Cyprus and the Compliance Risks of Offshore Accounts

The ongoing financial chaos in Cyprus underscores the exotic world of offshore accounts and holding companies, tax havens, and the risk of money laundering. The mere presence of an offshore account or shell company is a red flag when conducting due diligence on prospective intermediaries, or even when performing an internal risk assessment.

Antibribery cases are replete with examples of payments to third parties’ offshore accounts or third parties obscuring their ownership through offshore holding companies. Several of these cases even involve Cyprus:

• Paying millions of Euros to Cyprus-based consulting firms for lobbying, marketing, and advisory services that went to delaying entry of competitors and obtaining other regulatory benefits in Macedonia and Montenegro (Magyar Telecom).
• Concealing “commission” payments to third parties through offshore Cypriot accounts in order to yield contracts in Greece (Comverse).
• Paying sales discounts into bank accounts of shell companies set up in Latvia, Cyprus, Canada, and Hungary (Pfizer).

Lesson learned? If your company is prepared to make payments totaling, for example, millions of dollars to third party entities in Cyprus for “storage and delivery” or “to offer all necessary assistance,” then it would be a good idea to gather due diligence on the entities beyond a basic D&B report and a Google search. See SEC v. Eli Lily [PDF], Complaint, p.13-15, (12/20/12).

A quick refresher: Alarm bells should ring if your third party:

• Requests payment in a country other than the intermediary’s country of residence or the territory of the sales activity (especially if it is a country with little banking transparency).
• Uses shell or holding companies or other unusual corporate structures that obscure ownership without credible explanation.
• Refuses to disclose owners, partners, or principals.
• Requests payment in cash or to a numbered account or the account of a third party.
• Has an employee who simultaneously holds a government position.
• Has a family member in a government position, especially if the family member works in a decision-making position or is a high-ranking official in the same industry.
• Is owned by a government entity.
• Has a business ill-equipped or inconveniently located to support the proposed undertaking.
• Has little or no expertise in the industry in which he/she seeks to represent his/her company.