AccountancyCyprus

Transcription

AccountancyCyprus

AccountancyCyprus
N 112SEPTEMBER2013
o
www.icpac.org.cy
What’s
next
for the
banks?
The Journal of the Institute
of Certified Public Accountants
of Cyprus
ΠΕΡΙΟΔΙΚΟ
ΤΑΧΥΔΡΟΜΙΚΟ
ΚΛΕΙΣΤΟ ΕΝΤΥΠΟ
ΤΕΛΟΣ ΠΛΗΡΩΜΕΝΟ ΑΔΕΙΑ ΑΡ. 133
ΑΔΕΙΑ ΑΡ. 239
©2013 KPMG Limited, a Cyprus limited liability company
and member of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (”KPMG
International”), a Swiss entity. All rights reserved.
President ’s Address
Dear colleagues
During these past few weeks we had
several encounters with delegates from
the European Union and even from international rating agencies. All shared the
same query: “despite the current predicament in Cyprus and the measures taken, how come Cyprus maintains its international business? How did you manage
to keep your international clients here?”
Ioannis Charilaou
President
Institute of Certified
Public Accountants
of Cyprus
This sounds like a very reasonable question for a ordinary man in the street, but
for a professional in Cyprus this is not
odd at all. Cyprus may have been heavily criticised, unfairly I must say, for its
anti-money laundering activities; and
the application of the bail-in tool on the
two banks for their recapitalisation may
have brought severe repercussions to
the economy in general, however, Cyprus remains resilient and preserves the
advantages that it offers to international
investor more or less intact.
For instance, the legal framework still
remains fairly convenient to use, the tax
system is still simple with one of the lower corporate tax rates in Europe, the double tax treaty network expands to a large
number of countries offering significant
benefits. The professionals are highly
trained and educated, carrying significant
experience in the business. The professional services are provided in a quality
manner with very competitive rates. Finally, Cyprus has a very pleasant environment for setting up the holding company
operations.
However, no one said that the situation
has started to get better by the day. On
the contrary, the unemployment level remains high, the local market is depleting
and the liquidity has evaporated from the
market. The continuation of the capital
controls over the banks is another hurdle
for the economy, coupled by the recapitalisation needs to meet core tier 1 ratio
of 9%. Cash flow and liquidity have to be
re-injected into the market, allowing thus
all businesses to operate and produce
wealth and jobs.
prus and even more effort is made to attract new ones. Apparently, some new
markets seem to slowly open, such as
the USA. Interest is also coming from the
Far and Middle East.
Undoubtedly the above development is
related to the discovery of the natural gas
reserves off the coasts of Cyprus. This
is a “silver lining” in the dark clouds that
shade the economic horizon of the country, which of course has to be prudently
exploited.
The professional accountants and ICPAC
have been on the spearhead of the promotion of the Cyprus as an international
business centre of credible standing
for many years now, through extensive
traveling and hard work all over the world.
Despite the current gloomy circumstances, the accounting profession has
increased its efforts to promote Cyprus
and attract new investments, keeping at
the same time the existing clientele. This
is pivotal for the economy of the country
as it will immensely help to restore confidence and regenerate development.
Dear colleagues,
Our Institute has always been in the
heart of the economic development of
the country and the profession grew with
the economy. Once again, ICPAC will
take a leading role in trying to overturn
the situation, deploying all its available
resources.
In conclusion, I believe that it is important
to hear from foreign analysts that Cyprus,
despite the tons of problems caused after the Eurogroup of March 15, is still not
only alive, but may has prospects. It gives
us more stamina and courage to strive
for a better future. We have a second
chance and we must win the bet.
We remain confident though that the
economy will rebound sooner than expected. The various professionals have
done the best they could in order to
maintain their international clients in CyACCOUNTANCY CYPRUS • VOLUME 112 • SEPTEMBER 2013
1
Contents
September 2013 – No. 112
ISSN 1450-2380
Accountancy Cyprus is published quarterly by the Institute of
Certified Public Accountants of
Cyprus and is sent free to all members of the Institute as well as to
a large number of other persons,
companies and organizations.
Editor
Ninos Hadjirousos, FCA
Deputy Editor
T. Anastasiades, B.Sc., M.A. (Econ.)
Editorial & Institute Offices
11 Byron Avenue, CY-1096 Nicosia
P.O.Box 24935
1355 Nicosia – Cyprus
Tel. 22870030, Telefax 22766360
The Institute can accept no responsibility for the accuracy of
contributed statements or articles
appearing in this publication and
any views or opinions expressed
are not necessarily endorsed by
the Institute, its Council or by the
Editors.
E-mail: [email protected]
URL:http://www.icpac.org.cy
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Institute News
GM’s corner
Professional Briefing
P.4
P.5
P.7
P.8
P.10
Revised ICPAC
Regulations for Quality
Assurance –
Regulatory Committee
New Anti-Money
Laundering Directive
Council’s Activities
Commitee’s Activities
New Members
ACCOUNTANCY CYPRUS • VOLUME 112 • SEPTEMBER 2013
Think’n ahead
Contents
Economy
P.14
Cyprus will survive as an
international business centre
P.15
“Criminal delay” in applying to the
European stability mechanism
P.16
A single resolution mechanism for
the banking union
P.18
Taking care of Non Performing
Loans (NPLs )*
P.20
The absence of corporate
governance in the banking sector
and its consequences
P.22
Is ELA a good or evil mechanism?
P.24
Taking Stock of the Resolution of
the Cyprus Banking Crisis:
Salvation through Destruction!
P.26
Lessons from previous banking
crises
P.28
Cyprus after the Eurogroup of 25
March 2013
P.30
Need for a complete strategic
planning for privatization
P.31
Financial responsibility
P.32
Contracts for Difference (CFDS)
P.34
The Cyprus fund industry, a lifeline
for our financial center
P.36
Cyprus memorandum and the
perspective of economic policy
change
P.38
Privatisations are in the interest of
the economy and of the consumers
P.40
The Cyprus “baill-in” calamity:
a self-inflicted wound or a
Eurogroup policymaking blunder?
P.42
The significance of the first Troica
evaluation and the road ahead
P.44
Success stories of the Eurogroup
P.45
The revenge of the economy
P.46
Cyprus Shipping: “Current
Financial Developments in Cyprus”
P.47
Cyprus shipping pillar of
development
Business
P.48 European Parliament ahead of
important decisions
P.50 Why the new shopping hours are
a success
P.52 Cyprus should grow manufacturing
sector, but this requires careful
management
P.54 Russians support Limassol
P.56 DISTRESSED ASSET
INVESTING – Part2
P.58 Leveraging Technology to
Maximize Profitability
P.60 Investing in Cyprus
P.62 Getting out of crisis by beating
procrastination and its
rationalisation
P.64 The use of batteries for large
electricity storage
P.66 Turning crisis into an opportunity
for businesses
P.68 How to differentiate a small firm
P.70 “Best way to conquer stage fright
is to know what you’re talking
about” Becoming a compelling
speaker
P.72 Management by exception
Fraud
P.82
Urgent need for electorate
ccountability and transparency
P.84
Cyprus scores high in
unprecedented audit on the
national aplication of anti-money
laundering legislation
P.86
Global Corruption Barometer:
The Cypriot Perspective
P.88
Fraud is increasing: A cause of
concern
IT
P.90
Benefits of cloud computing
P.92
The Excel Wizard
Real Estate
P.94
Selling your property today
P.96
Property owners...The poor
relatives
Taxation
P.74 The moral aspect of Tax: Does Tax avoidance equal Tax Evasion
in turbulent economic times?
P.76 Shifting the balance from direct to
indirect taxes: perspectives and
challenges
P.78 OECD publishes sweeping Action
Plan on tax Base Erosion and
Profit Shifting (BEPS)
Internal Audit
P.80
Internal Audit in the Public
Sector
The Institute Council
President:*Ioannis Charilaou, FCCA, FAIA, MBA
Vice President: Nicos Chimarides, ACA, BSc
Secretary: *Demetris Halios, BSc(Acc), CPA, ΜΒΑ
Members:
Panicos Charalambous, FCCA
Christis Christoforou, BA(Econ.), FCA, MBIM
Stavros Pantzaris, B.Eng., FCA
Maria Pastellopoulou, FCCA
*Marios Skandalis, FCCA, FAIA, MBA
Nicos Syrimis, FCA
*Demetris Taxitaris, ACA
Elias (Liakos) Theodorou, FCA
Demetris Vakis, FCA, BSc, CF
*Denotes member not in practice
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Institute News
Council’s Activities
During the third quarter of 2013 the Council of the Institute
convened three times and considered various matters that
were of significant interest to ICPAC and to the profession in
general. The main activities of the Institute included the following:
Meetings with Officials
The President, Council Members and the General Manager
during the second quarter of 2013 held the following meetings
with Government, political, business and other officials:
•On 4/7/2013 the President and the Council met with the
Chairmen of the Committees of the Institute in a common meeting.
•On 16/7/2013 the Council met with His Beatitude the Archbishop of Cyprus Mr Chrysostomos B’ at the premises of the
Institute, where he later blessed the Institute and all its members .
•The President and the General Manager of the Institute visited on 29/7/2013 the Auditor General Ms Chrystalla Yiorkadji
for a courtesy meeting, during which matters of mutual interest
were discussed.
•On 20/9/2013 the President and the General Manager of
the Institute visited the Minister of Justice.
•The General Manager travelled to London between
3-6/9/2013 to meet with the officials of ACCA and ICAEW.
He met with the Chief Executive Officers and Senior Officers
of both bodies and sought ways to further enhance the existing
excellent cooperation.
•On 24/9/2013 the President and the General Manager of
the Institute met with the following Ministers: (i) Minister of
Finance, in order to discuss the Double Tax Treaties regime,
(ii) Minister of Communication and Works and (iii) Minister of
Defence. All meetings were held in a very pleasant atmosphere
Meeting of Council with Committee Chairmen of
the Institute
The Council held a common meeting with all Committee Chairmen of the Institute on 4/7/2013 at Cleopatra Hotel, Nicosia.
The meeting marked the beginning of the new season after the
annual general meeting of the Institute and served a good op-
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and reiterated the cooperation between the Institute and the
Government in many fields.
Council’s Decisions
•The Council during its meeting on 17/9/2013 revised the
Members’ Handbook by approving the Regulations for the
Quality Assurance, which make specific reference to the set
up and function of the Regulatory Committee.
•During the same meeting as above, the Council approved
the revised Prevention and Suppression of Money Laundering
Activities Directive.
Other important meetings and activities
•During the quarter the General Manager had a number of
meetings at the Ministry of Finance with officers of the Cyprus
Securities and Exchange Commission and the Cyprus Bar Association for the Anti-Money Laundering action plan that has
been incorporated in the MoU with Troika, as well as for the
Law Regulating the Providers of Administrative Services.
•The President and the General Manager met with the Public
Oversight Board during the quarter to discuss how the implementation of the Auditors Law will be better done and how the
mutual cooperation would be enhanced.
•Various meetings were held at the Ministry of Energy, Commerce, Industry and Tourism to discuss the improvement of the
operations and the efficiency of the Registrar of Companies.
•During the quarter, the Institute furnished the Ministry of
Energy, Commerce, Industry and Tourism with a number of
papers and supporting material for the EU Audit Policy Reform
proposal.
•During the quarter, ICPAC representatives appeared before
the Parliamentary Committees of Finance and Commerce regarding a number of Laws and Bills.
portunity for the new Institute President and Council Members
to get to know the Committee Chairmen. It was a very successful gathering as a number of important issues were raised
and the participants had the opportunity to get acquainted with
their counterparts and the activities of the rest of the committees
Blessing by the Archbishop Chrysostomos B’
On 16/7/2013 His Beatitude the Archbishop of Cyprus Mr Chrysostomos B’
blessed the Institute and all its members
in a humble ceremony that took place
at the premises of the Institute. Present
were the members of the Council, members of staff and Committee Chairmen. Mr
Ioannis Charilaou, Institute’s President,
announced a donation of €2.000 on the
Institute’s behalf, for the community grocery operated by the Holy Archbishopric.
Committees’ Activities
Education Committee
During the third quarter of 2013, the Committee held two meetings.
The following seminars and presentation have been organized during this period.
1.Liquidations, Dissolutions, Bankruptcies, Receiverships and
Corporate Schemes of Arrangement
The purpose of the seminar was to educate the members regarding
the theory and the procedures for the Liquidations, Dissolutions,
Bankruptcies, Receiverships and Corporate Schemes of Arrangement.
The seminars were presented by Mr. Chris Iacovides, Licensed
Insolvency Practitioner. The seminars were held on the 25th of
September2013 in Limassol, 26th of September 2013 in Larnaca
and 3rd of October2013 in Nicosia.
Upcoming seminars: Shipping, Corporate Governance, Tax and
VAT updated changes, Monitoring visits results etc.
Akis D. Kolokotronis
Chairman
2. Greece, Cyprus and the Eurozone Endgame.
The purpose of this presentation was to analyze the participants
the economic situation of Greece and Cyprus in the Eurozone. The
presentation was presented by Mr. Emmanouil Schizas, Senior
Economic Analyst – ACCA. The presentation was held on the 25st
of September 2013 in Nicosia.
Accounting Standards Committee
During the third quarter of 2013 the Accounting Standards Committee has carried out the following activities:
The Committee continued its scheduled monthly meetings as
well as several sub-committee meetings in the intervening periods. In accordance with the Committee’s action plan five subcommittees are monitoring developments and dealing with issues
in the following areas:
• News from the IASB and developments in IFRSs;
• Developments in the Cyprus Companies Law, Cap.113;
• Reporting matters relevant for listed companies arising from
developments from the Cyprus Stock Exchange and Cyprus Securities and Exchange Commission;
• Developments in the EU Accounting Directive; and
• Financial reporting issues arising from the financial crisis.
The Committee has been monitoring the developments following
the Eurogroup decision of 25 March 2013 on Cyprus and has
continued its discussion on financial reporting issues arising from
these events. The Committee will continue to monitor developments in respect of financial reporting matters arising from these
issues and will consider the preparation of additional guidance
when necessary.
During its meetings the Committee also discussed the following
matters:
• Developments in the EU endorsement status of IFRSs. The
Committee is monitoring the endorsement of IFRSs in the EU
and has communicated the latest Endorsement Status Report
as issued by the European Financial Reporting Advisory Group
(EFRAG).
• Developments from the IASB, including newly issued standards, amendments to standards and exposure drafts.
• Recent changes in the Cyprus Companies Law.
George C Kazamias
Chairman
Administrative Services Committee
During the third quarter of 2013, the Committee considered in
more detail the fiduciary profession from a strategic planning perspective. A specifically established sub-committee held discussions to consider the Association’s role in promoting the best
interest of the fiduciary profession as a whole. Further to the
above, the Committee considered the workings of the Registrar
of Companies and discussed possible ways for the improved efficiency and servicing of the fiduciary professionals. The recommendations resulting from these discussions were forwarded to
the Association’s representative on the committee formulated by
the Minister of Energy, Commerce, Industry and Tourism.
Helen Hadjichristoudia
Chairperson
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Institute News
CORPORATE GOVERNANCE, INTERNAL AUDIT AND RISK
MANAGEMENT COMMITTEE
During the third quarter of 2013, the Committee dealt with the
following matters:
• Continued working on the survey on Corporate Governance of
listed companies in Cyprus. The Committee members are reviewing the results of the survey with the intention to release
meaningful results to the members and others before the end of
the year.
• Continued working towards the organization of an Open Forum
Discussion focusing on Corporate Governance and its Relation to
the Financial Crisis. Made some final meetings with the selected
speakers, coordinated its endeavors with the Educational Committee and agreed most of the logistical details. The event has
been set for Wednesday, 9th of October.
Haris Kakoullis
Chairman
ECONOMIC CRIME AND FORENSIC ACCOUNTING (ECFA)
COMMITTEE
During the third quarter of 2013 the ECFA committee discussed
the Asset Disclosure Bills of the Elected and Public Officials being considered by Parliament. It also discussed the (a) Ernst and
Young 2013 Fraud Survey, (b) 2013 KPMG Fraud Barometer
and (c) Transparency International Global Corruption Barometer.
Finally, the Committee discussed the recent MoneyVal report
and the money laundering allegations against Cyprus.
The ECFA editorial committee issued Volume 3 Issue 2 of the
e-Bulletin. The e-Bulletin was emailed to the ECFA-SIG comprising now of almost 200 members. The particular issue focused on
the Ernst and Young Survey, Money Laundering, Corruption, Tax
Fraud and Evasion and recent announcements and news items.
At the same time a number of e-alerts were sent to ECFA-SIG
members during the quarter.
Finally, members of the committee have written two articles in the
current issue of the ‘Accountancy’ as part of its raising awareness and building capacity initiative.
Maria Krambia-Kapardis
Chairperson
The Auditing Standards Committee
During the period 13 June 2013 to 4 September 2013 the International Auditing Standards (ISA) Committee performed the
following tasks:
5.The Committee is in contact with other professional bodies with
the aim of addressing audit relevant issues. In this respect the
Committee has sent for comments to the Association of Cyprus
Commercial Banks a revised specimen audit bank confirmation
letter and standing bank authority. In addition, in coordination
with the Association of Cyprus Commercial Banks it is evaluating
more efficient ways for the process to be performed.
George E Georgiou
Chairman
TAXATION COMMITTEE
The main issues addressed by the Taxation Committee during the
third quarter of 2013were the following:
1. The Committee met with the Minister of Finance anddiscussed
current issues including the possibility of enacting some tax relief
to businesses that have suffered bail in losses.To this intent we
prepared and submitted to the Ministry our proposal.
2. The Committee has worked closely with the Tax Authorities
providing our technical assistance to the following:
a. The examination of our Intellectual Property Tax regime by the
ECOFIN Code of Conduct Group assessing possible harmful tax
practices.
b. The phase 2 review by the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes.
3. The Committee met with the Commissioner of the Tax Authorities and discussed various tax issues. Those that have been
agreed or otherwise finalised, including clarifications on released
tax circulars and for which tax circulars will not be issued, will be
communicated to our members shortly, in a separate document.
4. The Committee has commented on various tax bills including
that addressing the Directors’ liability for the payment of taxes
and has appeared before the Finance Committee of the House of
Representatives expressing our views on such bills.
5. Members of our committee have continued their involvement
with DTT negotiations.
Panicos Kaouris
Chairman
STOCK EXCHANGE AND CAPITAL MARKETS COMMITTEE
During the third quarter of 2013 the Stock Exchange and Capital
Markets Committee met three times.
1.The Committee is monitoring ongoing developments in auditing
standards, legislation and pronouncements with an aim to issue
technical guidance, as required.
The main activities of the Committee during this period were as
follows:
2.The Committee is evaluating the audit implications of the current financial crisis in Cyprus and in coordination with the Accounting Standards Committee, is considering what guidance
should be issued to our members.
(i) Review of new circulars and announcements issued during the
period by the CSE and the CySec.
(ii) Studied ESMA Report on ‘Comparison of liability regimes in
Member States in relation to the Prospectus Directive’.
3.The Committee is in the process of issuing illustrations of audit
engagement letters for audits of other entities than a company,
including those of Provident Funds, Branches, Partnerships and
Sole Traders. In this process the Committee will also update the
current illustration of audit engagement letter for Companies.
Katia Papanicolaou Charalambous
Chairwoman
4.The Committee is in the process of issuing a revised booklet
with illustration audit reports, including new reports for Provident
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Funds, Partnerships, ICIS and Public Companies.
PUBLIC SECTOR COMMITTEE
During the second and third quarter of 2013 the Public Sector
Committee held 5 meetings and carried out the following activities:
1.The committee was updated by its member and representative of both the Treasury of the Republic and the ICPAC in the
Federation of European Accountants (FEE), regarding the recent
developments in relation to the International Public Sector Accounting Standards (IPSAS).
2.The committee was updated regarding the progress of the implementation of the Code of Public Governance in the Treasury
of the Republic.
3.The committee met with the Assistant Auditor General and discussed a number of technical issues regarding the accounting
profession in the public and wider public sector.
4.A delegation of the committee, together with the General Manager of the ICPAC, met with the Commissioner for the Reform of
the Civil Service Mrs. Emmanuella Lambrianides and exchanged
ideas on issues regarding the public and wider public sector. The
delegation reassured the Commissioner as to ICPAC’ s willingness to contribute for the improvement of the public and wider
public sector.
5.The committee is currently working on the development of a
manual which will include a summary of the key provisions of
the legislation introduced in the context of the memorandum of
understanding with Troika. A first edition of the manual will be
sent to the members and it will be updated with new legislation
provisions.
In addition, the sub-committee will be organizing a number of
seminars which are critical for accountants in the public and wider public sector.
Constantinos Galinis
Chairman of the Public Sector Committee
VAT Committee
During the third quarter of this year, in addition to the monthly
meetings of its members, the VAT Committee addressed a number of issues, including the following:
• Meeting with the VAT authorities to discuss and analyze the
recommendations submitted to them in relation to various proposed measures for the promotion of the development and competitiveness of the Cypriot economy.
• Examination and research on the practices followed by other
EU Member States on the area of the “option to tax” of new
rental buildings and set up of a sub-committee tasked with carrying out an in-depth analysis of this measure and formulating of
a proposition on how this could be applied in Cyprus as part of
the overall measures for promotion of the competitiveness of the
local economy.
• Review and examination of the Invoicing Directive as well as
specific discussions in relation to the matter of Cash Accounting
and on the ways that this scheme could be improved so as to
benefit a bigger portion of small businesses.
