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During his visit to Moscow, Cypriote President Dimitrios Christofias finally embraced Russian financial regulation.
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Nov. 20, 2008
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Capital Discypriotization
// Cyprus agrees to turn in owners of Russian offshore companies
The Russian financial regulator intends to find out soon who owns all the Russian companies in Cyprus and obtain confidential information about them. The heads of the Russian Federal Financial Markets Service signed a memorandum of mutual understanding yesterday with the Commission on Securities and Stock Operations of Cyprus, where many Russian companies are registered in order to optimize taxes and hide their real ownership. Access to that information may threaten those Russian companies with taxes charges and reexamination of deals already carried out.
The memorandum between the FFMS and the Cypriote commission was signed yesterday at the end of the visit of Cypriote President Dimitrios Christofias to Russia. FFMS chief Vladimir Milovidov explained to Kommersant that the memorandum concluded makes it possible and sets the conditions for the two commissions to provide each other with necessary information on enquiry. He was referring to information that his service receives from market participants and all the legal norms that are included in regulation by financial services, for example, information about price manipulation, violations of the law, rules of behavior for market participants, and licensing requirements. According to Milovidov, the main goal of the document is the establishment of closer ties of cooperation with a country where a significant part of the Russian financial institutions are registered, in order to strengthen control and ensure the transparency of their activities. The FFMS has already taken steps in that direction. On November 7, the Justice Ministry registered an FFMS order requiring financial structures licensed by the regulator to reveal their owners.

The owners of many Russian companies are nonresident companies registered in offshore jurisdictions and tax havens. In Cyprus, for example, affiliates of the shareholders of the oil and gas company Itera, Norilsk Nickel, Rostelekom, the railway operator Globaltrans, automaker KamAZ, electric company TGK-4, investment company Troika Dialog and others are registered. Renaissance Capital, BKS, Otkrytie and many other Russian brokers carry out operations on the Russian stick market through their Cypriote offices. According to unofficial data, 99 percent of deals on the RTS go through offshore companies.

Rosstat data indicate that, as of September, Cyprus is in first place by volume of investment in Russia ($14.5 billion), surpassing The Netherlands ($12.3 billion) and the Virgin Islands ($5.8 billion). Between January and September, Russian businesses sent $12.5 billion to Cyprus.

The regulator has been trying to force Russian companies to reveal their ultimate owners registered offshore for a long time. In March 2002, the Federal Commission on the Securities Market signed an agreement with the Central Bank of Cyprus allowing the commission to obtain information on Cypriote offshore companies that invest in Russia. Igor Kostikov, who was chairman of the commission at the time, stated that Russian authorities had received access to information on the real owners of Cypriote offshore companies and Russian companies worried about the problems with tax evasion and the reversal of deals.

However, as Kostikov told Kommersant yesterday, There were no results from the signing of that document. The reason, he said, was that Cyprus was not a member of the European Union then and not among the countries that observed the requirements of the Financial Action Task Force. That is no longer a hindrance, Kostikov said, since Cyprus joined the EU on January 1, 2003. Now a memorandum like that could bring real results, he says. That is what the FFMS is hoping for. With additional legislative requirements and an agreement with the Cypriote regulator, we have created a base to ensure transparent regulation of financial institutes and lower risks for investors, Milovidov said.

If the exchange of information with Cyprus is comprehensive, the FFMS will be able to obtain information on the ultimate owners of many Russian organizations in a variety of sectors and financial structures, such as investment companies, brokers and registrars. But experts say that the FFMS will not obtain all the information it is interested in. The Cypriote regulator can disclose information only about the beneficiaries of institutions licensed by it and only if providing that information does not violate Cypriote law, observed Andrey Novakovsky, partner in the Liniya Prava law firm.

Thus, the Cypriote regulator is not authorized to provide information that is a banking secret, such as postings on accounts, Eduard Savulyak, director of the Moscow office of Tax Consulting UK said. However, in certain circumstances, if a criminal case is opened against a company in Russia, for example, the Cypriote regulator most likely will provide all the necessary information, he added.

If that happens, many participants in the market may have serious problems, mainly because of tax evasion. Often there is a deal in Russia to trade securities for hundreds of millions of dollars, but in Cyprus the parties give account only for millions of dollars, Savulyak said. He thinks major tax evasion cases may be brought and major deals reversed. Lawyers say it is possible that the owners of offshore companies will take new evasive action. The new FFMS measures will complicate the registration of new companies in Cyprus and their ownership structures will be made more complex, Novakovsky said. That will lead to the growth of expenses associated with registration and the desire to conceal beneficiaries. He thinks that companies will still register in Cyprus as long as Cyprus and Russia have an agreement on avoiding double taxation.
Nailya Asker-zade, Liza Golikova

All the Article in Russian as of Nov. 20, 2008

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