‘second peer review’ late last year, Cyprus was found fully compliant in seven and ‘largely compliant’ in three areas. This puts Cyprus ahead of Luxembourg (fully compliant in five), on the same level as Germany, the Netherlands and the UK (also seven) but behind Malta (eight) and Ireland (all 10).
The only problem is that no one is aware of this. I know this because of the streams of foreign journalists who come knocking at my door every year with nothing else but money-laundering on their minds. As far as they are concerned (they are mainly from NATO countries), Russia is bad, therefore Russian business must mean money-laundering.
One reason no one is aware that Cyprus has been cleaning up its act is because there are so many bodies charged with tackling money-laundering: the Institute of Certified Public Accountants of Cyprus (ICPAC/SELK), the Cyprus Securities and Exchange Commission (CySEC), the Central Bank of Cyprus, the Bar Association, and, of course, MOKAS, the anti-money-laundering unit in the Attorney-General’s Office.
A single record and a single voice
There is no single record of what they have done, whom they have fined, closed down, or withdrawn licences from.
It is time their efforts were gathered into a single place and recorded, shared with anyone who encounters foreign journalists, politicians or potential investors in their daily lives, and then shouted from the rooftops by everyone with an interest in promoting investment in Cyprus.
This job should not fall to the abovementioned regulators and overseers, as it might construe a conflict of interest. However, there is a body that has investment in Cyprus as its primary aim, namely the Cyprus Investment Promotion Agency (CIPA).
The work to be done is too important to be left to juniors. It needs a single, persuasive champion with the following qualities:
- A squeaky clean reputation.
- Strong selling skills for persuading a sceptical international public.
- A background in the sector so that he or she can identify remaining weaknesses.
- The diplomatic skills to lobby the government and the sector quietly to make the necessary changes.
In case you were thinking that I am putting myself forward, the requirement for a background in the sector has ruled me out. But there must be someone out there.