Chrysilios Pelekanos
Chairman of VAT Committee
New Members
DURING THE PERIOD JULY-SEPTEMBER 2013 THE FOLLOWING PERSONS HAVE BEEN ACCEPTED AS NEW MEMBERS OF
THE INSTITUTE:
3687 Angela Pittashi 3688
Loizos Tteralli
3689
Laryssa Smyelova Vasiliou
3690
Andreas Rousos
3691
Elena Iacovidou
3692
Christiana Pittashi
3693
Natasa Petrou
3694
Maria Malekkidou
3695
Eleftherios Charalambous
3696
Marios Theophilou
3697
Mariella Malioti
3698
Chloe Kaprou
3699
Yiannis Papamichael
3700
Savvas Marcou
3701
Cosmas Cosma
3702
Zoi Christofi
3703
Eleni Koumpoushi
3704
Kyriakos Papageorgiou
3705
Olga Gaponova
3706
Andreas Tourou
3707
George Kapsoullis
3708 Stavros Michael
3709
Anastasia Michael
3710
Nataliya Filipenko
3711
Anastasia Soteriou
3712
Stella Kotsapa
3713
Nicolas Neocleous
3714
Constantinos Tsiaklides
3715
Constantinos Zertalis
3716
Tatiana Michaelidou
3717 Christiana Chrysostomou
3718
Irene Palesi
FCCA
ACCA
ACCA
ACCA
ACCA
ΑCCA
ΑCCA
ΑCCA
ACA
ΑCA
ACA
ACA
ACA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACCA
ACA
ΑCA
ACA
ACA
ACA
ΑCA
ACA
ACA
3719
3720
3721
3722
3723
3724
3725
3726
3727
3728
3729
3730
3731
3732
3733
Evita Livera Michalis Konstantinou
Antonakis Takkos
Evanthia Sozou
Charoula Kazakeou
Marios Christoforou
Paraskevas Paraskeva
Maria Raspa
Anna Sinodorou Panayiotou
George Loizou
Andrea Chrysostomou
Costas Partassides
Charis Vasiliou
Hara Christoforou
Barry Hall
PASSED AWAY
60
Kyriakos Yiambides
ACA
ΑCCA
ΑCCA
ΑCCA
ΑCCA
ACCA
ACCA
ACCA
ACCA
CPA-USA
ACA
ACA
ACA
ACA
ACCA
FCCA
REREGISTRATION
1813 Nicolas Mantis
ACA
REMOVED FROM REGISTER
2368
Annita Tziarridou
1757
Stavros Papageorgiou
1758 Kyproulla Drousiotou
2918
Loizos Theophilou
3253
Paris Aristidou
1404 Ioanna Amaxari
3434
Yiannis Christou
2508
Polyxeni Peristiani
2948
Demetris A. Patsalides
ΑCCA
CA South Africa
CA South Africa
ΑCA
ACA
ΑCCA
ACA
ΑCCA
CPA-USA
7
GM’s corner: Think’n ahead!
It’s time for the public sector
to lead the way!
Our last issue of “Accountancy Cyprus” hosted
an article by Ms Emmanuela Lambrianides,
Commissioner for the reform of the civil service,
with which I couldn’t agree more. Ms Lambrianides touched upon a few “sacred cows” that
are dominating the civil service for decades.
By Kyriakos Iordanou,
General Manager of ICPAC
Being at the dawn of a probably long era with
Troika, it is essential to rectify a number of illpractices as soon as possible, in order to be able
to elevate to the next stage of the programme.
Here I quote Ms Lambrianides: “Increasing the
efficiency of the civil service is a catalyst for the
exit of the island from the economic crisis”. How
true!
How will the public sector lead the way? Well,
this can be done under various pillars, such as:
(a) Fiscal policies: balanced government budgets to eliminate excess expenditure. Unnecessary luxuries and other lucrative benefits have to
be abandoned.
(b) Accounting policies: the introduction of
the accruals accounting system via the adoption
of IPSAS could be a very helpful tool for the assessment and evaluation of the State’s financial
affairs and obligations.
(c) E-governance: this is a pivotal development that would enhance the efficiency, whilst
minimising costs and increasing the public’s
convenience. Most of the transactions that the
public is called to do with the government should
be done by maximising the use of technology.
(d) Private-Public Partnership: a perfect blend
between the public and private sector should be
sought, in order to capitalise on the merits of
both sectors. PPP projects should be the future.
(e) Organisational matters: civil service falls
under 11 ministries and a number of departments per each ministry. Now is the time for
a genuine rationalisation and consolidation of
the various activities, in order to remove onerous overlaps between ministries and/or departments to bring about efficiency. Activities which
are obsolete should be eliminated and more
simplistic procedures should be endeavoured.
(f) Human capital: this is an area that has to
undergo substantial improvement, where not
only technocratic input is required but also political decisiveness is essential. There should be
a revision of the process whereby civil servants
are selected and employed, promoted, trained,
transferred and evaluated. The evaluation process seems to belong to previous centuries. All
8
of the above must be done in the letter and spirit
of meritocracy, value and performance, and not
according to any political preferences and other
“qualities”!!! The evaluation system should be
used in such a way to indicate who is going to
be promoted and who rejected. Organisational
justice has to be instilled throughout the civil
service. In addition, rotation and mobility within
the civil service should be one of the underlying
factors for the best exploitation of the talent that
is hidden in the public sector and tackle immediate needs in staffing.
(g) Controls: in my opinion appropriate controls should be put in place, in order to enhance
compliance with the budgetary provisions and
promote accountability from the budget holders. The budget holders should have to explain
and be accountable for any deviations from their
budgets. According to Budget, the responsible
budget holder under the Law is the Director
General of each ministry. Hence, a financial
control function with increased powers could be
installed at each ministry to act as the controlling leg of the ministry on the one hand and, on
the other hand, to provide financial advice to the
Minister and the Director General.
(h) Better utilisation of Professional Accountants: there are several hundreds of qualified
accountants working for the civil service and the
wider public sector. Whilst a substantial number is doing an excellent job, many of them are
under-utilised. To my profound surprise, I have
noticed that apart from the accountant seconded by the Treasury to each Ministry, no other
professional accountant was there in the vicinity,
even for the “most significant” ministries under
the current conditions!!! In this very difficult and
challenging situation that the government faces,
many ministries ignore the professional accountant. I am not claiming that such civil servants
would solve all the problems, nor I support them
merely for camaraderie purposes, but these
people are well trained for the job in a specific
culture and mind-set. Therefore, their talent,
skills and knowledge should have been appreciated and sought after. These people could be
utilised throughout the public services, thus saving lot of cost for the government.
Many of the above suggestions have been discussed a few months ago with Ms Lambrianides
in person. Amid the current predicament, there
is no other way than the public should take the
initiative and lead the way out of the crisis. Rectifying internal inefficiencies, would unavoidably
lead to the rectification of the entire country’s
economy.
ΤΟ ΕΥΡΩΠΑΙΚΟ
ΟΡΑΜΑ ΤΟΥ 2020
Build Green
AYTOI ΖΟΥΝ ΤΟ ΟΡΑΜΑ ΣΗΜΕΡΑ
Live Green
Save Green
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www.ikopluseco.eu
Revised ICPAC Regulations for Quality Assurance – Regulatory
Committee
The Council of the Institute during its meeting in September,
approved the revised “Regulation 1.202: Quality Assurance”.
This Regulation contemplates the system of quality assurance for work of the members in public practice. Special
reference is made for the establishment and function of the
Regulatory Committee. The revised Regulation is situated in
the Members’ Handbook, which is accessible from the website of the Institute.
New Anti-Money Laundering Directive
The Council of the Institute during its meeting in September
approved the revised (4th) Directive for the Prevention and
Suppression of Money Laundering Activities. This revised
version takes into consideration the latest amendments of
the Law, as well as the comments/guidelines given by Troika.
This new Directive has immediate effect and all members are
urged to fully comply with its provisions. The revised Directive
is accessible from the website of the Institute.
ICPAC and ICAEW collaborate on technical services and support
In recognition of the ever-increasing needs of members for
technical support on IFRS and audit matters, the Institute of
Certified Public Accountants of Cyprus (ICPAC) in collaboration with the Institute of Chartered Accountants in England
and Wales (ICAEW), is pleased to provide ICPAC members
with electronic access to the resources of the ICAEW Audit
and Assurance Faculty and Financial Reporting Faculty.
The faculties aim to enhance their members’ professional
development and to ensure they have the technical resources necessary to carry out their roles to the highest standards.
In addition, all ICPAC members have access to ICAEW’s
Technical Helpline for guidance on matters relating to International Standards of Auditing (ISAs), International Financial
Reporting Standards (IFRS) and the IFAC Code of Ethics.
This service is provided over the phone or by email.
This offering represents a valuable opportunity for improved
provision of services by ICPAC to its members, especially
amidst the current hard economic situation. Both services
will be provided free of charge to members, until 30 June
2014.
Members are reminded and encouraged to take full advantage of the suite of products and services that are available
to them via the ICAEW website (icaew.com/icpac).
Instructions for the use of services provided under the
ICAEW-ICPAC agreements:
(i) Technical Advisory Helpline – Free to all members of
the ICPAC
All ICPAC members now have access to ICAEW’s Technical Helpline for guidance on matters relating to International
Standards of Auditing (ISAs), International Financial Reporting Standards (IFRS) and the IFAC Code of Ethics. You can
place your query by:
• calling 0044 1908 248 250
• emailing [email protected]
• Skype at icaew_uk
(ii) Access to the Financial Reporting and Audit and As10
surance Faculties.
Please email Katerina Timotheou with your ICPAC membership number, address and personal work email at
[email protected]. Should you still have a
record number from previous faculty membership, please
provide this also.
Financial Reporting Faculty
The Financial Reporting Faculty offers practical and accessible assistance, as well as the opportunity to share views and
experiences with a broadly-based international online community of financial reporting professionals. Fact sheets, webcasts, email bulletins, technical updates, a standards tracker
and access to eIFRS are among the faculty’s products and
services. These are available online to help members keep
abreast of changes in financial reporting standards, regulation and practice.
Benefits of membership include:
• Unique online standards trackers – Check which IFRS
standards apply to your financial statements, with direct links
to eIFRS. You will find details of all recent changes and can
determine which version of the standard is relevant to your
timeframe.
• Factsheets – Practical online guidance written exclusively
for faculty members by experts. The factsheets are linked to
our standard trackers and eIFRS.
• By All Accounts – ICAEW’s acclaimed journal contains high
quality features on topical financial reporting issues, putting
reporting into context.
• Full use of eIFRS – The IASB’s impressive online resource,
including the full text of the standards (normally GBP£200
per year).
• Webinars and events – On topical financial reporting issues, such as new IFRS requirements.
• Succinct monthly e-bulletins – The latest financial reporting news.
• Learning packages – Specially discounted packages combining an ICAEW study programme and membership of the
faculty (see icaew.com/ifrspackages).
• eBooks and online publications – Easy access to a consolidated list of helpful eBooks and online publications in the
public domain.
• Online community – Join the debate: network, compare
notes and influence the decision makers.
Audit and Assurance Faculty
The Audit and Assurance Faculty contributes to developing
standards and thought leadership, representing the majority of the leading accountancy practices in the UK and the
global networks. It provides practical guidance, technical updates, a monthly magazine and events on topical issues. It
facilitates the Audit Quality Forum - which was established in
2004 to promote open and constructive debate on transparency, accountability, reporting and confidence in independent audit internationally.
Benefits of membership include:
• Audit & Beyond – the faculty’s monthly magazine which
features the best of recent thinking from a wide range of
the profession’s foremost experts. The magazine includes a
technical update which provides a comprehensive review of
relevant pronouncements.
• Events – ICAEW’s acclaimed annual roadshow visits venues across the world, keeping you up to date with technical
issues and current hot topics. The roadshow is recorded and
made available on the website so all faculty members can
access the event.
• Publications – members receive copies of all faculty publications, including technical guidance and technical releases.
• Webinars – new to the faculty for 2013 will be a series of
live webinars where you can interact with our speakers and
ask questions during the event.
• CPD – the faculty provide resources to enable you to plan
your audit and assurance CPD activities to support your career development.
IPSASB PUBLISHES FIRST RECOMMENDED PRACTICE GUIDELINE ON THE
LONG-TERM SUSTAINABILITY OF PUBLIC FINANCES
The International Public Sector Accounting Standards Board
(IPSASB) has issued Recommended Practice Guideline 1
(RPG 1), Reporting on the Long-Term Sustainability of an
Entity’s Finances. RPG 1 provide guidance on reporting on
the long-term sustainability of a public sector entity’s finances over a specified time horizon in accordance with stated
assumptions on policy and demographic and economic variables.
RPGs are a new type of publication that provides guidance
on the broader aspects of financial reporting that are outside
the financial statements.
The sovereign debt crisis brought into sharp focus the importance of the fiscal condition of governments and other
public sector entities to the global economy. Concerns persist about the ability of governments to meet debt servicing
obligations. The extent to which governments can maintain
their current levels and quality of service delivery and meet
social benefit program obligations—without raising taxes
and contributions or increasing debt to unsustainable levels—is a major economic and social issue.
IAASB PROPOSES STANDARDS TO FUNDAMENTALLY TRANSFORM THE AUDITOR’S REPORT; FOCUSES ON COMMUNICATIVE VALUE TO USERS
The International Auditing and Assurance Standards Board
(IAASB) today released proposals to enhance the future auditor’s report. The IAASB’s Exposure Draft, Reporting on
Audited Financial Statements: Proposed New and Revised
International Standards on Auditing (ISAs), responds to calls
from investors, analysts, and other users of audited financial
statements in the wake of the global financial crisis for the
auditor to provide more relevant information in the auditor’s
report based on the audit that was performed.
“We expect the proposed new and revised standards will result in substantive changes to how auditors contemplate and
approach communication to users of their reports—the beneficiaries of a financial statement audit,” explained Prof. Arnold Schilder, IAASB Chairman. “These changes are critical
to the perceived value of the financial statement audit and
thus to the continued relevance of the auditing profession.”
PROPOSED AMENDMENTS TO THE IFAC CONSTITUTION AND BYLAWS
ISSUED FOR COMMENT
The Constitution Review Working Group* of the Board of
the International Federation of Accountants (IFAC) has issued proposed amendments to the Constitution and Bylaws.
Members, Associates, Affiliates, Regional Organizations,
Accountancy Groupings, and members of the Forum of
Firms are encouraged to submit comments by September
30, 2013. The Working Group will also consult other key
stakeholders, including the Public Interest Oversight Board
and the Monitoring Group, during the exposure period.
The Working Group, led by IFAC Deputy President Olivia
Kirtley, conducted a comprehensive review of the Constitution and Bylaws and considered the discussions at the 2012
Council meeting, 2013 Chief Executives’ Strategy Forum,
February and June 2013 Board meetings, and the May 2013
Survey responses in shaping its recommendations.
11
PROJECT AND INVESTMENT APPRAISAL REQUIRES GREATER RIGOR
New Guidance from IFAC Helps Manage Complexities
The Professional Accountants in Business (PAIB) Committee of the International Federation of Accountants (IFAC),
the global organization for the accountancy profession, today released International Good Practice Guidance, Project
and Investment Appraisal for Sustainable Value Creation.
The guidance supports the accountancy profession’s facilitation of sustainable organizations, financial markets,
and economies by providing guiding principles to manage the complexities of performing a robust project and
investment appraisal. Greater rigor in the appraisal and
decision process can be achieved by using the principles
as a benchmark against which to assess an organization’s
current practice.
INTERNATIONAL ETHICS STANDARDS BOARD FOR ACCOUNTANTS RELEASES
2012 ANNUAL REPORT
The International Ethics Standards Board for Accountants
(IESBA, the Ethics Board) today released its 2012 Annual
Report, Connecting and Engaging with Our Global Stakeholders.
The report introduces Jörgen Holmquist, the first independent chair of the Ethics Board, and details the board’s
ongoing commitment to developing high-quality ethics
standards for the global accountancy profession. It emphasizes the board’s further commitment to promoting and
facilitating the adoption and effective implementation of
these standards around the world, thus supporting professional accountants in their commitment to act in the public
interest within their diverse roles in business and practice.
The report summarizes the progress made on the IESBA’s
Work Plan, which in 2012 included finalizing three pronouncements—breach of a requirement of the Code of
Ethics for Professional Accountants (the Code), conflicts
of interest, and a revised definition of the term “engagement team.” The report also highlights the board’s efforts
in exploring appropriate ethics standards for professional
accountants in one of the most challenging projects the
board has undertaken so far—responding to a suspected
illegal act.
“The Annual Report is one of the ways through which the
board demonstrates the transparency of its activities. This
year’s report focuses on our activities in further building
on the strong base of ethics standards contained in the
revised Code released in 2009. Additionally, it elaborates
on the renewed focus we’ve placed on stakeholder outreach,” said Mr. Holmquist. “As the first independent chair
of the board, I see it as an important priority to increase
the trust of stakeholders, particularly the regulatory community, in the board’s work, and extending and deepening
the board’s engagement with them.”
Prof. Arnold Schilder Reappointed to Chair the International Auditing and Assurance Standards Board from 2015 to 2017
Prof. Arnold Schilder has been reappointed as chairman of
the International Auditing and Assurance Standards Board
(IAASB) for the period 2015–2017.
As chairman, Prof. Schilder will continue to lead the IAASB
as it works to set high-quality international auditing, assurance, and related services standards. Since his appointment in 2009, he has played a key role in guiding
the IAASB as it strives to enhance the quality and consistency of practice throughout the world. With 90 jurisdictions around the world already using or in the process of
adopting or incorporating International Standards on Auditing (ISAs), his leadership will be critical in expanding this
broadly based acceptance more widely.
Additionally, he will steer the board into the future as it
works to enhance public confidence in financial reporting.
Part of this agenda includes the IAASB’s leading edge
proposals for significant changes to the content of the
auditor’s report and considering the results of the implementation reviews of the ISAs. Also, the IAASB will closely
monitor new developments, such as integrated reporting,
and their implications for assurance and related services
standards.
“It has been my great pleasure to chair the IAASB, and I
am honored to have been reappointed to continue to lead
the board,” said Prof. Schilder. “We are now preparing a
12
global consultation for the IAASB’s Strategy and Work
Program for 2015-2019. I look forward to the dialogue
with many key stakeholders. As a result, I expect a challenging program in my third term to serve the public interest with high-quality standards, ongoing implementation
support, and cooperation with regulators, other standard
setters, and more.”
Prof. Schilder’s appointment to a third three-year term as
IAASB chairman begins on January 1, 2015. The Public
Interest Oversight Board (PIOB) approved the appointment at its last meeting in Madrid, Spain.
From 1998 to 2008, Prof. Schilder was a member of the
Managing Board of the Dutch Central Bank, responsible in
particular for banking regulation and supervision. He served
as the chairman of the Basel Committee on Banking Supervision’s Accounting Task Force from 1999–2006, and
from 2005–2008 as a member of the PIOB. During 1994
and 1995 he served also as president of Royal NIVRA
(now Nederlandse Beroepsorganisatie van Accountants).
From 1972 to 1998 he worked with PricewaterhouseCoopers, first in the small- and medium-sized entities practice and since 1985 as an international audit partner. Prof.
Schilder served as part-time professor of auditing at the
Universities of Amsterdam and Maastricht from 1988 to
2009.
YOUR BUSINESS
IS THIS PRECIOUS TO US
CHOOSE THE BEST INTERNATIONAL BUSINESS
SOLUTIONS PARTNER IN CYPRUS
[email protected], tel. +357 22555800, www.abacus.com.cy
Economy
Cyprus will survive as an international
business centre
The Eurozone crisis interrupted more than
three decades of growth for Cyprus as an
international business hub. The consequences have been harsh for the country,
with the banking sector bearing the brunt
of a financial assistance package which
will see one bank wound down and another
recapitalised through a depositors’ bail-in.
By Evgenios C. Evgeniou
CEO of PwC Cyprus
The signed Memorandum of Understanding (MoU) sets out measures for restoring the soundness of the banking sector,
controlling public finances and ensuring
sustainable growth. Cyprus has secured
the funds needed and has agreed to implement reforms that, despite the pain, will ultimately strengthen the economy. Following its restructuring, the key Cypriot bank
will find itself on a stronger capital footing,
enabling it to focus on serving the needs of
businesses and individuals in Cyprus, while
unaffected local and international banks
may identify new opportunities. Lifting of
capital controls and diligent implementation of the MoU will be necessary to restore the country’s credibility and to regain
the trust of the markets.
The main pillars of the development of Cyprus as a business centre, which have been
the tax, legal and regulatory frameworks
and the quality of professional services,
have remained fundamentally unchanged.
Furthermore, the strategic geographic location as a European gateway to the East
and the excellent living conditions were
beyond reach in the context of the MoU
agreement.
The country retains one of the most competitive tax environments in the EU, fully
compliant with the EU Code of Conduct
and the OECD Harmful Tax Practices,
working under double taxation treaties with
47 countries. It has a robust common law
linked legal system (based on English law),
easily understood by international businesses.
Cyprus continues to have an excellent
EU-compliant regulatory environment and
recognised central administration companies providing operational support and re-
porting solutions to a wide variety of holding and financing companies, funds and
investment management firms.
According to the final round evaluation
report by Moneyval, Cyprus ranks higher
in FATF-compliance than most other EU
countries and is on the OECD ‘white list’.
Per the MoU, Cyprus has agreed to further
improve Anti-money laundering implementation, on the basis of an audit by Moneyval
and an independent auditor, to make Cyprus “best of class” in the EU.
In shipping, the island is the only EU-approved ‘Open Register’ with one of the
most competitive and wide ranging taxation systems covering ship owning, ship
management and chartering, offering a
secure, legally transparent and attractive
basis of operation.
The World Economic Forum identified
Cyprus as one of 35 innovation-driven
economies in 2011-12. The country enjoys
a highly-qualified and multilingual workforce and the professional services sector
is dominated by UK-qualified accountants
and lawyers with deep expertise and collective experience.
Cyprus will not relinquish its unique advantages as an international business hub.
The underlying strength in professional
services and non-financial sectors of the
economy will be important to Cyprus’
long-term economic recovery. The active
maritime, technology, education and tourism industries continue to require a stable
financial services sector to support their
activities. On the horizon, the commercialisation of natural gas reserves will augment
this requirement and necessitate the provision of new and specialist services.
An EU member for nine years, Cyprus is
committed to both the Union and the common currency. Operating within its legal
and regulatory frameworks, the country will
focus on developing key, vibrant industries
with an emphasis on innovation to further
evolve as a competitive and reliable international business hub. Cyprus has faced
crises before, emerged stronger from
them, and will do so again.
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
© 2013 PricewaterhouseCoopers Ltd. All rights reserved. PwC refers to the Cyprus member firm, and may sometimes refer to the PwC
network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
14
“Criminal
delay” in
applying to
the European
stability
mechanism
By Marios Mavrides
Member of the Parliament
Associate Professor of
Economics
European University Cyprus
It is now accepted by everyone that Cyprus
needed a memorandum of understanting
(MOU) since 2011. When the international
markets have stopped lending the Republic
of Cyprus in June 2011, the Cyprus government should have applied to the European
Stability Mechanism (ESM). That was the
only way out. It is a rule that applies everywhere, if you have no credibility and you
need money, you must seek assistance
from the IMF and the ESM. The excessive
delay in signing a MOU, has caused a huge
damage to the economy and the banking
system. It is important to note that in June
2011, the economy was growing at 1%
annual rate (that was before the disaster
in the village of Mari), the non-performing
loans were lower than 8% of total loans,
and the amount of the Emergency Liquidity Assistance (ELA) borrowed from the European Central Bank was zero. When the
government of Cyprus has finally signed an
MOU with the ESM in April 2013, things
were much different. The economy was
going through a severe recession at 4.3%
(first quarter of 2013), the unemployment
rate was running at a record 16%, the nonperforming loans of the commercial banks
were around 24% of total loans and the ELA
was €11.2 billion, €9.2 billion for Laiki and
€2 billion for the Bank of Cyprus. Any citizen may compare the figures and comprehend the magnitude of the damage caused
by the “criminal delay” shown by the previous government. This delay has caused
people of Cyprus a lot of billions of euros. If
we had seek refuge to the ESM earlier, just
like Greece, Ireland and Portugal, we would
have suffered less damage, and above all,
we would have a avoided the “haircut” on
deposits. Now, the people of Cyprus are
asked to pay, not only for the negative consequences of the economic crisis, but also
for the huge cost of the delay. Our European partners had persuaded us to seek
help from the EMS, but we ignored them.
The rating agencies were issuing warnings
but we were accusing them that were serving the interests of our “enemies”. I don’t
really know why the previous government
has delayed our application to the ESM so
much, but I do believe that they should be
held responsible and account for their actions. In a democratic society, such things
cannot be ignored. The damage caused to
the society of Cyprus is too much to be ignored. The investigation committee has every reason to examine the issue of the delay
of Cyprus application to the ESM. To be fair,
many months have passed since June 2011
before political parties in Cyprus persuaded
the government to apply at the ESM. No
one wanted to talk about the possibility of
applying to the ESM. Everyone wanted to
avoid it, because of the “harsh” measures
that would be imposed to the people of Cyprus, and because those measures would
have cause a lot of suffering. However, the
responsibility of the unjust and criminal delay of the application of Cyprus to the ESM,
lies with the former government of Cyprus,
which has left the economy and the banking
system unprotected, for two years.
Our European partners had persuaded us to seek
help from the EMS, but we ignored them.
15
Economy
A single resolution mechanism
for the banking union
The lessons learned in the context of the
economic, financial, and sovereign debt
crises since 2008 have been drivers of
a major overhaul of the economic governance of Economic and Monetary Union,
which has already led to unprecedented
steps. One of the most important lessons
learned was that national action needs to
be coordinated.
By Georgios
Markopouliotis*
This is especially the case on the financial front. The eurozone debt crisis has
highlighted the potentially vicious circle
between banks and sovereigns. For that
circle to be broken, a more robust financial sector is not enough. In particular for
countries which share a currency, a deeper more integrated approach is necessary.
This is why in 2012 the EU Heads of State
and Government committed to a banking
union, confirming the need to move towards an integrated financial framework,
open to the extent possible to all Member
States wishing to participate.
The European Commission has been
working towards this direction, presenting pieces of legislation that cover, among
others, capital requirements for banks and
a single rulebook applicable to all financial
institutions in the single market. It also
proposed the creation of a Single Supervisory Mechanism for all euro area banks.
16
Last July, the European Commission put
forward a proposal for the last building
block of the banking union- the Single
Resolution Mechanism (SRM). This mechanism will accompany and complement
the Single Supervisory Mechanism (SSM)
in the Banking Union which, once operational in late 2014, will see the European
Central Bank (ECB) directly supervise
banks in the euro area and in other Member States which decide to join the Banking Union.
The reinforced supervisory framework of
the SSM, as well as enhanced prudential requirements will bolster the safety of
banks. However, the risk of a bank experiencing a severe liquidity or solvency
problem can never be totally excluded.
Bank supervision and resolution need to
be aligned and exercised at the same central level in order to curb uncertainty and
prevent bank runs and contagion to other
parts of the euro area.
The Single Resolution Mechanism would
ensure that – not withstanding stronger
supervision - if a bank subject to the SSM
faced serious difficulties, its resolution
could be managed efficiently with minimal
costs to taxpayers and the real economy.
EU leaders set themselves the target of
reaching agreement on the mechanism by
the end of 2013 so that it can be adopted
before the end of the current European Parliament term in 2014. This would enable it to
apply from January 2015.
The Single Resolution Mechanism would work
as follows:
• The ECB, as the supervisor, would signal
when a bank in the euro area or established in
a Member State participating in the Banking
Union was in severe financial difficulties and
needed to be resolved.
• A Single Resolution Board, consisting of
representatives from the ECB, the European
Commission and the relevant national authorities (those where the bank has its headquarters as well as branches and/or subsidiaries),
would prepare the resolution of a bank. It
would have broad powers to analyse and define the approach for resolving a bank: which
tools to use, and how the European Resolution Fund should be involved. National resolution authorities would be closely involved in
this work.
• On the basis of the Single Resolution
Board’s recommendation, or on its own initiative, the Commission would decide whether
and when to place a bank into resolution and
would set out a framework for the use of resolution tools and the fund. For legal reasons,
the final say could not be with the Board.
• Under the supervision of the Single Resolution Board, national resolution authorities
would be in charge of the execution of the
resolution plan.
the resolution. It would monitor the execution
at national level by the national resolution authorities and, should a national resolution authority not comply with its decision, it could directly address executive orders to the troubled
banks.
• A Single Bank Resolution Fund would be
set up under the control of the Single Resolution Board to ensure the availability of medium-term funding support while the bank was
restructured. It would be funded by contributions from the banking sector, replacing the
national resolution funds of the euro area
Member States and of Member States participating in the Banking Union, as set up by the
draft Bank Recovery and Resolution Directive.
The Commission’s role would be limited to
the decision to trigger the resolution of a bank
and the decision on the resolution framework,
thereby ensuring its consistency with the Single Market and with EU rules on state aid, and
safeguarding the independence and accountability of the overall mechanism.
The Single Resolution Mechanism is a strong
and integrated single system for dealing with
failing banks. As President Barroso has noted, ‘’we cannot eliminate the risk of future
bank failures, but with the Single Resolution
Mechanism and the Resolution Fund it should
be banks themselves – and not European taxpayers – who should shoulder the burden of
losses in the future.” 
*Georgios Markopouliotis is the Head of the European Commission Representation in Cyprus
• The Single Resolution Board would oversee
17
Economy
Taking care of
Non Performing
Loans (NPLs )*
Dr Lars Nyberg,
Economist
Resolving the banking crisis in Cyprus is a
complex undertaking. Confidence and credibility must be restored and this will involve
many aspects and it will take time. Resolution is crucial since a functioning banking
system is a prerequisite for growth. Hence,
cleansing the banks’ balance sheets and
working out troubled assets is necessary
to ”kick-start” the economy. But how big
should the banking system be and how
should it be funded during the resolution
process?
The Panel event in Nicosia on August 27th
focused on addressing Non Performing
Loans (NPLs) on the balance sheets of the
banks in Cyprus, and on the various paths
to resolution, including the structure of the
corporate entity likely to hold them. This is a
key activity in stabilising the banks through
cleansing the balance sheets and laying the
foundation for growth.
There is no universal recipe for taking care
of problematic assets. Countries have different legal systems and traditions and
these can weigh heavily on the solution adopted. Additionally, sources and availability
of funding and/or required speed of deleveraging can have a material impact on the
results achieved. Nevertheless, a number
of important principles have turned out to be
valid in most jurisdictions and some of them
are presented in brief below.
Separating out NPLs
The scale of NPLs on the balance sheets
of Cypriot banks need to be dramatically reduced. So far everybody seems to agree.
The best way of doing this would be to
transfer the NPLs to a separate and independent Asset Management Company
(AMC) where the loans can be systematically restructured. This is one of the important
conclusions from international experience.
All NPLs need not be transferred. The bank
should be able to handle a normal amount
of bad credits related to its core customers.
Experience also indicates that loans below a
18
certain value should also stay. But enough
NPLs must be taken away from the bank’s
normal operations to make the bank viable
and to make management credible to rating
agencies and outside investors.
Having said this, it is not always possible to
create a full separation of NPLs from the
bank as a legal entity. This would currently
appear to be the case in Cyprus because
of the practical difficulties associated with
funding and possible multiple banking licenses. Separation of NPLs can still be
achieved in a separate department within
the bank or in an independent subsidiary of
the bank. Keeping the NPLs within the balance sheet of the bank is always a secondbest solution. The more serious the NPL
problems are the further away from the
bank they may need to be if the credibility
of the bank is to be restored. In the absence
of full separation of the NPLs, it is likely that
the process of re-building credibility and
trust with investors will take longer.
Restoring normal bank
operations
An important reason for putting the NPLs
under separate management is that it will
allow the bank board and management to
focus on restoring the ordinary banking
business of lending money, which is crucial
to the bank’s sustainability, but also to the
country. With high NPL ratios, management
will spend most of its time addressing problems and the pressure to de-lever the balance sheet will prevent the flow of credit to
creditworthy companies. Taking away the
NPLs will allow management and board to
look forward instead of backwards.
Good Governance & Transparency
Another important reason for separating
the handling of the NPLs is to make the
bank more transparent. Markets can handle
risk, but hate uncertainty. The further away
from the normal banking operations that
the NPLs are handled, the easier it will be
to show a clean balance sheet and thus to
restore credibility. There is a lot of money available in the international capital markets ready
for speedy deployment into investments where
the risks are known and where there is improved
confidence in future stability. The needs of Cyprus are small compared to those of other markets. Investors will come eventually if the Bank
of Cyprus can convincingly demonstrate that the
NPLs are professionally handled.
The workout process
If the separation of NPLs is done professionally,
whether externally in a separate AMC or internally
in a separate division or subsidiary, it should help
stop the downward trend in asset (notably real
estate) prices and work to restart the market. It
must be possible for the workout organisations
to keep the asset until satisfactory restructured.
The workout process is of course also dependent
of the market valuation levels, viability of restructuring / resolution alternatives and, importantly,
the time frames established.
A key foundation of any workout program must
clarify the value retention assumptions – a focus
on extracting maximum value; an avoidance of
asset fire sale sales and the resultant negative
capital consequence; a policy of working consensually with clients to repair and restructure
as opposed to enforcement. In some jurisdictions it has been necessary to make trade-offs
in the timing of workout programs to accommodate agreements the Troika around areas such
as deleveraging targets and ELA / ECB debt reduction. Philosophically, while trade offs like this
can be detrimental to asset values in the short
term and make the workout program more challenging, it is important to realise that the reason
these trade offs are put in place is to produce
some form of longer term benefit for the country.
Management Structure & Expertise
The NPL workout organisation must have a
separate management. This is true regardless of
whether it is placed as a division of the bank, a
subsidiary or a separate AMC. If it is kept as a
division or subsidiary of the bank, it is preferable
for the leader of the area to report directly to the
board and not to the bank CEO. The workout of
NPLs may imply conflicts between the workout
staff and the bankers running their normal business and this should be clearly recognised from
the start. One way of doing this is to create an
organisation structure with co-CEO’s utilising a
shared services structure.
The handling of NPLs, of the magnitude being
experienced in Cyprus, needs expertise that is
not generally available in banks working under
normal conditions. It is now internationally accepted that industrial experts, specialised corporate finance specialists, real estate people, liquidation experts etc. need to be found outside the
bank if objectives are to be successfully realised.
Most often the necessary resources need to be
hired on the international market. This may be
expensive, but there is no other way.
Sense of Urgency
Discussing the best way to handle the NPLs is
important as the complexities are many and the
difficulties need to be well understood. It should
however not prevent action in the short term.
NPLs that are not taken care of tend to quickly
lose in value and many countries have seen this
happen. To prevent further value destruction, the
Bank of Cyprus should go to the international
market and immediately hire a head of the new
NPL workout department. This individual should
report directly to the board of the bank and be
supported with resources to start analysing the
bad loans in detail and set up the necessary organisation structure and operating protocols.
If so desired and if funding will eventually allow,
the workout organisation could later be transformed into a subsidiary or even sold partly to
outside investors. The final form need not be decided now. But the NPLs need urgent handling.
The Development Bank concept
We do not believe that transferring the non-core
assets to a new bank that also should work as
a development bank is a good idea. An AMC
should have the clear objective of regaining as
much money as possible from the distressed assets and then close its business. A development
bank should have other objectives and mixing the
two will just introduce uncertainty, confusion and
scare investors away. The skills required to run
an AMC are materially different to those required
to run a going concern bank and the people who
run an AMC should not be trusted to run a bank
– and vice versa.
*This paper has been produced as a result of collaboration between Mike Aynsley and Lars Nyberg
following a Panel discussion on 27 August 2013
sponsored by the Institute of Directors (IoD) Cyprus. Both Mr Nyberg and Mr Aynsley are independent advisers specializing in crisis management
and restructuring of distressed financial institutions.
Contacts for the authors are as follow: Mr [email protected] Mr Aynsley – [email protected]
The Panel discussion was Chaired by Evdokimos
Xenophontos, Chairman of IoD Cyprus.
Moderator was Michalis Sarris ex Minister of Finance. The event was very well attended and there
was a welcoming speech by the Governor of the
Central Bank of Cyprus Mr Panicos Demetriades.
19
Economy
The absence
of corporate
governance
in the banking
sector and its
consequences
The Independent Commission on the Future
of the Banking Sector in Cyprus (www.icfcbs.org) issued its interim report last June,
making recommendations on our banking
system in the context of best international
practices.
By Maria Kyriacou
Barrister at Law
Head of Nicosia office
Andreas Neocleous &
Co LLC
In its 100-page report the Commission
analyses the economic crisis in Cyprus, and
notes that although many of the factors that
led to the collapse of our banking system
are exogenous, there are as many endogenous reasons.
In fact the report focuses on two major endogenous factors contributing to the banking crisis, namely the absence of corporate
governance and the politicisation of the
banking system, which together significantly hindered the restructuring of the banking
system.
According to the Interim Report the fact that the
banking system in Cyprus is highly politicised is unhealthy for several reasons.
One of the Commission’s essential and
highest-priority recommendations is that
there is a clear boundary between the banking world on the one hand and the world of
politics on the other. In the opinion of the
Commission, the banks must be independent from politics, with new people with new
ideas, unsusceptible to political influence,
connections and interference. The same
must go for those on who the banks depend
for advice.
According to the Interim Report the fact
20
that the banking system in Cyprus is highly
politicised is unhealthy for several reasons.
To focus on just two: political interference in
the management and control of banks has
been shown consistently to lead to bad decisions being made. Furthermore, in Cyprus
the same political cliques constantly reappear with their fixed ideas, shouting down
any outsiders who might challenge the status quo. Any new ideas that might actually
improve the running of the banks are dismissed out of hand, as the same sterile orthodoxy is continually recycled.
The principles of good corporate governance
are a powerful tool by which companies are
managed and controlled, for the benefit of
all stakeholders, including society at large.
The objective of corporate governance is to
maintain an appropriate balance between
economic and public objectives and social
responsibility, so that the company can work
with social responsibility and also be profitable for its members, not only in the short
term, but also in the longer term. Effective
corporate governance includes appropriate
and effective checks and balances, ensuring that the company’s officers serve the
company, not themselves. It makes the officers, including the board of directors, accountable to the shareholders who elect
them. It ensures that auditors are independent and act in the interests of those who
elect them, and do not become toothless
lapdogs for the board of directors.
In Cyprus, even though we have corporate
governance rules under the auspices of the
Cyprus Stock Exchange and the Central
Bank of Cyprus (CBC) in accordance with
the European Directive, it is apparent that
for most companies corporate governance
is merely an abstract concept with no practical relevance. The failure of corporate governance is one of the most important reasons why the major Cypriot banks were led
to disaster. It allowed ambitious senior executives to choose risky strategies without
risk assessment, and conflicts of interest to
go unchecked, leading to disastrous lending
decisions.
The objective of corporate governance is to maintain an appropriate balance between economic
and public objectives and social responsibility...
The independent Commission recommends
upgrading the level of corporate governance
of banks and cooperatives by putting in
place experienced directors, by increasing
the number and powers of non-executive or
independent directors, improving directors’
awareness of the principles of corporate
governance and by creating committees
for internal audit, for risk assessment, for
preparation of long term plans and strategy.
Improvement of corporate governance.
As a first step the CBC’s Directive on Corporate Governance needs to be revised and
then effectively enforced, with emphasis on
internal control assessment and risk management. Supervision needs to be tightened in order to ensure that banks genuinely comply with its requirements in practice,
not merely on paper.
composition and conduct of board of the
directors of Banks and to confirm that the
Directors elected meet the fit and proper
test as described in the Directive. Having
learned from the bad experience of the recent past, the Central Bank has to upgrade
its supervision as Regulator of the Banking
Sector.
Section 1.10 of the MOU stipulates that the
majority of the board members must be independent. It also requires that legislation
should be enacted before mid September
to strengthen the corporate governance of
banks by prohibiting commercial banks and
co-operatives from giving loans to independent directors and their relations and associates, and forcing the resignation of any
director whose existing debt to the bank is
non-performing according to the new CBC
definition. Lending to other members of
the board will be allowed only up to a fixed
amount calculated by the CBC. Loans and
other credit facilities to any member of the
board will be published.
Both the Independent Commission’s Report
and the MOU make it clear that the strict
application of corporate governance is essential for healthy companies to earn public confidence and give value to a country’s
economy. It is up to our supervisory authorities to ensure that in future adherence to
the principles of corporate governance is
real, practical and consistent, and not just
lip-service.
The Memorandum of Understanding (MOU)
as agreed with the Eurogroup recognises
the need to strengthen corporate governance and align it with acceptable international standards in all sectors, including
semi-governmental organisations. While
the MOU will not itself promote growth and
economic recovery, it lays the foundations
for the restructuring of the banking system,
which is essential if we are to achieve a recovery.
Τhe General Meeting of the Bank of Cyprus
shareholders has now elected the bank’s
new board of directors who will now have
a huge task to work within the principles of
Corporate Governance and bring the Bank
back to profitability and growth. It is therefore appropriate now for the Central Bank to
consider what the European Directive and
the MOU has to say about the appointment,
21
Economy
Is ELA a good or evil mechanism?
I was recently asked on a live radio station
broadcast about the “famous” ΕLA (Emergency Liquidity Assistance) if it was a good
or bad thing to have and especially for Laiki
bank that had the opportunity “to take advantage” of this liquidity mechanism. As
I was told both the public and journalists
were not so clear about the answer.
By Haris Stavrinides
MBA Distinction, MSc.
Finance*
Before we answer the above question we
need first to understand what is ELA, what
is its purpose, when it should be available
and how should it be used. Well this mechanism is nothing else than an overdraft facility which must be covered/insured by
assets that belong to the banks applying
for it. This facility is given to solvent banking institutions when they come across to
a liquidity problem, meaning that that they
need funds to cover short term outflows of
deposits. Please pay attention to the words
“short term”. When the facility fulfills its purpose then it is paid back in full along any
interest attached to it.
Now, please allow me to simplify a bit the
terms in order to answer to the main question of this article if ELA is GOOD or Evil.
We therefore replace Laiki bank with a Cyprus citizen, who happens to obtain from a
Cyprus Bank an overdraft facility. In such a
case we would all agree that this is a good
thing to have just in case of emergency or
an unforeseen need. Our friend though not
only spends his income but also spends his
overdraft facility, and since now that he became unemployed, cannot pay back to the
bank. The bank therefore asks for the repayment of the overdraft from his brother
(Bank of Cyprus) since with some legal
mumbo jumbo the first brother managed
to put on the shoulders of the second one.
Now the overdraft facility becomes a burden to the second brother (Bank of Cyprus)
and an evil since due to an unjust action it
has been transferred to the party that did
22
not utilize it.
Lets return back to reality now. Additionally,
one could say that the overdraft should not
have been given to Laiki Bank if it was considered insolvent, or if it was considered solvent at the time the ELA was approved then
why was it dissolved a few months later and
the ELA exposure was transferred to Bank
of Cyprus?!?! Additionally since it’s a short
term mechanism with its purpose to sustain
the trust and good faith of each bank that
applies to it and the Eurosystem itself then
why did our European “partners” decided to
destroy Laiki? Not only Laiki Bank but the
entire Cyprus banking sector…considered
being the oxygen of our financial income
system…And as if that was not an enough
blow to our shattered economy, they decided to add the ELA burden to remaining
bank that was placed in the “intensive care
unit”!
Dear friends I see many unanswered questions in this short analysis and it would be
good to demand and obtain some answers
from the people responsible for this mess!
At the end of the day (of the second Eurogroup) we are entitled to, since the depositors paid for it, the taxpayers and the unemployed that increase in an unprecedented
pace! Additionally I see an unjust treatment
of our country from our European “partners”
and that we should at least demand some
corrective actions to be taken by them in
order to ease the overwhelming shrinking of
our economy and transfer of labor from one
sector to another one. Otherwise we should
be expecting very difficult years to come! 
*Founder and partner at OSYS Global Corporate
Consultants (www.osysglobal.com), a corporate
advisory firm to international business companies and financial firms.
Economy
Taking Stock of the Resolution of the Cyprus Banking Crisis:
Salvation through Destruction!
By Theodore Panayotou
Cyprus international Institute
of Management (CIIM)
The saga of how the two main Cypriot
banks got into trouble and were bail-out, or
rather resolved and bailed-in will remain in
the textbooks as a classic case of how not
to do banking and how not to restore stability and trust in a failed banking system. It
takes two to tango and it took the failure of
both the Cyprus side to regulate its banking system and the Eurogroup to administer the right treatment at the right time, to
demolish a thriving banking system. With
the completion of the recapitalization of the
Bank of Cyprus and its exit from the status
of consolidation it is time to take stock of
what happened and where we stand.
The resolution of Cyprus
Popular Bank: too much too late
The CPB became insolvent two years ago
and should have been liquated then, if it
could not be restructured to become a going concern. The big mistake was keeping the bank artificially alive through the
transfusion of billions of euro in liquidity
from ELA, which was ending up in the black
hole of its operations in Greece. The ECB
should have pulled the plague off at least a
year earlier.
The way that troika insisted on the resolution of the CPB was partially correct (perhaps liquidation would have been better)
but it was clearly unfair to the unsuspecting depositors who kept their money at the
bank assuming that our Government, the
Central Bank and the ECB knew what they
were doing when they were lending their full
support and unlimited resources to CPB for
the past couple of years.
The bail-in of the Bank of Cyprus:
efficient and unfair
For the BOC, technically speaking, the bailin was the internalization of risks to the decision makers (depositors) who are the most
effective agents in containing and managing them. As such it is an efficient way of
dealing with the problem: it minimizes the
social cost and maximizes the benefit by incentivizing the bankers to assess and manage risks as to avoid future bank collapses.
It is also fair, since those who benefit from
the bank’s high interest rates, which are
usually associated with high risks, pay for
the rescue of the bank.
24
What makes the bail-in unfair in the case of
Cyprus is the way it happened, without advanced warning to the depositors of BOC,
as it has done since with the depositors
of all other Eurozone banks, for whom the
caveat emptor “depositor be aware” was issued by Eurogroup: In selecting a bank ,
depositors assume the risk of losing part
or all of their deposits if the bank has been
making risky loans and investments in order
to afford the high deposit interest rates.
It may be argued that BOC depositors should
have known that only the first 100,000 euro
were insured, but like the case of the Greek
bonds, the conventional wisdom was that
bank deposits and sovereign debt were not
subject to haircut. It is unfair that relatively
small depositors lost their lifetime savings
and a big part of their provident funds, when
the target was big foreign depositors with
suspect sourcing of their money.
The fire-sale of the banking
operations in Greece
The sale of the Greek banking operations
of the troubled banks was a very bad deal,
which was concluded under duress without
the proper preparation and without the use
of competitive procedures to maximize the
sale price. While the troika wanted Cyprus
to get rid of those operations as soon as
possible to limit the systemic effects of the
Cyprus bail-in on the Eurozone via Greece,
they did not dictate the buyer or the price.
We could have called for competitive bids
and sold these operations to the higher bidder within days. However, under pressure
and in the confusion of those days clear
thinking did not prevail. In our rush to conclude a deal we put ourselves in the hands
of a well-prepared monopsonist. As the
only buyer, the bank of Piraeus, exploited
to the fullest the circumstances and the
worse-case scenario of PIMCO, to obtain
these operations at a fire-sale price, possibly a quarter or a fifth of the likely competitive–bid price.
“Extorting” compliance through
ELA
The Bank of Cyprus will be hard-pressed to
survive the 9 plus billion euro of ELA trans-
ferred from the CPB in addition to its own 2 plus billion
euro of its own ELA. We should not forget that the ELA,
as emergency liquidity lending, is a short term loan which
needs to be repaid right away; this obligation is now renewed every two weeks. Second, ELA, as ECB money,
has the first priority on any funds recovered from the sale
of land and other bank assets used as collateral.
Restructuring of ELA into a long-term loan or converting it
into bonds would help make the BOC viable but it is unlikely to happen since the troika, and especially the ECB,
is holding it as a bargaining chip, or even better a lever to
“extort” compliance to the terms of the MOU and the loan
agreement or future demands. A good solution would be
the taking over of BOC by a reliable investor with global
credibility, such as a major international bank, for whom
the relative size of the ELA obligation is miniscule. The
chances of this happening, however, are rather small.
Can the economy survive a BOC resolution?
In the unlikely event that the BOC goes into resolution, the
ramifications for the Cyprus economy will be severe for the
short to the medium run. First, there would be the losses
to the shareholders, the lenders and the depositors in the
tens of billions of euro. Then there will be the job loss for
about 4,000 bank employees and the economy will go into
a tail spin because of inability to carry out business transactions and the drying up liquidity. Even more serious will
be the total collapse of trust in the Cyprus banking and
financial system and the credibility of the state will hit rock
bottom. The BOC is not only the country’s largest bank; it
is also its largest single organization, several times the size
of the country’s GNP. It is a historic and systemic bank in
which virtually every citizen and business has a stake.
The economy and the country can survive a BOC resolution over the long-run but the short-to-medium-run implications would be devastating and every effort must be
made to ensure that the bank survives as the country’s
systemic bank and plays its pivotal role in mobilizing and allocating financial resources for the recovery and growth of
the Cyprus economy. In this regard the contemplated split
of BOC into a commercial and a property or development
bank should be very carefully studied and well prepared, if
done at all, as it risks further loss of trust and credibility.
Only non-viable land development projects should be sold
as property to repay loans while viable land development
projects should be financed to completion by foreign investors, given the immediate need for development and jobs
and the paucity of development alternatives.
The new world of banking and finance
It is clear that the banking sector will shrink, not only in Cyprus, but throughout the Eurozone, and the role of banks in
the financing of the economy will be reduced. The individualization of responsibility and internalization of risks and
consequences to the depositors (along with the lenders
and shareholders) will change the investment behaviour of
the capital holders, and will move funds away from banks.
Reduced safety for depositors requires educating depositors and the general public about the risks they take when
they choose where to put their money.
The interest rate should not be the only consideration; the
risk must also be considered. For this, we need transparent indicators of risk. We also need indicators of the health
of the institution, the quality of its portfolio, the capability
of its management; and, the quality of its corporate governance. We also need transparent accounts and clearly understood financial statistics of both bank and host country.
A leaner and meaner banking
The closer supervision of banks and the reduction and regulation of their pay and bonuses will make banking a less
profitable activity. The requirement for increase in capital
adequacy to 9%+ will further lower the profitability of the
banking sector; leveraging and incessant expansion will be
contained. The banks will become tighter in their lending
and business will seek funding directly from capital markets.
New ways and new instruments of financing will emerge:
e.g. corporate bonds, trade bills, commercial paper, discount instruments, investment companies, and special
purpose banks such as entrepreneurship and property
banks, as it is the case in the US, where under 25% of
the total financing comes from banks, the rest comes from
other sources, and financing schemes even if it is channelled through the banks.
The banks will stop lending with main criterion the adequacy of the collateral (usually real estate) and they will
be considering more seriously the profitability, the cash
flow and the ability of the borrower to service the loan.
They will be requiring of their borrowers detailed and well
documented (with market research) business plans, and
they will acquire the expertise to scrutinize such plans. The
banks will get rid of their speculative mind-set and concentrate on their socio-economic role as mobilizers and allocators of funds for economic growth and development, or
this is what they should do if they want to survive. 
SHORT BIO
Dr. Theodore Panayotou is Professor of Economics, Ethics and Entrepreneurship and Director of the Cyprus International
Institute of Management (CIIM). He served as Professor of Economics and the Environmental Management at Harvard University for 25 years, as consultant to UN agencies and as advisor to governments in the U.S., China, Russia, Brazil, Mexico,
Thailand, Costa Rica and Cyprus, among others. He has published more than 100 books, monographs and peer-review
articles on economic, business, and environmental issues. He was recognized for his contribution to the Intergovernmental
Committee on Climate Change won the Nobel Peace Prize in 2007.
25
Economy
Lessons from previous banking crises
Cyprus economy and its banking system is
undoubtedly going through a rough period
following the decisions taken by the Eurogroup members last March. The Memorandum, among others, calls for the restructuring of the banking sector that includes
better corporate governance and supervision. It seems that everyone was got by
surprise by the decisions taken, however,
the truth is that the problems of the banking sector go a long way back. We should
have seen this coming and acted appropriately at the right time. Furthermore, there
were lots of other major banking crises
(and some of them are very recent ones)
that we should have studied them carefully
to draw important lessons of how to cope
with the difficult situation. The purpose of
this article is to document some of the previous, major banking crises.
the Glass-Steagall Act, which limited the
activities of commercial banks (restrictions on speculative actions), the competition for interest rates on deposits through
rate controls, and branch banking. The
Act also provided a separation between
commercial and investment banking, and
limited and enforced a federal system of
bank deposit insurance. The instigators of
this Act claimed that big commercial banks
were marketing high-risky securities to
their clients, unsophisticated bank depositors (“naïve” investors) and other, smaller banks. Opponents of this Act argued
that a “government-enforced” cartel was
therefore formed limiting competition and
producing an inefficient banking system.
Supporters of this Act though argued that
it was the reason for a prolonged period of
stability in the US banking system.
Many stories and theories have been written about
the crisis and its causes...
The limitation on interest rate for time deposits (Regulation Q) was put into effect
for the first time in the 1960s when the
market interest rates exceeded the limits. This led to a series of credit crunches
as depositors withdrew their funds from
the banks in order to invest in the capital
markets at higher interest rates. Thus, the
regulation of commercial banks imposed
by the banking reforms of the 1930s,
failed with the emergence of nonbank institutions that replaced traditional commercial banks for providing loan and deposit
By George Theocharides
Associate Professor
of Finance
Director of MSc in Finance
& Banking, CIIM
The Great Depression of the 1930s is obviously one such example. There are many
stories regarding the causes of this crisis, ranging from demand-driven to monetary theories. Major bank failures were
certainly instrumental to the stock market crash in October 1929 and the subsequent depression. The response to the
crisis was the Banking Act of 1933 and
26
schemes. Multiple efforts were then made
to repeal the provisions under the GlassSteagall Act, with the successful signing
of the Gramm-Leach-Bliley Act (GLBA)
in 1999 by President Clinton. This Act repealed the Glass-Steagall Act and the provision for separation between commercial
and investment banking.
It seems that everyone was got by surprise by the
decisions taken, however, the truth is that the problems of the banking sector go a long way back.
Many argue that the above repeal was an
important factor for the recent global banking crisis. It allowed commercial banks to
provide the same kind of risky products
similar to the capital markets, and created
institutions that grew to such a large extent, that now were “too big to fail”. That
was the case with the collapse of Lehman
Brothers in September 2008 that rocked
capital markets, propagated the shock
to the real economy, as well as markets
around the globe. Many stories and theories have been written about the crisis
and its causes – real estate bubble, lack
of the necessary supervision of financial
markets, failure of corporate governance,
creation of highly complex but very risky
securities, cheap credit, excessive leverage by institutions, deregulation of financial markets, among others. Governments
around the world responded to the crisis
with large fiscal stimulus packages, lowering of interest rates, and expansion of
money supply through quantitative easing
(QE) programmes.
Furthermore, the US has proposed and
passed a law known as the Dodd-Frank
Wall Street Reform and Consumer Protection Act in 2010 (that included the Volcker
rule) that calls for much stricter regulation
and increased transparency. Results of
this Act thus far are mixed, and even the
U.S. Fed Chairman Ben Bernanke
has pointed out that the government is not capable in measuring
the costs/rewards that this law
has placed on the U.S. economy.
Oversupply of credit, especially to the real
estate sector, created asset bubbles and
eventually in 2007, (and partly due to the
deteriorating worldwide economic conditions), the bubble burst, causing massive
losses for the Irish banking sector. The
Irish banking case is also an example of
an asset-liability mismatch, where shortterm borrowing was used in order to fund
long-term projects. When those long-term
projects though could not be sold, lead to
oversupply, causing a mismatch between
the duration of assets and liabilities. The
government intervened in early 20009 by
bailing out or nationalizing the country’s
largest banks.
A National Asset Management Agency
(NAMA) was also formed to take over the
bad loans, enabling the banks to return to
normal operations. However, banks’ bailouts pushed the government debt out of
control and eventually had to seek a bailout package of €85 billion, mainly from
EU and IMF. The Icelandic banking crisis
stems from the huge debts incurred by
the country’s largest banks (that dwarfed
the GDP of the country). The result was
a collapse of three of the country’s major
commercial banks and a run on deposits
in the Netherlands and the UK. In November 2008, the country received an IMF-led
package of €4.6 billion. Banking reforms
were put in place to “ring-fence” the operations of the banks, to continue servicing
the Icelandic people, whereas the foreign
operations went into receivership. Since
the crisis erupted in 2008, the reforms
as the measures imposed by the outside
creditors (led by IMF) helped the country’s
economic situation and Iceland is on its
way to recovery.
Two more crises that are important to mention since they have
similarities to our case is Ireland
and Iceland. Ireland went through
a prolonged period of prosperity
and growth from mid-1990s to 2007
(known as the Celtic Tiger years).
27
Economy
Cyprus after the Eurogroup
of 25 March 2013
In this article I will discuss neither how we
got into this mess nor who is to be blamed
for it. I will not, also, venture any opinion on
how we get out of it. What I will say is how
I, as an economist, see the economy progressing after the Eurogroup shock.
By Dr.Marios Clerides
Group Senior General
Manager
Risk Management &
Strategy
Hellenic Bank Public
Company Limited
A “leftist” economist of the Keynesian
School (economists like Nobel winners
Stightz, Krugman etc) will argue that the
economy will enter into a deep contraction,
because the drastic reduction in government expenditure, the increase in taxation
and the consequent reduction in household
income and spending, the drop in private investment spending due to the unfavourable
economic climate and the drop in invisible
export earnings due to the shock that the
offshore sector received with the haircut
and capital controls. In addition the “reduc-
tion” of private sector wealth (arising from
the forced haircut of deposits/savings) will
lead to further reductions in consumption
spending as consumers try to rebuild the
lost savings. The consequent reductions in
incomes and profits will lead to further consumption and investment drops creating a
vicious multiplier effect1. Such economists
will also argue that a reduction in interest
rates in such situation will not increase
spending or investment because households and companies in this kind of situation will just “hoard” the cash. The process
is self-feeding – reduction in spending and
investment leads to contraction, loss of jobs
and incomes, leading to more reduction in
spending etc. The only hope, for recovery,
seen from a Keynesian perspective, is foreign spending to substitute the reduced
spending of Cypriots with that of foreign-
1 Keynes described the effect as the paradox of thrift. While each one of us feels that he/she can increase his/hers savings, this is impossible to do at the economy as a whole level or macro level. This is because my increased savings and consequent reduction in spending
reduces the income of others in the economy etc etc which in the end reduce both their consumption and savings because of their drop in
income. And then back to square one.
2 In this respect we need to distinguish between two types of foreign investment – “direct” investment (eg the building of the gas liquidation
plant that creates economic activity and jobs and “financial” investment (like the recent sale of property in Paphos) which doesn’t have such
effect.
28
ers – either in the form of exports (tourism, etc) or
foreign direct investment2 (gas infrastructure projects
etc).
A “liberal/right wing” economist (like Nobel winner
Milton Friedman) will focus on the “money” side of
the economy - the drastic reduction of liquidity in
the system due to the haircut in deposits, the malfunctioning of the credit markets (banks being both
unwilling and unable to lend) due to the high capital
requirements imposed by the MoU or their inability to
tap fresh funds, as well as the continuous exodus of
“foreign owned” deposits due to the economic uncertainty. This reduction in the “money supply” (as
economists call it) puts upward pressure on interest
rates or, in the absence of upward flexibility in interest rates, introduces credit “rationing”, both of which
reduce economic activity. The only hope of exit from
the vicious spiral, if we follow this kind of analysis,
is fresh and ample liquidity (unlimited ELA?). Such
economists also give emphasis to the need for structural reforms – wage and labour market adjustments,
de-nationalisation, increasing competition and so on,
which make the economy (in the long term) more efficient (Cyprus will become as efficient as Germany
according to this line of argument!!!).
The only hope of exit from the vicious spiral,
is fresh and ample liquidity...
Both schools of thought will agree that the collapse
of one systemic bank and the deposit haircut in the
other will, per se have adverse consequences. Banks
basically perform two roles – they are the payment
mechanism of a country (the way we move money
around when we buy / sell things both domestically
and from overseas) and perform financial intermediation (channelling funds from savers / depositors
to borrowers). Banks are systemically important if
their size is such that, any problems in performing
these functions has a serious effect on the economy. Seen from this perspective one can understand
the effects of the 25th March 2013. The introduction of transaction controls between customers of
different banks hinders and slows down economic
activity, while the introduction of exchange controls
forces the economy to direct resources to costly yet
unproductive mechanisms of either enforcing these
controls or attempting to circumvent them! At the
same time banks cannot perform their financial intermediation role since deposits cannot move from
banks unwilling to lend to banks that might be willing
to do so. Sand has fallen in the cockwheels of the
economy, slowing it down even further.
An additional comment is also due. This has to do
with the time horizon of the recessionary process.
How long do we have to wait before we see signs
of improvement? Unfortunately economic theory is
not very helpful in this respect. The Keynesian traditional way of getting out of this kind of situation,
fiscal stimulus, (increasing government spending or
reducing taxes) cannot be applied because of the
“unsustainable” situation of Government finances,
while the “printing of money” or quantitative easing
favoured by monetarist economists cannot be locally
applied since such matters are now Euro Area issues. Phrases like in the “long term” the economy
will recover if we allow the “market” to operate unfortunately do not offer much comfort and are counter
argued by “in the long run we are all dead” .
Is there any school of economic thought that offers
any hope? The Austrian/German School of economic thought (associated with the Austrian American economist Joseph Schumpeter) has evolved the
idea that economies need this kind of shock therapy
whereby the system destroys outdated structures/
businesses, in order to increase its efficiency and to
make room for new business etc. According to this
school, economies become set in their ways, they
don’t adapt to a gradually changing world with the
result to find themselves, after some time, obsolete.
Outdated laws, regulations, industrial practices, labour relations on one hand, and companies or enterprises which have outlined their usefulness to society
on the other, need to be put aside if the economy
is to progress. A shock is then needed in order to
destroy the old and make room for the new. (Is it any
surprise that the Cypriot economic remedy prescription has a “made in Germany” label?)
29
Economy
Need for a complete strategic planning for
privatization
According to the terms of the Memorandum of Understanding, which were
agreed between the Republic of Cyprus
and Troika, a privatization plan must be
prepared with a binding implementation
timeframe.
By Christos V. Vasiliou
Board Member, Head of
Advisory services
KPMG ltd
Privatizations deal with the selling of
the State’s stake to state owned businesses and semi-governmental organizations through a public or a private
transaction or a mixture of the two.
The corporization, or in other words, the
transformation of the semi governmental organization into a company by issuing equity
shares, precedes the privatization of the semi-governmental organization. Privatization does not necessarily mean transferring the majority of the shares
to the private sector.
In fact, based on various studies which have been
prepared, only 30% of the most recent privatizations
relate to the State selling the majority stake.
Main targets of a successful
privatization
There does not exist a universal privatization programme which can be applied to organizations. The
majority of the worldwide privatization programmes
has been implemented on a case by case basis,
tailored to the conditions of the business and the
country. Privatizations might have taken place in
other European countries. However Cyprus has its
own specific circumstances. In particular, Cyprus is
under Turkish occupation leading to important national security issues.
Generally, these programmes aim at: increasing efficiency, the exposure of such organizations to best
practices, the promotion of wider share ownership
and entrepreneurship, the reduction of state intervention in the economy, the reinforcement of competition, the development of domestic capital markets, the abruption/ reduction of budget deficits and
the capital inflow arising from future tax proceeds
resulting from increased profitability.
Advantages of privatizations
Privatizations are expected to contribute to efficiency and productivity improvements of such organization’s operations, the reduction of the administrative
burden in the public sector, quicker decision-making process in the administrative and managerial
levels, the reduction of bureaucracy, the quicker
response to market conditions and consumer de-
30
mands, the maximization of income inflow, to profitability increase and to the promotion of the involvement of the private sector in the economy’s growth.
In addition, employees are given the opportunity to
participate in the organization’s share capital.
Critical success factors for
privatization
A successful privatization programme requires clear
goals on behalf of the government, alignment of investors’ objectives with the public/ social welfare,
promotion of healthy competition, creation of a
strong regulatory framework with clear legislation,
careful programme planning and the appropriate
preparation for its implementation. Also the proper
selection of consultants with experience in countries
in which these programmes have been implemented
successfully, the transparency and objectivity during
the programme’s implementation and the involvement of employees, the management, the provident
funds and of all stakeholders are key to a successful
privatization.
Challenges of the privatization
programme
The regulatory framework should safeguard the
country’s interests, given the country’s national security issues. The government can guarantee the
authority of its decisions through veto rights (golden
shares) or through any other type of private agreement between the government and the investor.
It is imperative to avoid the creation of oligopolies or
monopolies like Mexico and the correct valuation of
the assets of semi-governmental organizations and
their prospects by ensuring access of social goods
to the population. Given the current economic environment, there is a risk that these organizations and
their assets are not valued at their fair values/market values. The pricing policy of these organizations
must be controlled through the strengthening of the
regulatory framework.
The commitment for privatizations can be found in
the memorandum and is a commitment of the Republic of Cyprus. The preparation of a complete plan
which will guarantee a strong and effective regulatory framework is required. Any immediate privatization without correct planning will probably create private monopolies or oligopolies affecting the society.
Finally, the case of each organization must be considered separately, since the conditions for each
one are unique and cannot be covered by generic
and universal legislation.
Financial responsibility
What is happening in the economy at the
moment is a painful experience for everyone. Possibly the worst aspect is the uncertainty that has crept in the daily lives of
all of us; not knowing what is going to happen next. Are things going to get better?
Are things going to get worse before they
improve? Is the salary that feeds the family
secure?
BY Frixos Kyprianou,
FCCA Manager
MK KYPRIANOU LTD
Certified Public Accountants
If we are honest with ourselves the problem is largely of our own making. Financial
responsibility and prudence went out of the
window many years ago at every level of
business and society. As businesses and
as private individuals we followed the irresponsible example of bankers and successive governments, living beyond our means
and paying no attention to our accumulating
debts. We acted as if the bill would never
arrive, and boasted of our booming economy on false pretences. We had a booming
economy based only on credit expansion
and relentless consumerism without actually producing anything. It was only a matter of time before the collapse and the day
of reckoning. If we look back objectively we
will realise that what we are going through
today was simply inevitable.
...the average Cypriot did not consider it unduly risky
to have 50 per cent or more of the family income
committed to paying loan instalments.
If we put the greedy bankers and irresponsible politicians out of our minds and take
a close and dispassionate look at our own
behaviour we will see that we were not any
better in managing our finances. With very
few exceptions we have to admit that we
lived beyond our means. Prudence was an
outdated concept. A banker friend of mine
once told me that the average Cypriot did
not consider it unduly risky to have 50 per
cent or more of the family income committed to paying loan instalments. No-one
seemed to consider the possibility that
economies sometimes go down as well as
up and that our family income might also
decline. Most mortgages have a repayment
term of between 20 and 30 years - what are
the chances that the economy will not face
a downturn over such a long period?
Several years ago, with this point in mind,
I suggested that mortgage repayment pe-
riods should be limited to a maximum of
10 years. The reaction to my suggestion
was unenthusiastic, to put it mildly, and
the main argument against my suggestion
was that long mortgages allow lower income people to live the dream of owning a
house. While that is undoubtedly true, the
counter-arguments are more serious and
much more important. The first is the one
made above, namely that the longer the
term of the loan, the greater the risk of an
economic downturn occurring before it is
repaid. The increase in unemployment that
comes with downturns results in higher levels of non-performing loans, with negative
consequences for the banks and the economy as a whole. Secondly, easy mortgage
finance with long repayment terms creates
housing price bubbles as surely as night follows day. During the good times, increased
demand fuelled by borrowing drove house
prices in Cyprus up to unsustainable levels
(which, incidentally, disproves the argument
that long mortgages make home ownership
affordable to lower-income earners). Eventually the housing price bubble bursts, as all
bubbles are bound to do, with devastating
consequences for borrowers, lenders and
the economy. The people at the bottom of
the housing ladder, who were only able to
afford to buy because of the easy credit, are
usually the first to be hit and the hardest-hit.
People say that long mortgages allow lower
income families to live the dream and own a
house. In my opinion, it is more of a nightmare that they are letting themselves in for.
In order to buy an overpriced house they
will take on unsustainable debt and will be
burdened for years with the repayments. If
things go wrong, the value of the house will
not cover the debt and they will be left with
the unpleasant consequences. In my opinion a shorter mortgage regime limited to a
maximum of 10 years will protect everybody
in the long run.
If any comfort can be drawn from the present situation, it lies in the hope that normality will eventually return. Will we be any
wiser at the end of it all? I hope that we will
at least have learned that even though easy
money may be available from the banks, it
may not be in our best interests to take it.
Living beyond our means through excessive
borrowing has never been, and never will
be, a good idea.
31
Economy
Contracts for Difference (CFDS)
What are CFDs
To put it simply, CFDs are agreements between two parties to exchange the difference
between the current price of an underlying
asset (which can be shares, currencies, commodities, indices, etc) and its price on the day
the agreement expires. The profit or loss is
calculated when the contract expires by multiplying the difference between these two prices
with the number of CFDs invested in.
By Demetra Kalogerou,
Chair of the Cyprus
Securities and Exchange
Commission
CFDs are leveraged products, enabling investors to make transactions with only a small
margin (deposit). However, although CFDs
might look similar to more traditional investments, such as shares, in reality they are very
different and far more complex. Due to their
complicated structures and the high level of
risk they carry, CFDs are considered by the
financial supervisory authorities as being
suitable only for professional clients or
highly experienced retail investors who can
understand how they work and the risks
they entail.
Risks for investors
CFDs are not standardized products and thus
each Investment Firm (IF) can apply different
terms and charges. As a result, costs for the
investor may be difficult to calculate for a given trade and may well outweigh the potential
profit.
The risk of investing in CFDs is especially increased when they are highly leveraged. Investors must remember that leverage can
magnify the profits but it can also magnify
the losses.
Further, investment in CFDs carries also a liquidity risk. The margin needed to be maintained by the investor is recalculated on a daily
basis, according to the changes in the value
of the underlying assets, and if the balance is
negative due to a reduction in the price of the
underlying assets, the margin position should
be restored by the investor. If the investor is
unable to cover the loss, then the IF may close
the position and liquidate all the CFD positions
of the investor, even if the price of the underlying asset subsequently recovers resulting in
a profit at a later stage. This is very important
since it means that the investor stands to
lose more money than his/her initial capital investment. Limits placed such as “stop
loss” limits cannot always protect the investors
from losses.
Unfortunately, and despite efforts from the
supervisory authorities to contain such phe-
32
nomena, companies offering trading in CFDs
advertise the potential profits without adequately explaining or highlighting the risks to
the investors. Also, various marketing ploys
are used to lure investors in investing, such as
“free start-up money”. This is true especially
when transactions in CFDs are offered online.
In addition, CFDs are not suitable for investors
who want to “buy and hold” their investments
without monitoring their position on a regular
basis. The dynamic nature and volatility of the
financial markets, together with the leverage,
can expose the investor to great risk even by
simply maintaining the investment overnight.
How investors can protect themselves
Due to the afore-mentioned and other risks
related to CFDs, the European Securities
and Markets Authority and the Cyprus Securities and Exchange Authority, have issued
warnings to investors, which can be found
at
http://www.esma.europa.eu/system/
files/2013-267.pdf
According to these warnings, investors
should choose to invest in CFDs only if
they understand the product, they have
extensive experience in trading in CFDs
and they fully appreciate the risks involved.
Also, before they decide to invest in CFDs, investors should ensure they have enough time
to monitor their investment very frequently.
Amongst other things, investors are advised to
carefully read the contract they sign with the
IF, making sure they fully understand at least
the costs of trading CFDs with the IF, whether
the IF will disclose the margins it makes on the
trades, how the prices of the CFDs are determined by the IF, what happens if the investor
holds his/her position open overnight, whether
the IF provider can change or requite the price
once the investor places an order, whether the
IF will execute the orders even if the underlying market is closed, and whether there is an
investor or deposit protection scheme in place
in the event of counterparty risk (if the IF defaults) or other client asset issues. Most importantly, investors are advised not to trade
if they do not understand what is on offer.
Lastly, investors are reminded to check if they
intend to receive investment services in that
jurisdiction. For Cyprus, investors should always check the CySEC website for a complete
list of all licensed Cyprus IFs at www.cysec.
gov.cy/licence_members_1_en.aspx
Economy
The Cyprus fund industry, a lifeline for our financial center
It is undeniable that the Cyprus financial
industry is going through turbulent times.
Assuming that the worst is now behind us,
this experience could give way to a financial environment that is stronger and more
resistant to the destabilization factors that
caused the troubles in the first place.
By Ioannis Gaiganis*,
Vice-Chairman of the
Cyprus Investment
Funds Association.
While everyone’s attention is narrowly focused on the banking sector, the investment
funds industry is paradoxically evolving at a
pace that gradually puts Cyprus on the list
of EU countries that may be considered for
optimal fund related solutions, namely Luxembourg, Ireland or Malta. By digging a little
deeper in the subject though, we see that
this is not a paradox but possibly the natural
evolution of many years of slow progress in
the sector.
The Cyprus’ fund industry first became reality in 1999 with the introduction of the ICIS
Law, at a time when other countries that
are today mature fund jurisdictions, did not
offer the flexible fund environment offered
by Cyprus. While the first decade since the
ICIS Law introduction saw the creation of
approximately 50 investment schemes with
many of them being dormant, from 2009 to
this day their number has more than doubled
34
with funds that are not only actively managed
but much more diversified in terms of asset
classes. Put in the context of the overall financial industry evolution, this is a remarkable growth to be attributed to the country’s
attractive regulatory and fiscal framework
combined to quality, cost efficient services.
Despite the recent events, investor protection is an embedded feature of the Cyprus
fund industry as like in most mature fund
jurisdictions, invested fund assets are segregated from the custodian bank’s other assets.
Developments in the Cyprus fund industry
have been continuous for many years now
and the exceptional work done by the current members of the Cyprus Securities and
Exchange Commission resulted in Cyprus
being at the forefront of countries that fully
integrated in law and practice all relevant
EU directives relative to investment funds
and their managers either in the context of
UCITS IV or the Alternative Investment Managers Directive (AIFMD).
The most recent development relates to
Alternative Investment Managers and was
adopted by the Cypriot Parliament on July
8th 2013. It marks a new beginning in the
alternative fund space not only domestically
but in the wider region where Cyprus may
rightfully be considered a serious candidate
to offer access to EU regulated solutions
for funds and their managers. Alternative funds under the new regime may also
be immune to local banking risk as they
may be established in Cyprus and appoint
a reputable custodian in any EU country at
least until 2017. This exception to the rule
of local custodian bank which still applies to
UCITS funds should by no means bring us
long term comfort. It must remain an absolute priority for our banking sector, to implement best practice securities services if we
are to emulate the success of other EU fund
management jurisdictions. It should also remain a priority for the financial industry to
attract new reputable custodian banks and
fund administrators, or trigger the growth of
existing players in the market with incentives
and guidance.
Despite the recent events, investor protection is an
embedded feature of the Cyprus fund industry...
Guidance and the development of a fund industry awareness is also reality in the form
of the Cyprus Investment Fund Association,
or commonly known as CIFA. The recent
establishment of CIFA with the backing of
CIPA (the Cyprus Investment Promotion
Agency) and the support of CYSEC is another crucial and necessary development in
Cyprus’ efforts to become a renowned center for all asset classes of funds and fund
managers. Other than being the voice of the
industry at regional level, CIFA will also be
applying in the coming weeks to become a
national member of the European Fund and
Asset Management Association (EFAMA).
“We have the opportunity to position Cyprus
and the center of an industry where if we
take as examples Luxembourg or Malta,
could well become one of the pillars of our
financial industry in the coming years. Especially now with the adoption of the AIFMD,
we can offer unequaled solutions to alternative fund managers that would choose to operate from Cyprus regardless of the domicile
of the funds they manage.” Said Mr. Angelos
Gregoriades, Chairman of the CIFA.
In times when the financial industry is seeking new horizons that would not be associated with the challenged banking sector,
the investment fund industry offers a unique
chance of growth to the image of a country like Luxembourg where while the size of
its banking industry is astronomically higher
than the much criticized Cypriot bank sector
size, it is so in custody of structured and protected assets in the form of funds or similar
investment schemes, not deposits.
“In the EU investment fund management
sector, we all operate under common European rules and regulations. While each
country presents strengths in particular areas, Cyprus offers a uniquely attractive total package in terms of regulatory support,
services, cost and growth potential. Furthermore, the foreseeable income for our
economy from this industry is considerable
especially if one sees the opportunity of redirection it offers to our financial industry model that has thrived for decades but is now in
need of new growth areas “ said Mr. Ioannis
Gaiganis, Vice Chairman of the CIFA.
The Pan-European developments affecting the future of investment funds and their
managers are shaping a new fund management landscape where every EU country has
the right and an open invitation to project
its advantages. Perennially in Cyprus and
even during tumultuous times, we have successfully created growth by showcasing the
multiple benefits offered by our country. We
have translated these benefits into action
and best practices, reaping the rewards of
intelligence, flexibility and ability to adapt.
The renewed investment fund industry enables us to isolate growth from the rebuilding process of our banking sector and invites
us once more to seize the opportunity to
showcase our advantages. Let’s seize it and
with it, the prospects of a thriving financial
industry that can effectively renew itself.
Ioannis Gaiganis is an expert professional in fund management and securities services. He is the Vice-Chairman of the
Cyprus Investment Funds Association (CIFA), member of the Alternative Investments Fund Managers Directive Committee
and a Board Member of numerous Cyprus domiciled Investment Companies as Principal for Red Fort Capital. Before this,
Ioannis was a Director for the Fund Manager Beneficentia Ltd and its fund range and headed the Investment Fund Services
of Deloitte and KPMG in Cyprus. He started his financial career in Luxembourg where from 1998 to 2009 he occupied senior
positions at JP Morgan Fleming Asset Management, Fidelity Investments and Societe Generale Bank & Trust.
35
Economy
Cyprus memorandum and the perspective
of economic policy change
By Tassos Yiasemides
Principal,Audit
KPMG Limited
In general, Troika judged its evaluation
of the Cypriot programme as positive,
while with its departure from Cyprus it
handed the updated memorandum to
the Cypriot authorities. Public finances
goals have been achieved, while priority
is now given to the timely completion of
the budget for 2014 so that it may be
evaluated by our creditors. Maintaining
the rates of the recession and unemployment percentages still remain important challenges.
Structural reforms
In relation to the required structural measures,
the provisions for privatization and related time
frames which must be kept remain within the updated memorandum. It is expected that there will
be a study which will evaluate the different privatization models, such as that of Portugal as well
as the agreement made with COSCO for Piraeus
port, so that the receipt of related income that is
required by the memorandum is possible.
Moreover, the timeframes which concern the
implementation of the National Health Insurance Scheme (implementation until 2015), the
adoption of the new income policy (1 July 2014),
and the public service reform are renewed. As
far as the latter is concerned, it is expected that
such reform will be completed in the beginning
of 2016, while work has already commenced on
the study to be prepared by the competent Commissioner, technocrats from the United Kingdom
and the World Bank. In the property sector, it is
required to promote the enactment of legislation that makes necessary the filing of buy-sell
contracts, while until the first quarter of 2014 a
road map for the issue of property titles must be
formed, with a final goal that by the end of 2014
the number of properties more than one year old
and for which no property titles have been issued
must be reduced to 2000.
Moreover, the consolidation of the VAT service
and the Inland Revenue Department is promoted,
while the measures to be taken for the improvement of the procedures of compliance with antimoney laundering requirements are recorded in
detail.
Financial Sector
An important positive development is the exit of
the Bank of Cyprus from the rehabilitation regime
and the recovery of the counterparty regime, so
36
that the Bank can be financed directly from the
ECB through monetary policy actions, something which is expected to lead to the reduction
of the amounts which have been drawn from the
emergency liquidity assistance. It is expected that
the completion of both the recapitalization of the
country’s banking system by the end of the year
and the restructuring plans in the beginning of
2014 will lead to the lifting of the majority of the
restrictive measures which are currently in effect
regarding bank transactions within Cyprus.
However, regaining trust in the banking sector
requires hard work from all competent bodies
whose primary goal should be the preservation
and strengthening of the Cypriot economy.
Economic growth enhancement programmes
There are enough analysts who believe there may
be a partial change in Germany’s position following the elections on 22nd September, including
the enhancement of specific growth programmes.
In its last report regarding Germany, the International Monetary Fund on the one hand confirms
that Germany’s fundamentals remain strong
while on the other it points out that the increased
insecurity in the eurozone is an obstacle to the
country’s more powerful growth, as a sudden deceleration in economic activity appeared last year
and in the beginning of 2013.
The above estimations are supported by the
American president’s belief that, following his
meeting with the Greek prime minister, efforts for
exiting from the crisis cannot be focused solely
on strict economic austerity measures, but rather
must be coupled with stimulus to boost growth
and job creation.
Cyprus Economy
It is a fact that the difficulties and challenges
in the immediate future are significant. Any enhancement of growth policies will strengthen
economic activity, but the continuous effort for
the implementation of reforms and the organization of public finances is required. Many of the
proposed changes are expected to lead to a more
flexible government system, friendly to both business activity and citizens. A change in attitude,
consent and professional analysis are required so
that trust in the Cypriot economy and the financial
system is regained.
Economy
Privatisations are in the interest of
the economy and of the consumers
A discussion is now going on as to whether
the loan which Cyprus will get from Troika
will be manageable or not. In case it is
not manageable there is a provision in the
memorandum that Cyprus will promote
privatisations of state companies and generally of state assets. In this way the loan
from Troika will be reduced and it will be
manageable.
By Tassos Anastasiades,
Economist, Deputy Editor,
Accountancy Cyprus
In general all political parties are against privatisations because with state companies
they have the possibility to compensate their
supporters to whom they can offer employment or contracts. Thus appointments are
made not on merit or qualifications but on
political affiliation, and usually, more than
the required number to meet the needs of
the companies. It maybe noted that, as the
audit-general has revealed both CYTA &
EAC have engaged in unproductive use of
millions of euros.
The final result is the increase of the cost
of production and thus of the prices or fees
charged to the consumers. These state
companies are usually profitable because
in most cases they are allowed to charge a
certain percentage of profit. With this procedure, however, the state companies have
no incentive to reduce costs. In contrast a
private company has an incentive to reduce
cost thus expanding sales and profits.
Also with privatisations a ``popular capitalism’’ is introduced. And this because in
most cases that privatisations were introduced shares at a discount were offered to
the employees of the privatised companies
which means that the employees are also
investors. In parallel a private company has
an incentive to adapt to the needs of the
costumers and thus to improve the quality
of their products or services while at the
same time to introduce new products so as
to compete possible other companies in the
industry it operates.
With privatisations the Government will have
revenue to reduce the public debt and will
have annual tax revenue from the taxation of
the profits of the privatised companies. It is
argued that the profitable state companies
should not be privatised because the Gov-
38
ernment has an income from the surpluses
of the companies. But perhaps the Government will be collecting higher revenue
from the taxation of the profits of the company and the taxation of the dividends of the
shareholders. In parallel there is a possibility that the state companies which are now
profitable may become loss-making, as in
the case of the Cyprus Airways. In many
countries there have been privatisations in
various sectors of the economy, including
electricity generation, telecommunications,
posts, water supply and financial services.
In case privatisation of state companies
goes ahead the Government may keep
a certain percentage of share capital and
25% to be offered to a strategic investor,
a company which operates in the same industry. In parallel a proportion of 5-6% of
the share capital may be offered to the employees of the company to be privatised so
that they will have incentive to work more
efficiently since, besides their salaries, they
will also have dividends. Of course a certain
proportion, perhaps 15%, should be offered
to the public. It is usually stated that state
companies belong to the public. Unfortunately this is not realized by any one. But
with privatisations of state companies and
with the sale of shares to the public in general and the employees of these companies
they will realize that they have an interest in
these companies.
In view of the fact that the state companies
to be privatised perhaps they will have an
oligopoly or monopoly power it is necessary
to set up a regulatory framework which will
prevent them from earning abnormal profits.
They can do this either by limiting prices or
limiting profits. In some countries regulators
tend to focus on profits. This, it is argued ,
neither encourages the company to reduce
its costs nor be innovative by creating new
products and new services. In other countries, like the UK, regulation has centred on
prices. Privatised companies have been set
price limits but allow them to earn as mush
profit as they can within these limits so as to
encourage the companies to reduce costs.
Therefore, in case privatisation goes ahead, it
is advisable that regulation should be centred
on price limits and not on profit margins.
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2/21/2013 11:20:23 AM
Economy
The Cyprus “baill-in” calamity: a selfinflicted wound or a Eurogroup policymaking blunder?
By Yiannis Kitromilides*
In the minds of many Cypriots the economic calamity that resulted from the decision
of the euro-group to impose a ‘haircut’ on
bank deposits was comparable to the Turkish invasion of Cyprus in 1974. Prominent
and highly contentious among the attempts
to answer the ‘why’ question is the suggestion that the recent calamity was largely
‘self-inflicted’. This diagnosis has two components: One relates to the responsibilities
of successive governments in promoting
an ‘unsustainable’ economic model based
on an overblown banking sector; the other
focuses on the crucial mistakes by the previous Cypriot administration. The former
view has been expressed by the German
finance minister while the latter by, among
others, various witnesses to the committee
investigating the circumstances leading to
the economic collapse in Cyprus. The main
arguments contained in both diagnoses are
not mutually exclusive.
The German finance minister, commenting
on the rejection by the Cyprus Parliament of
the controversial euro-group plan of imposing a ‘haircut’ on all bank deposits, insisted
that the citizens of Cyprus and their elected
representatives needed to ‘understand’ the
simple fact that their ‘business model’ was
wrong. The major problem with the economy of Cyprus was its banking sector. It had
two undesirable features: first, it was too big
in relation to the total economy; second, Cypriot banks, attracted huge foreign deposits
mainly by Russian depositors (allegedly of
dubious origin). The first feature was undesirable because it posed a ‘systemic risk’
for the entire economy in the event that one
or more banks failed. The second feature
exposed Cyprus to the suspicion that the
country had become a ‘money-laundering’
centre within the European Union.
With regard to the second component of
the diagnosis that Cypriots are largely responsible for their own misfortune, the main
argument relies on the claim that had appropriate measures been adopted in time
the disaster of the ‘bail-in’ could have been
avoided. While there is little doubt that serious policy errors have been committed, the
40
claim that Cyprus, and by implication other
economies with oversize banking sectors,
was pursuing an unsustainable economic
model that made the ‘bail-in’ solution inevitable, may not be valid. There are countries
without overblown banking sectors that experienced similar banking crises, (Ireland,
Spain and Greece) and countries with overblown banking sectors (Luxemburg, Switzerland) that did not.
Even if it can be established that the
Schaeuble diagnosis is correct, or that Cyprus committed serious policy errors, was
the ‘bail-in’ decision the appropriate remedy? I believe that, it was inappropriate,
unnecessary, unduly harsh and ultimately
counterproductive. It represents yet another
example of ‘muddling through’ policymaking by euro-group leaders.
Cyprus applied for a ‘bail-out’ and was offered a ‘take-it-or leave-it’ partial ‘bail-in’
solution. In principle the justification for a
‘bail-in’ appeared reasonable: taxpayers
should not have to pay for the mistakes of
bankers and policy makers and ‘tax havens’
and ‘money laundering’ centres should be
eliminated. Is it not fair that part of the burden of rescuing the ‘lop sided’ economy of
Cyprus be borne partly by depositors which
included a number of dubious Russian ‘Oligarchs’? Moreover, according to this viewpoint, this plan is not only fair but also efficient for at least two reasons. First, it will
have the effect of reducing the unsustainably large financial services sector. Second,
if the experiment in Cyprus is successful
it will introduce some market discipline in
banking. By sending the message to all
depositors in all banks that if a bank needs
re-capitalisation they may be asked to bear
some of the cost, they will be forced to take
more care where they ‘park’ their savings.
If only things were that simple ordinary citizens and politicians in Cyprus and, hopefully
everywhere, would understand and accept
the logic of this plan. Unfortunately the
world is a much more complicated place
especially the world of money and finance.
The stability of the entire system depends
on confidence. In the banking system confidence becomes a self-fulfilling prophesy: if people believe their
deposits are safe and stay calm, then things will be calm
which justifies their confidence in the safety of bank deposits. Central banks and governments must play a crucial
role in maintaining confidence.This was the lesson from
the experience of the 1930s. Following the collapse of
Lehman Brothers in 2008 central bankers and policymakers globally were determined to maintain confidence in the
banking system and prevent the policy mistakes of the
1930s. The taxpayers bore most of the cost of saving the
banking system from the threatened meltdown and a repetition of the banking collapse of the 1930s was averted.
There are still a number of un-answered questions with
regard to the tragedy in Cyprus. But, in the context of destroying confidence in the baking system the crucial conclusion, is that the ‘bail-in’ proposal is crazy! The objectives
of the plan are not at all crazy. On the contrary they are very
laudable: tax payers must be protected from the greedy
decisions of bankers and from the tax evasion practices
of ‘tax havens’ and money laundering centres. Why would
it not be possible to confiscate a small proportion of bank
deposits to ease the burden of bank re-capitalisation on
tax payers, current and future? Why would depositors be
so selfish and refuse to help their bank and ultimately the
economy by making a small contribution equivalent of just
under two years interest on deposits in the case of Cyprus? It is not possible to achieve the objectives of a ‘bailin’ plan for exactly the same reason that it is not possible to
be ‘a little pregnant’! Having a ‘little’ confidence in a bank
or a banking system is like having no confidence. Depositors will not be able to make a ‘small’ contribution because
once the announcement of a ‘haircut’ on deposits is made,
confidence in the entire banking system, evaporates. Confidence evaporates predominantly because of uncertainty
about what the reaction of other depositors will be. Such
uncertainty creates a situation whereby it becomes rational
to assume the worst.
There is a very simple lesson from the experience of Cyprus: it is much easier to destroy confidence in the banking system than to maintain confidence. It is not possible
to have ‘a small contribution’ from depositors without destroying confidence; and a sudden and abrupt ‘reduction’
of the size of the banking sector results in its near destruction. All that has been achieved so far by this ‘experiment’
in Cyprus is huge losses by depositors, many of whom are
small to medium size business, and the near destruction,
not reduction, of the banking sector. The ‘bail-in’ as an
alternative to a ‘bail-out’ has never been attempted anywhere before. As the Cyprus ‘experiment’ is clearly demonstrating it should not have been imposed on Cyprus and
it should not be attempted anywhere else.
The declared objective of the plan was to spare European
taxpayers from having to cough up 5.8 billion Euros which
would have been used to prop up the oversized banking
sector of Cyprus and protect the deposits of ‘Russian Oligarchs’. Was there an alternative? Yes, it is called ‘bailout’ and was applied to re-capitalise the banks in Ireland,
Greece and Spain not to mention the UK and US. The
IMF was adamant that lending Cyprus the extra 5.8 billion Euros would have produced ‘unsustainable’ levels of
indebtedness in Cyprus. ‘Unsustainable’? Would the indebtedness, have been more ‘unsustainable’ than the current catastrophe inflicted on Cyprus and particularly on its
youth, by its European family?
As in 1974 Cyprus will, no doubt, soldier on and may even
perform another economic miracle. Unfortunately, unlike
in 1974, Cyprus is now part of a malfunctioning monetary
union in Europe. One of the most serious and widely acknowledged ‘design faults’ of monetary union in Europe is
the absence of a banking union. The existence of a single
currency without a unified banking system created a lethal interdependence between the banking systems and
governments whereby national banks essentially relied on
their own governments to be rescued and states depended
on their own national banks to borrow. According to The
Economist the Cyprus ‘bail-in’ “appears to move Europe
further away from the institutional reforms that are needed
to resolve the crisis once and for all. Rather than using the
European Stability Mechanism to recapitalise banks, and
thereby weaken the link between banks and their governments, the euro zone continues to equate bank bail-outs
with sovereign bail-outs.”
The Cyprus ‘bail-in’ was a euro-group policymaking blunder. Although currently contagion to the rest of the euro-zone has been avoided this does mean that the bail-in
‘experiment’ in Cyprus was a success: the risks of adverse effects on depositor confidence in other vulnerable
economies during a future crisis have undoubtedly been
elevated. Moreover if the Cyprus ‘bail-in’ was intended as
a template for dealing with future banking crises in the
euro-zone it is highly unlikely that it will work. At best this
plan can only work, once. When people realise that their
deposits over a certain limit could be confiscated they may
decide to hold multiple accounts up to the insured limit. In
that case a ‘bail-in’ cannot raise sufficient funds unless the
government raids the un-insured deposits thus risking creating a bank panic. If, on the other hand, it was intended as
a ‘one-off’ policy, no credible, case has been made as to
why Cyprus was selected for such draconian punishment
other than electoral considerations in Germany.
*Yiannis Kitromilides is a retired academic economist, based in the UK. He is currently associate member of the Cambridge
Centre of Economic and Public Policy, Department of Land Economy, University of Cambridge. He had previously taught at
the University of Greenwich, University of Westminster, University of Middlesex, and at the School of Oriental and African
Studies, University of London. He was also Visiting Research Fellow at the Centre for International Business and Sustainability, London Metropolitan University.
41
Economy
The significance of the first Troica
evaluation and the road ahead
During the second half of July the first
evaluation of our economy has taken place
by the Troika specialists’ teams.
They have thoroughly reviewed the banking system, including the Coop one, as well
as the public sector and it seems they will
positively recommend that the next transfer of an amount of approx 1,5 billion euros
will be cleared in September.
By Dr Ioannis
M. Violaris
Associate
Professor of
Economics
Frederick
University
This first evaluation is of great significance
as it has proven to our creditors that we
mean business and we are seriously working towards correcting all the evils that
have surmounted since 1960.
Their visit has also coincided with the Bank
of Cyprus’ and the Coop’s banking sectors
return to a relatively more normal status
and future prospects.
Though the above developments are positive one should not assume that the recession is over and that growth is lying ahead.
Unfortunately economies need much more
than this to overcome shocks such as the
one our economy is going through.
We still need, for instance, to deal with the
future status of organizations such CYTA,
the EAC, Cyprus Airways and the Ports
Authority. We still need to introduce the
National Health System and to further reorganize the public sector.
In the meantime we have to deal with the
side effects of the measures taken, such
as the unemployment rate, which has al-
42
ready reached extremely worrying levels,
especially among the young sector of the
population. We have to additionally deal
with the ever increasing number of non
performing loans.
Furthermore we need to build an environment of trust that will attract foreign investors that we desperately need to inject in
our economy new capital and create new
opportunities.
All the above cannot and won’t happen
overnight and most importantly they will
only happen if we once and for all overcome all old practices that have led us
to this situation. This will require a totally
new approach on the part of trade unions,
which will need to realize that insisting on
unrealistic benefits is neither helping their
members nor the economy. It will also require a totally new approach on the part of
civil servants whose productivity needs to
be improved.
And it will also require a fresh, innovative,
approach on the part of enterprises.
It is obvious, therefore, that until the next
Troika visit, we will need to work even more
hard so as to achieve further improvements
and manage to get another positive evaluation that won’t necessitate any new measures. And by doing that we are actually
not simply satisfying our creditors but most
importantly we are building a better, more
sustainable, future for our economy and
our country.
2013
Ranked
Tier One Tax
Planning
Advisor
Albania: Rr. Hajdar Hidi, Pall. “PIENVIS”, Kati VI, Tirana Tel.: +355 42 248 548, Fax: +355 42 424 448
Economy
Success stories of the Eurogroup
Βυ Dr. Jim Leontiades
Cyprus International Institute
of Management
There have been some 29 meetings of the
Eurogroup as the leaders of the Eurozone
try to keep one jump ahead of the latest crisis. Many billions have been provided to help
certain member countries survive. Millions
of jobs have been lost to “austerity economics”. For the most part the results have been
disappointing. The Eurozone is now entering its seventh consecutive quarter of economic recession, the longest since the Euro
was established in 1999. If we consider the
European Union and not just the Eurozone,
growth of GDP across the 27 EU countries
has been consistently better (or less bad)
than in the 17 Eurozone countries. In short,
the EU countries outside the Eurozone are
growing faster than those inside.
We are all too painfully aware of the many
financial defaults and near- defaults among
the Euro’s member countries. These have
been largely absent in the non-euro countries. The former East bloc countries of Hungary and Estonia received temporary financial
assistance from the EU and IMF, but there
have been no bail in /bail outs among countries of the EU not in the common currency.
The EU countries most closely associated
with financial disaster are mainly those who
have joined the common currency. These
have also been the ones who have shown
the least signs of recovery from the crisis.
Wasn’t joining the common currency and its
various institutions, commitments and sacrifices supposed to improve matters? Indeed,
Eurozone officials sensitive to the obvious
lack of progress are quick to point to some
such instances. Irish Government finances,
are presented as an example of economic
recovery there. The borrowing costs of Ireland dropped recently on the back of an upgrade from Standard and Poor’s. Surprisingly, Eurozone officials also point to Greece as
another example. It has seen major improvements in its export/import balance, hailed as
a sign of improved international competitiveness.
Progress through poverty
In the rosy days before the global crisis
Greece was indeed importing much more
than it was exporting. The result was a massive balance of payments debt which contributed to its dire economic situation. There has
indeed been a marked improvement in the
international trade balance of Greece. The
44
reason is obvious and applies to most countries experiencing recession.
Recessions represent a drop in demand.
This effect both imports as well as domestically produced goods but imports particularly, since many of these tend to fall in the
luxury category. Not only do imports typically
drop in a recession but the lack of demand
in the local market pushes producers to look
harder for opportunities abroad. Hence also
some improvement, though usually less, in
exports.
The force behind such improvements is falling domestic demand. The real test is what
happens if and when a country recovers. Demand will then increase and put the whole
process in reverse. Unless of course, there
has been a major improvement in the countries productivity and international competitiveness- in which case the improvement may
turn out to be permanent. There is scant sign
of such improvement in Greek productivity.
Moving the goal posts
The improvement in Ireland’s national finances which recently resulted in lower borrowing costs is of course welcome. Ireland’s
improved access to international markets
was the reason for the optimism. But official
statistics in the Irish Times recently indicate
that the country’s economy has just entered
its third recession since 2008.The Euro zone
has redefined economic recovery in line with
its own emphasis on government debt and
finances.
Some readers will remember the great fuss
that was made some years go about the “fiscal compact” and the commitment of all Euro
member countries to a national debt ceiling
of 60%. EU statistics show that by 2012 the
average debt of countries in the Eurozone
has been steadily rising reaching an average debt to GDP ratio of 90% in 2012 (Germany’s national debt in that year was 83%).
For the EU as a whole the national debt ratio
was lower at an average of 85% of GDP.
Here again, countries within the EU but outside the Euro did better than members of the
common currency.
Of course, there is also the fact that since
the “rescue” of the Cypriot banks the Euro is
no longer a common currency.
The revenge of the economy
By Dr Iacovos
Aristidou,
Ex Minister of Labour
and Social Insurance,
Ex Director General,
Planning Bureau
It seems, after all, that the economy, like nature, takes revenge when basic rules of theirs
are being violated. The idea of the optimum
size of an economic activity under certain conditions, which we fought in our university studies to find out with complicated econometric
models, is valid also in the case of a country’s
economy. A correct growth policy must try to
enhance further this magnitude but this effort
must aim at the achievement of a dynamic
stability always at a higher point and not to resemble a blind jump in the vacuum. In Cyprus
we have ignored these basic principles and for
many years we have embarked on adventures
in many fields. With an obvious disregard of
the principle of the optimum size and an excessive abuse of the very useful institution of
the Stock Exchange we led ourselves to the
known crash at the beginning of the 2000 decade. Unfortunately, together with the establishment of the Stock Exchange, we did not
take in time the necessary measures ensuring the appropriate rules of the game. In what
follows I will deal with some examples where
we have ignored the size of the Cyprus market
and indeed of Cyprus.
After the invasion the Cyprus economy had
shrunk by 70% and Cyprus itself by 40% raising viability issues. The fact that some major
countries stopped the financing of their exports to Cyprus was not incidental. It was then
when the big opening took place through specific programs like ‘expanding the economic
boundaries of Cyprus’ or ‘turning Cyprus
into an international economic, business etc
center for the region’ in order to recover the
lost part of internal market. It was in this way
that Cyprus became an international business
centre and the Cypriot banks expanded to
Greece and elsewhere. Unfortunately, eventually things got out of proportions. In view of
the interconnection of banks with the Cyprus
economy irrespective of where they are operating, a very painful lesson we have learned
already, the bankers and even more the supervising authorities should have been more
prudent and effective. The expansion itself
abroad was a move in the right direction. It
should have been made within the limits of the
size of Cyprus.
Though great town planners, like the late Angelos Demetriou, believed that Cyprus, because of its small size, from the country planning point of view should be treated as one
area from Saint Andreas Cape to Paphos, various physical plans that were prepared since
1968 took special care of the peculiarities of
each District and Area. Priority was given to
the development of each region according
to its contribution to the GDP, whereas the
others were not neglected. These plans and
the priorities were not valid after the invasion.
Though every effort was made so as development on the basis of the new situation to be
promoted on rational criteria (priorities, optimum utilization of resources, etc), the quick
reactivation of the economy and later the violation of basic viability principles led to dangerous situations. It is in this respect that the
basic principle of optimum size was neglected
as well. I do respect the desire of many politicians to decentralize power towards Local Authorities and provide more voice to the people
on a wider basis. However, in parallel to the
creation of too many Municipalities in a Country of the size of Cyprus, which is not more
than the size of a small European town, there
should have been rules and arrangements for
a better handling of their finances by imposing, perhaps, some form of cooperation in the
provision of basic services, common use of
personnel and various basic structures.
Unfortunately, the systematic ignoring of the
basic factor of the small size of Cyprus is
permeating in many other sectors. Since the
1960’s there was a real effort to build in Nicosia a multipurpose economic cultural centre to
house the State Library, the State Theater/
Musical Events/Other Events and the State
Gallery. Instead of this, the desire of many
people to construct their own independent
‘palace’ (see Nicosia Cultural Centre etc) has
led to today’s tragic situation: no basic cultural
centers (library, gallery) and the construction
of many centers with little use in a small area.
There is no space to continue. I will finish by
reference to the handling of the civil service,
where some necessities have to be satisfied
anyway irrespective of the size of the Country. What did we do, however, so as to have
the best use of both civil servants and public resources? Even today it is not possible
to transfer a daily worker from one place to
another where his services are really needed.
But what have we done in the case of the remuneration of public servants, which naturally
are costing proportionately more in the functioning of a small State? Though rightly their
remuneration was fixed at a higher level than
that of the private sector (except the banking)
for reasons of devotion to duty, ever since
the 1990’s there has been such an abuse of
this principle so as today the remuneration of
civil servants, especially those in senior posts,
Ministers and Members of Parliament to be
three or more times of the remuneration and
pensions even of old colleagues of theirs. The
remuneration in the banking sector has remained unreachable. This issue is worth of a
special investigation.
45
Economy
Cyprus Shipping:
“Current Financial Developments in Cyprus”
The recent Troika Loan Agreement on Cyprus has admittedly brought an end to the
immediate financial uncertainty that has surrounded the overall banking system of Cyprus. The strict austerity measures imposed
on Cyprus and the temporary banking restrictions, have affected to a certain extent,
the smooth operation also of the Shipping
companies based in Cyprus.
Despite a limited number of cases where
shipping companies in Cyprus have been
Director-General,
affected by the banking system problem,
Cyprus Shipping Chamber
the overall Shipping operational and taxation infrastructure in Cyprus remains intact.
The strength of the Shipping Taxation System is
perhaps the main reason why these companies remain fully committed to Cyprus as their base of operation and the Cyprus flag. The Cyprus Shipping
Industry therefore, stands united and remains loyal
to Cyprus and the Cyprus flag. Similarly, the Cyprus Maritime Administration, through its Department of Merchant Shipping, is working normally
and without any interruptions and restrictions.
By Thomas Kazakos,
The temporary banking restrictions are continuously being reduced by the day and the Government is in the process of introducing new measures, so that all these restrictions are lifted the
soonest. The Cyprus Government is continuously
implementing the appropriate urgent financial
measures taking into account the needs of the
Cyprus Economy including those of the Shipping
Industry. In addition, the Cyprus Shipping Chamber, through a coordinated plan of action and close
contact with various state agencies, is continuing
and has intensified its efforts to alleviate any operational problems that might occur, thus allowing
Shipping companies in Cyprus to continue trading
as per normal, meeting their obligations towards
their seafarers and business associates. As such,
there is a gradual return to normal business for
the Shipping companies in Cyprus, in terms of local banking transactions, something which contributes to reinstating the trust between the banks
and their clients. The Cyprus Government has also
publicly acknowledged its appreciation to the Shipping Industry for its continuous loyalty, as well as
its substantial financial support and high professionalism. The Government also pledged its commitment, now, more than ever, to work together
with the Shipping Chamber, in promoting the advantages of Cyprus as a reliable and competitive
maritime centre.
The Chamber has commenced after the first Eurogroup decision, a “Positive PR Campaign” en46
titled “Shipping remains in Cyprus and continues
to support the Economy”. The aim of this initiative
is to promote in Cyprus and abroad the fact that,
despite the global depression in Shipping freight
rates and the recent Cyprus banking problems, the
overall Cyprus Shipping infrastructure remains solid and fully operational. Between the Eurogroup
Meetings, while the banks remained closed Cyprus Shipping managed to continue its high standard and reliable operations. An objective “Media
Crusade” mostly to foreign Television, Press and
Internet Media and Governments Parliaments from
various EU countries was initiated by Chamber
representatives, and although at the beginning,
Cyprus was faced with huge negative media responses due to incorrect information provided, at
the end, this negative perception was changed to
a rather positive one.
The release of the first installment of the loan to
Cyprus by the European Stability Mechanism already marks the beginning of the re-financing of
the banking system in Cyprus and as a result the
full stabilisation and subsequent recovery of the
Cyprus Economy. In this respect, we are optimistic
that with the implementation and enforcement of
efficient corrective measures the road to recovery
will not be a long one and Cyprus will regain its
leading edge as a competitive and internationally
credible business centre. It is therefore, of the
utmost importance, that the re-structuring of the
Bank of Cyprus and the complete lifting of the remaining baking restrictions, are effect the soonest.
With the assistance and cooperation of the Cyprus
Maritime Administration and in close cooperation
with the Cyprus Investment Promotion Agency
and other professional bodies, we shall be able
to continue promoting Cyprus as one of the most
advanced Shipping centres internationally for the
benefit of the Cyprus Economy. In addition, the
commitment of the new Government to upgrade
the infrastructure of the Cyprus Maritime Administration with the creation soon of an “Under-Secretary to the President on Shipping” will boost even
more, the efforts to expand and promote Cyprus
Shipping even more.
That way, the Chamber remains confident that Cyprus Shipping will sail through the stormy waters
with steady course and will continue to support the
Cyprus Economy.
After all, following more than 40 years of international Shipping presence here, Shipping and
its vast contribution is in essence a clear “Vote of
Confidence” for Cyprus and its Economy.
Cyprus shipping pillar of development
By Sylvia Loizides,
Board Member,
Head of Shipping,
KPMG Limited
While within the program provisions agreed
with Troika, the Cypriot economy has been
facing high remission rates since the decisions of the Eurogroup. In Q2 of 2013
there was a contraction of the country’s
economy by 5,2%, following a decrease in
the activities of the most significant economic sectors. On the positives, the trade
balance and the fiscal/government/budget
deficit improved during the first six months
of 2013.
The merchant shipping sector continues to
steadily contribute to the country’s Gross
Domestic Product, whilst it is expected to
be one of the most significant growth areas
in the coming years.
It is important to note that Cyprus is the
basis of a considerable number of international corporations engaged in shipping
and shipping related activities. The Cyprus
Ship Registry holds the 10th position of the
world’s largest merchant fleets and the 3rd
position in the EU, with a total capacity exceeding 21 million gross tonnage. Cyprus
is also the largest ship management centre
in the EU. More than 60 ship management
companies are established and operate in
Cyprus, many of which are among the largest of their kind worldwide. This classifies
Cyprus among the top 5 countries worldwide with the highest number of ship management companies.
Important advantages
Cyprus offers one of the friendliest and most
competitive tax regimes in Europe. The Cyprus tonnage tax system, which is based on
the ship’s net tonnage, has been approved
by the European Union and enhances the
advantages offered to ship owners of Cyprus ships, as well as to owners of foreign
ships (community or non-community ships),
to charterers and to ship managers.
Under the tonnage tax system, the profits
from the operation or the management of a
qualifying ship, which engages in a qualifying shipping activity and is registered in the
Cyprus Ship Registry, is not subject to any
tax, whilst the same applies to the dividends
distributed by shipping companies as well
as to the profit from the disposal of such
a ship.
In addition, Cyprus offers a clear and robust legal framework that secures investments in the sector, whilst having bilateral
cooperation agreements with 23 countries
through which specific privileges are granted to Cypriot ships calling at the ports of
these countries.
The high levels of safety and security, the
highly qualified staff, along with the high
quality of services being offered, the geographical position of the island, as well as
the fact that Cyprus was one of the first
countries to enact legislation to protect
ships against piracy, are additional benefits
enjoyed by companies engaged in the sector.
Turkish embargo
Notwithstanding the European and international institutional decisions condemning it,
one of the most important problems faced
by the merchant shipping industry is the
Turkish embargo on ships flying the Cyprus
flag. This reduces the potential for further
expansion of the sector and for attracting
companies that have commercial relationships with Turkey and the surrounding
countries. The agreed recommencement
of the talks for the resolution of the Cyprus
problem may be an opportunity for the Cypriot side to raise the issue and seek from
Turkey to lift the embargo as a confidence
building measure.
Energy sector
The discovery of hydrocarbon reserves in
Cyprus’ Exclusive Economic Zone and Cyprus’ decision to create an onshore LNG
terminal for exporting natural gas, enhances
considerably the development prospects of
merchant shipping. It is expected that there
would be significant interest from shipping
companies operating in energy transportation. The benefits will increase further
should Israel ultimately decide to use Cyprus for its natural gas exports.
Quick decision making is a very important
attribute in merchant shipping, thus it is
of vital importance that all processes and
procedures are strengthened in ordered to
avoid any bureaucratic hurdles and so that
services are provided 24/7, for Cyprus to
become an even more competitive maritime centre. In addition, it is vital that both
the government and the private sector (accounting and law firms) actively promote the
advantages of Cyprus as a maritime centre,
and especially its EU approved tonnage tax
regime, in order to attract new shipping
companies on the island.
47
Business
European Parliament ahead
of important decisions
MEPs took a break from official meetings
the past weeks, but behind the scenes work
continued to prepare for important legislative files later this year. Parliament will have
to decide on matters that will affect the EU
and Europeans for years to come, such as
the long-term budget, banking supervision,
data protection and better protection for temporary workers.
By Alexandra Attalides
Acting Head
European Parliament
Office in Cyprus
In the autumn Parliament will vote on a proposed deal for the EU’s long-term budget for
2014-2020. This will also affect the reform
of the EU’s agricultural policy. Agricultural
spending accounts for about 40% of the European Union’s annual budget and has been
at the heart of EU policy since the very start
of the European project. As the last revision
of the agricultural policy dates from 2003 and
13 countries have joined the EU since then,
it is clear that it must be updated in order to
face new challenges. EP, Commission and
governments have now reached a tentative
political agreement on how the reform package should look.
The three institutions sealed the political deal
on 26 June 2013. It includes among others
additional support for young farmers, stronger farmers’ organizations and emphasis on
environmental protection. The deal does not
include capping direct payments to bigger
farms and distributing funds between farmers as those areas depend on what happens
with the negotiations for the EU’s long-term
budget. Parliament will vote on the full package of new CAP regulations once the negotiations for the EU’s long-term budget have
been completed.
During the September session MEPs will vote
on tougher rules for tobacco products to prevent young people from taking up smoking
and a proposal to promote greener biofuels.
Parliament is also working on a new regulation on a single set of rules for all data collected online to ensure it is kept safe as well
as on a directive on data processing in law
enforcement. In addition the civil liberties
committee is conducting an inquiry into the
Prism scandal and will report back to Parliament by the end of the year.
In October MEPs are expected to vote on a
48
proposal to give better protection to the one
million workers temporarily posted in another European country by their employers
every year. The employment committee has
called for better protection for the one million
workers posted in another European country
by their employers every year. These posting are essential to fill temporary shortfalls
in sectors such as construction, transport
and agriculture, but MEPs fear it could leave
these workers open to abuse. Companies
sometimes use posted workers to circumvent employment laws by setting up so-called
letter-box companies in countries with lower
levels of employment and social protection.
To prevent this, MEPs have come up with a
check-list to help member states trace these
companies. They also want postings to apply
for a limited period only. In addition the committee insists on tougher controls on these
companies and calls for workers to be better informed about their rights. The rights of
people employed by subcontractors should
also be strengthened.
MEPs will also aim to reach an agreement
with the Council on the single supervision
of European banks. Rules for setting up a
single supervisory mechanism for EU banks
under the control of the European Central
Bank were preliminary backed by MEPs on
22 May. Final approval will follow once details
of the supervisor’s accountability have been
agreed with the European Central Bank.
The landmark event for September is the
kick-off for the European Elections of 2014
campaign. These European elections promise to give people more of a say than ever before. Andrew Duff the British member of the
ALDE group was in charge of preparing recommendations on how to improve the electoral process and give more choice and more
influence to European citizens. According
to the recommendations, European political
parties should name their candidates for the
post of president of the European Commission well in advance. National parties should
also say which European party they belong
to and who they back for Commission president. These and other suggestions are aimed
at spicing up the electoral campaigns and get
people more involved with EU topics.
IT’s
all about
Business
Why the new shopping hours are a success
In a bold move, the Government extended shop opening hours on a trial
basis from July to October 2013.
Now all shop owners can choose to
serve their customers 7 days a week
and for longer hours, a prerogative
so far reserved for the privileged
few whose stores were conveniently
located in decree-defined ‘tourist
zones’. Like every brave reform, this
one too has its opponents and critBy Michalis Antoniou,
ics. However, the concerns voiced
Assistant Director General
Cyprus Employers and
are unwarranted. It is our view that
Industrialists Federation,
the extension of shopping hours is a
(OEB)
right move that will create new jobs,
serve consumers better and help the economy.
this measure is that extended shopping hours are
good for consumers and help improve our tourist
product. Be they locals or tourists, consumers so far
could only enjoy convenient shopping hours if they
happened to be at the right place at the right time
of the year. Overregulation of shop opening hours
and division of Cyprus in ‘tourist’ and regular (nontourist) zones created confusion, discrimination and
unfair competition between businesses. For example,
a supermarket located within a tourist zone could take
advantage of longer shopping hours and stay open
until late in the evening while another supermarket,
in the next block and just outside the ‘tourist’ zone,
could not; imagine being able to shop in London’s
Oxford Street but not in Tottenham Court Road on
the same day.
For the Cyprus Employers & Industrialists Federation (OEB), shop opening hour liberalisation is a sine
qua non, a matter of principle. Our position on the
matter is clear and adamant: as a major tourist destination, Cyprus should in its entirety be considered
and treated as a ‘tourist zone’ with liberalised shop
opening hours for all businesses. Freedom to conduct
business fosters economic growth whereas unnecessary restrictions and regulations hinder it. Provided
all relevant employee protection laws are observed, it
should be left upon shop owners to decide when it is
best for them to open or close their shops. Territorial
discrimination in a small place like Cyprus, whereby
some parts are declared ‘tourist zones’ but others
are not, is an illiberal practice that stifles and curtails
competition at the expense of the economy, the tourism industry and the consumer.
Some are concerned about how extended shopping
hours might lead some unscrupulous employers to
abuse their shop assistants’ employment terms. Even
if that were true, does this mean that necessary measures should not be implemented in fear of some minority abusing or exploiting them? Limiting consumer
choice in a free-market tourism-oriented economy
is counterproductive and equivalent to shooting ourselves on the foot. The enthusiasm with which the
public embraced the new extended shopping hours is
the best proof of the measure’s success. Withdrawing the measure to prevent employee exploitation is
not the answer; implementing the law is.
One of the major arguments in favour of extended
shopping hours is that they create new jobs. Since legislation concerning shop assistants is restrictive and
puts a ceiling on the number of hours they can work
every day and week, businesses that choose to take
advantage of the extended shopping hours will have
to hire new employees to cover for the extra time. The
first indications are positive and encouraging. From
the moment the measure was announced many businesses rushed to hire new employees, some of them
taking advantage of existing employment schemes. In
times of unprecedented unemployment, particularly
among the young, such initiatives should not be opposed but welcomed and encouraged. Even if these
jobs are temporary or part-time - let’s not forget that
the measure is temporary and under evaluation - they
are valuable sources of income for many in dire need.
Had this measure been implemented earlier, as OEB
had asked, fewer people would be forced to suffer
the consequences of unemployment today.
The second major argument put forth in support of
50
Alleged abuses may be reported anonymously to the
‘hotline’ of the relevant department of the Ministry of
Employment and Social Insurance. The Ministry has
also increased the number of inspections and the
President of the Republic, when asked on the subject during a televised press conference, stated in the
most categorical manner that his administration will
implement a zero-tolerance policy towards those who
exploit their employees as a result of the extended
shopping hours. But I do not worry too much about
this. Extended shopping hours or not, most employers in Cyprus are hardworking, honest, law-abiding
businessmen and will remain so.
Taking advantage of the extended shopping hours is
an entirely voluntary choice; being forced to close because your business is located in the wrong kind of
shopping zone is not. It was high time Cypriots and
tourists, like the residents of most developed nations,
enjoyed convenient shopping hours. We are confident
that the Government, once it evaluates the results of
this trial, will recognise the benefits of shopping hour
liberalisation and adopt them permanently. Voluntary
longer shopping hours are convenient for consumers
and create new jobs. That in my book is a win-win
scenario the Cypriot economy desperately needs.
Ο Καλύτερος Φορολογικός Οίκος στην Κύπρο
Winning is a state of mind
Στην 9η τελετή βράβευσης του International Tax Review
(ITR) European Tax Awards, η Deloitte εξασφάλισε το
βραβείο του καλύτερου Φορολογικού Οίκου στην Κύπρο
(Cyprus Tax Firm of the Year) για το 2013.
www.deloitte.com/cy
Business
Cyprus should grow manufacturing sector,
but this requires careful management
By Christiana Diola
FCA
Services and Technical
Manager, Cyprus
Europe Region
52
There is no escaping the fact that Cyprus
has taken a battering. Whilst there is likely
to be some way to go before the economy
has turned the corner, it does seem that
things are gradually improving, and measures are now being put in place to find a
roadmap to recovery, rather than just reacting to impending disaster. As we consider
what the future economy of Cyprus should
look like, it is worth considering the benefits of economic diversity. The European
financial crisis has highlighted the danger
of allowing any country to rely to heavily
on one sector of the economy – especially
financial services – and it is likely that future success will depend on diversification
to provide a robust basis for sustainable
growth. Cyprus has not historically had a
large manufacturing sector, but just before
the crisis there were signs of the beginnings of restructuring, based on high-tech
and knowledge-based companies. Moreover, the government appears to be looking
keenly at a diversified economy; as part of
the tax incentives announced this summer
to help revive the economy, President Nicos
Anastasiades included a deduction of 100%
until 2016 on expenses used for the acquisition of fixed assets related to innovation,
research, computing, communications and
renewable energy. It seems that there is a
will to move away from a largely servicesbased economic model, so might investing
in manufacturing pay long term dividends?
Cyprus does not have the same historical
manufacturing base as other financial centres such as the UK or Singapore, but until last year it looked likely that there might
be some progress in developing technology and other tech industry. Historically,
Cyprus was caught between Western Europe’s cost-efficient modern producers
and the low-wage mass production of the
East. However, there were signs that moving towards high-value skills-based production would rebuild the sector, capitalising
on Cyprus’s highly educated workforce and
ideal geographical position. However, since
the economic upheavals, the sector has declined, with production figures down almost
6% year on year since April 2012.
On 12 July, ICAEW launched a new report:
Audit Insights: Manufacturing. This is the
second in a series of investigations into different economic sectors from the perspective of auditors. Unlike analysts, auditors
get right into the detail of every company
they look at, meaning they are able to offer
observations not always available to others.
This report warns that whilst manufacturing
is ‘coming back into fashion’ in the UK in
the wake of the financial crisis, it cannot be
seen as a fad.
Even in countries without a traditional manufacturing base, there are clear advantages
to supporting growth in the sector. Firstly,
we have seen the dangers of relying solely on
the highly transferable services sector for prosperity. Secondly, the majority of manufacturers
in Cyprus are Small and Medium sized Enterprises (SMEs) making the sector flexible and
adaptable.
However, as the ICAEW report shows, manufacturers face unique challenges that must be
recognised if growth in the sector is to be sustainable. Firstly, manufacturers are required to
‘hold their nerve’ to a greater extent. Constantly
changing market demands, combined with the
need for innovation and research and for everincreasing efficiency and productivity mean the
business cycle can be both long and volatile.
Things can appear to be going badly, and then
suddenly a company can reap the rewards.
Manufacturers in countries lacking abundant
relevant resources – such as metals or rare
earths, which are often vital for high-tech – can
find their supply chains are long and managing them can expose businesses to foreign currency risk. Manufacturers need to explain both
that manufacturing businesses go through economic cycles, and that different companies can
be at different stages at any given time.
Funding is vital for all businesses, but manufacturing stands out. Changes in technology, the
need for innovation, and the start-up costs of
research, new products, or launching in a new
market all mean that the sums involved can be
significant. For smaller businesses this could
well be the single biggest hurdle they face.
There are solutions available, but there is room
for policy to encourage growth; tax incentives
could encourage companies to invest and cre-
ate employment. This would take courage at a
time when tax is a political hot potato, but bold
leadership is needed in order to help manufacturing grow.
Skills is another area for concern; industries
such as technology or engineering require high
technical skills, but those experts may lack
business skills. Equally, those with business
skills may be tempted by other economic sectors where the returns are quicker or where
there is greater risk but far higher reward. Also,
the constant need for innovation in manufacturing means there must be constant investment,
otherwise companies end up with a ‘succession
problem’ where they have great people at the
top, but find it hard to attract young talent. Cyprus has a great record of training and education, and so this should not be impossible to
change, but there needs to be a focus on the
necessary skills. This cannot simply be government-led; companies can offer training to motivated employees, and could consider offering
more non-graduate routes into the company for
bright, hard-working young people who demonstrate the right aptitudes.
Cyprus has many attributes that mean expanding its comparatively small manufacturing sector, especially to high-value, knowledge-led
products, could in the future prove a real driver
of the economy. In order to do this, all parties
involved must understand that manufacturing is
in many ways different to other sectors of the
economy and has its own challenges. However,
with good management and careful planning, it
could be an opportunity to contribute to sustainable economic growth.
53
Business
Russians
support
Limassol
Unwavering relationships between
the Russian and Cypriot people are
maintained, despite the huge problems that have emerged as a result
of the Troika imposed ‘haircut’ on
deposits in Cyprus. Fortunately, the
trust and strong relationships that
Russians who live in, or conduct
business in Cyprus, have in Cyprus
doesn’t appear to have been shaken.
By Alecos Vilanos
The Russian culture is deeply rooted
in Cyprus and especially in Limassol,
with over 30 thousand Russians currently living in Limassol. Testament
to this is the fact that the Russian Commercial Bank’s
operations on the island continue. The bank’s decision
was characterized by the Minister of economics, Mr Charis Georgiadis as a ‘vote of trust’ in the Cyprus economy.
Director at Vilanos Real
Estate Agents
Cyprus and Russian culture have a lot of common characteristics. This is one of the main factors that Russian
people take into consideration and that reinforces their
will not to abandon Cyprus, in particular Limassol, which
has become the base for many successful Russian businesses.
Favorable Laws Remain
Low taxes, security, Cyprus background, legislative
framework, location, sunny weather and small distances
prevent entrepreneurs from turning their back on Cypriots whom they trust and appreciate. Of course no one
can ignore that the recent situation has upset a lot of
businessmen. However the messages from the Russian
community in Cyprus are encouragingly positive. Large
companies that offer their services to Limassol based
Russian businesses have informed us that none of their
major clients have left Cyprus so far, despite the bitterness that they feel towards the ‘haircut’ on deposits.
Integration of Russians into Cyprus society, especially in
Limassol strengthens the ongoing Russian cooperation
and business activities on the island, which is why the
project of construction of the Russian Orthodox Church in
the Kalogirous area named Saint Nicholas is continuing.
Russians love Cyprus
The ‘Moscow Times’ had written in an article that was
published last February, mentioning the reasons why
Russian people love Cyprus: Tax effectiveness, sunny
each day, the flight from Moscow is only three and a half
54
hours and ease of acquiring a visa or permanent residence permit when purchasing real estate over 300,000.
There’s also a respectable Russian community, four Russian schools and two radio stations. All of these factors
contribute to make Cyprus unsurpassed.
Russians and Cyprus’ natural gas
Let’s not forget Cyprus natural gas, which is one more
reason that Russians don’t want to leave Cyprus. Even
if they are not directly involved in the process of gas extraction, their involvement in worldwide energy market
imposes that they maintain close contact to European energy sources so that they can have the chance to affect
related decisions.
Eliminating bureaucracy
In the real estate division, Russian interest for investments remains at high levels. Nevertheless, Russians
should be given much more motivations such as facilitation in the process of naturalization and permanent residence permit.
It’s also imperative that a considerable reduction of bureaucracy is exercised, and all procedures are completed
in a much shorter time frame, in particular when providing
urban permissions and licenses in business projects and
investments.
Cypriot people are people of great strength and courage
and who above all stand out for their hard working ethic
and their determination to succeed. Let’s not forget that
we may have the largest percentage of educated manpower in Europe. Russians recognize and appreciate
these characteristics in Cypriots and value their reliability,
hospitality and honesty.
Russian fires against Europe
European leaders have already started receiving direct attacks from Russian political leadership, who, after the initial shock settled, have realized that the responsibility for
the haircut of deposits in Cyprus lies with the European
Union and not Cyprus
Profit from their losses
Russian depositors who have fallen victim to the ‘deposit
haircut’ are now share - holders in the Bank of Cyprus,
which, if it survives, will become the base of the Cyprus
Economy, bringing possibilities of profits to its shareholders, and in turn recovery of their lost fortunes. For these
reasons it looks certain that the cooperation will be carry
on for more years to come.
consulting I technology I outsourcing
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you can operate more efficiently,
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and respond more rapidly to market shifts.
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and other SAP products mentioned herein are trademarks or registered trademarks
of SAP AG in Germany and in several other countries.
Business
DISTRESSED ASSET INVESTING – Part2
In Part-I of the distressed asset investing
article (last month) we defined distressed
assets as well as addressed the advantages and risks in investing in such assets.
This month we present key considerations
of distressed asset transactions.
By Alexandros Pericleous
Manager of Transaction
Advisory Services /Enst
& Young
& Antonis Vidakis
Head of Transaction
Advisory Services /
Enst & Young
Once distressed assets have been identified, prospective buyers must understand
the complicated acquisition process and
each stakeholder’s agenda. Successful
acquirers will also need clearly-defined
investment objectives, confidence in their
own valuation and operational/commercial/financial due-diligence processes, as
well as insight into potential acquisition
strategies. Add to this the need to move
fast and maintain sufficient management
resources to make it all work.
Due-diligence in a distressed asset context requires careful risk assessment and
specifically an intensive focus on identifying hidden (often off-balance sheet) liabilities. For example, assets are often
transferred with no warranties or indemnities. Potentially damaging legacy issues
include underfunded pension liabilities,
employment contracts, termination agreements, warranties, regulatory issues and
breach-of-contract claims. Would-be
buyers must also assess their ability to
re-configure and re-deploy the target’s
assets, including an often demotivated
workforce, to generate target returns.
Valuing distressed assets can be especially challenging. Often, there are few
comparables. Historical performance data
based on the current owner’s use of the
assets can be helpful. However, in performing valuation and due-diligence, companies should focus on plotting future returns for any distressed asset based on a
new set of forward-looking circumstances
with the right management and business
plan that derive greater value.
Consideration needs to be given on how to
structure the acquisition. The most common approaches include buying the asset
outright or acquiring the asset or discrete
assets within a bankruptcy process. Following the insolvency process may allow
the acquirer to structure the deal in order
56
to separate the asset from certain liabilities and leave the latter with the bankrupt estate. Other structuring techniques
involve purchasing operating companies
and leaving behind entities that hold the
financing arrangements. When contemplating a purchase of just discrete assets
or an entire corporate entity, other factors
such as tax implications of an asset purchase versus share deal may differ significantly and, therefore, impact the total
purchase price.
An environment with less credit availability
will tend to mean fewer competing bidders. Buyers offering cash, paper and (or)
equity, or a workable combination will likely occupy a strong negotiating position.
This is not to say that the use of credit
is completely out of reach. Distressed assets are often controlled by creditors such
as banks willing to negotiate re-financing
or credit “rollover” on ownership change
at leverage ratios in excess of 50% despite tight credit markets. Over the past
few years specialist funds have raise more
than €65bn to invest in, or provide leverage to, stressed/distressed European assets transactions.
Perhaps the greatest challenge in the
complicated, high-pressure effort to secure distressed assets is the need for
speed. Businesses tend to fail very quickly, even after protracted suffering because
management, often in denial, fail to take
critical distress softening steps. When
failure becomes evident, key stakeholders
such as lenders and bondholders move
with great haste to protect their capital.
Today, there are increased opportunities
for distressed asset acquisition. Entities,
adequately prepared, will likely find enormous opportunity. Owing to greater complexity and heightened risk, distressed
asset investing requires companies to
commit greater management capital. But
with preparation, information and nerve,
such investments can yield rich rewards.
Business
Leveraging Technology to
Maximize Profitability
By Andry Papalexis,
CFO, Microsoft Cyprus
& Malta
58
The “New” Economic Reality
In Cyprus today we find ourselves operating in a highly volatile economy, with serious
challenges being faced within the business
environment. With rapidly increasing unemployment and reduced disposable income,
we see market sentiment at a historic low
and market demand collapsing in turn. The
banking crisis has significantly increased
the operational risk within which businesses
operate and sources of cash financing are
increasingly more difficult to secure.
As market dynamics change, businesses
that are lean, agile and quick to react will
differentiate and prosper.
help to build a more competitive business in
the long term.
Three areas in which investments in technology can be considered to help your business become more agile, competitive and
adaptive are as follows:
How Technology can help evolve
your business strategy?
The first reaction to the economic downturn
has been to cut costs. However, companies
that continue to fuel innovation, will differentiate and gain competitive advantage.
Each business will need to consider whether short term strategic investments now will
How Technology Can Help?
1.“Cloud computing”
Purchasing technology as an online service
directly from an IT service provider and paying for the technology as a monthly operating expense helps organizations to:
o Improve cash flow management, as there
is no need to spend significant amounts of
Business Challenge 1: Save Costs
and Increase productivity
• Businesses need to do more with less
or existing resources and ensure money is
spent on areas that provide higher return.
• Inefficient, cumbersome processes need
to be streamlined and non-value added activities eliminated.
cash upfront in order to deploy a technology.
o Decrease business risk by avoiding funds being
tied up in investments that may have uncertain returns; Shifting from capital expenditure to operating expenditure means the service can be terminated if the required return is not realized on the
technology.
o Reduce total IT costs and improve predictability
of IT costs.
o Increase agility as it enables an organization to
scale up and scale down the technology as and
when required to fit their individual needs.
2.Business productivity tools
a.Collaboration Tools enable online task & process workflows as well as central uploading, sharing and editing of documents.
b.Unified Communications include Instant messaging and Audio & video conferencing.
These tools help organizations to
oEliminate repetitive, manual tasks so that resources can be re-directed to more value added,
strategic and customer facing activities.
o Reduce costs and save time, enabling budget to
be re-allocated to investments with higher return.
o Increase productivity, enabling remote workforces & virtual teams to work more efficiently.
3.Software Asset Management
Proactively managing your software through structured reviews of your licenses can help you to:
o Understand what software you have, therefore
help to eliminate unnecessary licenses.
o Understand what software you need and therefore make more informed decisions on what to
prioritize and how to procure it in the most cost
effective way.
o Fully utilize what you have by identifying licenses
that have been paid for but not yet deployed. Quick
productivity gains can be achieved by implementing what you have already purchased.
Business Challenge 2: Grow Your Business
• Businesses need to find breakthrough ways of
acquiring new customers and retaining existing
profitable customers.
Customer Relationship Management
Is the structured organization of customer information in a database that is available to the sales,
marketing and customer service teams. It provides
access to critical, up to date customer information,
including customer profiles, historical purchases,
current deals being negotiated as well as customer
needs. It therefore:
o Ensures that the feedback from sales, marketing and customer services are used by the com-
pany to formulate the right strategy for each key
customer.
o Enables alignment of all departments and therefore increases productivity.
o Ensures a high quality of service is achieved,
which boosts customer satisfaction.
o Helps to focus the company on the right marketing campaigns, identifies the most profitable opportunities and ensures key customers are prioritized, all of which maximize return on investments
and drive business growth.
Business Challenge 3: Manage performance
• Businesses need to cascade goals across the
organization, track progress against strategic objectives and take corrective actions quickly, in order to keep ahead of competition.
Business Intelligence
Enables an average business user to transform
data to business insight.
o Dashboards empower decision makers by helping them understand what is going well and what is
not going well at a glance.
o Performance versus the organization’s strategic
goals is tracked through relevant scorecards. Corrective actions can be taken timely and accountability is maintained.
o The right information is provided at the right time
to help businesses make the right decisions.
59
Business
Investing in Cyprus
Antypas Asfour,
ACSI*
“Verba volant, scripta manent”. People usually say that “spoken words are transient,
written words remain”, however, what happens when the latter is not the case? On
August 23rd 2013, the Cyprus Securities
Exchange Commission (CySEC) issued
circular CI144-2013-24 that effectively annulled two previous circulars, which compelled Cyprus Investment Firms (CIFs) to
evidence authorisation from regulators in
third countries for services rendered outside the European Union. The first circular, dated July 26 2013, bewildered CIFs
and their clients as it diverged from the
EU’s harmonised regulation for investment services stipulated in the MiFID law.
To add insult to injury, CIFs had less than
a month to evidence the lawful provision
of their services to all third countries, with
a subsequent clarification circular merely
extending the deadline to the end of October. Although the obligation to evidence
authorisations had legitimate grounds, the
flawed implementation process and the ultimate annulment of the circulars defeated
CySEC’s attempt to lead the way towards
stricter financial regulation.
With Cyprus’ appeal as an investment destination tarnished following the banking crisis
in March, and with investment firms in other jurisdictions uttering slander about the
safeguarding of client funds held by CIFs,
the last thing the investment industry in Cyprus needs is undue attention. Despite the
current macroeconomic environment and
the inefficient government bureaucracy,
which are two of the most problematic factors for doing business in Cyprus according to the World Economic Forum’s Global
Competitiveness Index for 2012−2013,
CIFs continue to establish in Cyprus. In
fact, investment firms regulated by CySEC
have increased by 27% over the past 18
recessionary months, proving that there is
at least one industry where Cyprus can remain competitive, in spite of its plunge in
the Global Competitiveness Index rankings.
Policymakers ought to realise that with the
debilitation of the banking sector, the investment industry is the industry that can guide
Cyprus out of the crisis. As such, misconstruing or making impetuous decisions can
prove disastrous for the economy as such
decisions would trigger a negative multiplier effect. Accounting, auditing, banking,
60
legal and corporate services firms are the
obvious beneficiaries of new investment
firms establishing in Cyprus, however, this
list is far from being exhaustive. With tertiary education in Cyprus skewed towards
business, accounting and finance, and with
recruitment companies deriving a sizeable
portion of their revenues from investment,
particularly Forex, firms, impeding the investment industry will have a detrimental
effect on employment, and consequently
economic growth. Since 2008 unemployment has soared in Cyprus, as according
to Eurostat the rate of unemployment has
rocketed from 3.7% to 17.3% in July 2013,
the third highest rate amongst the 28 Member States. With unemployment forecasts
painting a bleak picture for the future, Cyprus should attract and retain investments
and investment firms to mitigate the situation.
In recent years, CySEC has strived to build
a reputation for Cyprus as an international
financial services hub. To some extent this
has been accomplished, since according to
the Forex Magnates Quarterly Market Report for Q2 2013, 6 out of the top 29 retail Forex brokers in the world in terms of
volume are Cyprus-regulated firms, making
Cyprus a Forex Silicon Valley. Nevertheless, increasingly CIFs look to disassociate themselves from Cyprus by obtaining
authorisation from other EU jurisdictions
to rebrand themselves and this trend can
only reflect poorly upon policymakers. That
said, top officials at CySEC have repeatedly
propagated the need for more personnel
and automation but are constrained by the
Government’s and the Commission’s budget deficits.
In order for Cyprus to regain and maintain its
primacy as an investment jurisdiction, consultations with CIFs and other stakeholders
may be warranted, especially prior to enacting policies. When it comes to financial supervision and the future of Cyprus as an investment centre, mistakes, misconceptions
and cutbacks cannot be afforded.
*Business Development Analyst at FxPro Financial Services Limited / Business Ethics and
Strategy Lecturer at the Cyprus Institute of
Marketing.
Business
Getting out of crisis by beating
procrastination and its rationalisation
“In a moment of decision, the best thing you can do is the right thing to do. The worst thing
you can do is nothing.” Theodore Roosevelt
Coming across the recent surveys
on procrastination, it has been found
that 75% of the UK population can be
considered as procrastinators, delaying tasks and leaving jobs unfinished
(http://www.guardian.co.uk, February
2013). Unfortunately, many people have
a tendency of being stuck and immobil-
ised regardless the country of their origin. For us, however, it would be interesting
to analyse some common circumstances of
procrastination in the time of crisis and to
learn whether individual and organisational
performance might be under its constant
attack.
By Irene Antoniou*
Source: International Herald
Tribune, February 18, 2013
Looking at the above comics, we can see
an example of procrastination as a psychological behaviour which is associated
with the process of putting off duties or
intentionally delaying performance of
tasks we are not in favor of. By reflecting
our daily routine, almost all of us procrastinate from time to time, however if a person
has a tendency of leaving tasks incomplete
on a constant basis by actually knowing
what he or she has to do, will undermine his
or her opportunities for growth at the end.
A recent example of an extended period
of denial (when “the outgoing President of
the country, knowing that elections were
due in February 2013, managed to put-off
dealing with the simmering crisis to avoid
being blamed for harsh policies” http://
russeurope.hypotheses.org) has resulted
in missed opportunities, offended plans,
depression, stagnation, loss of trust and
catastrophe. Thus, procrastination seems
to be a very costly phenomenon since by
postponing duties and putting off the tasks
people waste hundreds of euros. The recent crisis in Cyprus has been intensified by
62
the slow actions that have caused the delay
of tough decisions and resulted in financial
paralysis of the whole country.
Although the core of procrastination involves denial and avoidance of doing unpleasant things, up to a certain extent procrastination could be a good thing when the
time gap is required to reconsider the given
opportunity before the final decision; however “you may delay, but time will not”
(Benjamin Franklin).
“Procrastination makes easy things hard, hard things harder”.
Mason Cooley
At the time of crisis we have to consider
procrastination as a barrier to success
of employees, companies and even countries since it can be the factor that affects
the performance in both local and international markets. Consequently, we have to
focus on what we are doing and how much
it takes us by attentively considering every
single step.
By delaying obligations you might make yourself believe
that you handle work pressure, but in fact you are enhancing stress level by not being able to manage your
work load.
What are the indicators of procrastination?
• Poor time management - overestimating or
underestimating the time required to perform
your duties
• Lack of self-organisation - troubles you face
when putting your duties in order
• Fear of failure - being afraid of circumstances due to vagueness of the future
• Indecisiveness - difficulties to make actual
steps and put your plans into action
• Perfectionism - trying to reach an exceptional level of performance, however by overdoing
it, this might cause troubles since it is often
counter productive
• Fear of change - any change requires extra
efforts that you might like to avoid as well as
uncertainty of any change threatens
“The secret of getting ahead is getting started. The secret
of getting started is breaking your complex overwhelming
tasks into small manageable tasks, and then starting on
the first one.” Mark Twain
Symptoms of being a procrastinator:
• Constantly being late on meetings
• Inability to prioritise your duties
• Failure to organise your duties and your
working space
• Feeling of boredom from work you are assigned to do
• Feeling of powerlessness at your working
place
• Feeling of purposelessness of what you are
doing
• The phrase “I am very busy” is one of the
most common in your lexicon
that cannot be performed by yourself at present, due to lack of recourses, but are crucial for
your future main results
• Running the process:
- Start with one of the most enjoyable tasks
out of the most important ones in the list (otherwise start with the least frustrating)
- Choose the time when you feel yourself most
productive (morning time vs evening time)
- Draw up a schedule for the task accomplishment by breaking it down into smaller activities (this will allow you to get quicker visibility of
your progress)
-Do not forget to reward yourself after an
accomplishment of your tasks (this might be
something minimal but enjoyable, for instance,
getting time for a small walk in a park or spending time watching your favourite movie) – this
might be anything that will make you feel fulfilled due to the progress you have achieved
and will reinforce your behaviour
- Ask for consultation if required – you need to
avoid sense of isolation if something goes out
of order – thus talk to someone and by articulating your worries, decision might come on its
own.
Remember! Every single time when you postpone and put off unpleasant tasks, you stimulate behaviour of not doing what is required to
be done from your part. This is a high time for
individuals to actually start thinking of their own
performance in restoring the country’s competitiveness rather than wasting their power, time
and abilities in delaying actions and saying: “I
will do it tomorrow!”, but this tomorrow will never come. As businesses attempt to step up to a
broader role by finding new opportunities, new
investors, new markets, individuals should pay
attention to the valuable opportunities given to
them each day and looking for the prospects
that are open to every person.
Irene Antoniou
B.Sc., M.Sc. in Social Psychology
M.Sc. in Management in Organisations
PhD candidate in Social Sciences
Do any of these symptoms sound familiar?
Then, what are the techniques that
might help a person to reduce the
attempts of procrastination?
• Getting started:
- Work on your schedule of your major and minor goals
- Prioritise by emphasising the most important
and significant goals
- By prioritising your goals be focused on present facilities, available time and opportunities
you have
-Do not be afraid to outsource some tasks
63
Business
The use of batteries for
large electricity storage
By Dr. Andreas Poullikkas
Department of Mechanical
Engineering
American University
of Sharjah
Balancing power supply and demand is
always a complex process. When large
amounts of renewable energy sources
(RES), such as photovoltaic (PV), wind and
tidal energy, which can change abruptly
with weather conditions, are integrated
into the grid, this balancing process becomes even more difficult. Effective energy storage can match total generation
to total load precisely on a second by second basis. It can load-follow, adjusting to
changes in wind and PV input over short or
long time spans, as well as compensating
for long-term changes. While conventional
power generation plants may take several
minutes or even hours to come online and
will consume fuel even on spinning reserve
standby, storing renewable energy for later
use effectively produces no emissions.
Some well established technologies offer significant energy storage capacity but
require specific geographical features and
considerable infrastructure. Others can be
deployed rapidly to whenever they are required, but currently offer restricted capacity, often at high cost.
Although, due to their cost, batteries tradi-
64
tionally have not widely been used for large
scale electricity storage, they are now used
for energy and power applications. Energy
applications involve storage system discharge over periods of hours (typically one
discharge cycle per day) with correspondingly long charging periods. Power applications involve comparatively short periods
of discharge (seconds to minutes), short
recharging periods and often require many
cycles per day. Secondary batteries, such
as lead-acid and lithium-ion batteries can
be deployed for energy storage, but require
some re-engineering for grid applications.
Grid stabilization, or grid support, energy
storage systems currently consist of large
installations of lead-acid batteries as the
standard technology. The primary function of grid support is to provide spinning
reserve in the event of power plant or
transmission line equipment failure, that is,
excess capacity to provide power as other
power plants are brought online, especially in the case of isolated power systems.
These systems can take energy from the
grid when either the frequency or voltage is
too high and return that energy to the grid
when the frequency or voltage begins to sag. The
current implementation can provide a few minutes of energy, but overall grid management, including shifting peak loads, and supporting RES,
will require longer durations of storage and therefore re-engineering of storage systems to handle
greater energy to power ratios.
Considering the current operational and planned
large scale battery energy systems around the
world it can be observed that the largest battery
energy storage systems use sodium-sulfur batteries, whereas the flow batteries and especially
the vanadium redox flow batteries are used for
smaller battery energy storage systems. The battery energy storage systems are mainly used as
ancillary services or for supporting the large scale
solar and wind integration in the existing power
system, by providing grid stabilization, frequency
regulation and wind and solar energy smoothing
Specifically, the Amplex Group has employed a
battery energy storage system with sodium-sulfur batteries in the United Arab Emirates, with a
capacity of 350MWe, which is used as ancillary
service for grid stabilization, frequency regulation, voltage support, power quality, load shifting and energy arbitrage. Furthermore, in Laurel Mountain of West Virginia of USA, a battery
energy storage system with lithium-ion batteries
and a capacity of 32MWe and 8MWh has been
employed, which is used for helping large scale
wind integration in the existing power system by
providing frequency regulation and wind energy
smoothing.
and 0.8MWh, which is used as ancillary service
for peak shaving.
Regarding the planned large scale battery systems, the most important is the Rubenius battery energy system in California, USA, which will
have a capacity of 1000MWe and will require an
area of 1,416,400m2. The battery system that
will be used is sodium-sulfur type and the system
will be used for helping for large scale solar and
wind integration in the existing power system, by
providing grid stabilization, frequency regulation,
voltage support, power quality, load shifting and
energy arbitrage.
By comparing the different types of batteries, as
well as other types of large scale energy storage
systems, it can be concluded that lithium-ion batteries and sodium-sulfur batteries have high power and energy densities and high efficiency, but
they have high production costs. Also, pumped
hydro energy storage systems and compressed
air energy storage systems have high capacity,
but they have special site requirements. Furthermore, with the exception of pumped hydro energy
storage systems and compressed air energy storage systems, all the other energy storage systems are fully capable and suitable for providing
power very quickly in the power system. Regarding the energy applications, sodium-sulfur batteries, flow batteries, pumped hydro energy storage
systems and compressed air energy storage systems are fully capable and suitable for providing
energy very quickly in the power system, whereas
the rest of the energy storage systems are feasible but not quite practical or economical. 
The Golden Valley Electric Association has employed a battery energy storage system with nickel-cadmium batteries in Alaska of USA, with a capacity of 27MWe and 14.6MWh, which is used as
ancillary service for spinning reserve and power
system stabilization. Moreover, the Puerto Rico
Electric Power Authority has employed a battery
energy storage system with lead-acid batteries
in Puerto Rico, with a capacity of 20MWe and
14MWh, which is used as ancillary service for frequency control and spinning reserve. Finally, The
Sumitomo Densetsu Office has employed a battery energy storage system with vanadium redox
flow batteries in Japan, with a capacity of 3MWe
Dr. Andreas Poullikkas holds a B.Eng. degree in mechanical engineering, an M.Phil. degree in nuclear safety and turbomachinery, a Ph.D. degree in numerical analysis and a D.Tech. higher doctorate degree in energy policy and energy systems
optimization from Loughborough University of Technology, U.K. His present employment is with the Electricity Authority of
Cyprus where he holds the post of Assistant Manager of Research and Development; he is also, a Visiting Professor at the
American University of Sharjah. He is a member of various national and European committees related to energy policy issues. He is the developer of various algorithms and software for the technical, economic and environmental analysis of power
generation technologies, desalination technologies and renewable energy systems.
65
Business
Turning crisis into
an opportunity for businesses
By Rakis Christoforou,
Director RC Business Valuation & Forensic Accounting
Ltd
Introduction
The present Economic and Financial Crisis
is gravely impacting business volume and
causing far-reaching changes in numerous
management variables for most companies
operating in Cyprus. Examples range from
credit availability, prices, payment periods,
to shrinking client portfolios to name a few.
Under these circumstances companies
concentrate on down-sizing staff, cutbacks
in strategic plans, and sometimes proceed
with indiscriminate cost-cutting.
Even though some of these measures may
indeed be necessary, companies can also
implement an alternative response in the
opposite direction. The current situation in
the Island is one of the most appropriate
in terms of boosting Business Transformation processes. It is the ideal time to prepare for the future, consolidate projects,
always with a watchful eye to the present
of course, and to come up with solutions
that create value. These critical times open
the door to strategic opportunities for Businesses operating in Cyprus, including International clients.
Following are some of the Transformation
Processes that Businesses must explore
66
1.Employment of Highly Qualified Professionals
This is the right time to reinforce company
structures by incorporating highly qualified
professionals, with relatively lower cost
than ever before, who would most probably
be impossible to hire at another time. Cyprus is unique in this respect because
there is an abundance of Professionals
in almost every area.
This unique advantage that we have as a
country must be promoted much more by
all decision makers both in the private as
well as the public sector. It is also a source
of utmost interest for International firms
looking to extent their operations abroad.
2.Improvement of Relationships with Clients and other Key Agents
It is important to appreciate the nature of
each relationship and to identify whether
there are distinct groups that need to be
approached differently. It is highly probable that through this process we discover underexploited opportunities which
would allow us to determine new lines
of business. Although this is an essential exercise at any point in the Economic
Cycle, it becomes much more important in
times of crisis.
a mix of products and services to assure company
stability for today and tomorrow.
It is of great importance for all companies to
invest now more time with existing key customers in order to win back their trust and/or
strengthen their relationship.
3.Mergers, Acquisitions and Reorganizations
In Cyprus we have many small and medium size
companies that operate in the same line of business and are now struggling to survive; actually
we have more than we need and the market cannot absorb them all. Such companies need to explore the possibility of Merger or Acquisition. The
Merger and Acquisition of Businesses aims generally in the union of companies for the creation
of more powerful and stable structure for companies and can also be used for business expansions into new markets. In many cases, Mergers
or Acquisitions may prove to be the best solution available. International firms may also be
interested in acquiring some of these enterprises
operating in Cyprus.
At the same time internal reorganizations can
restructure the internal activities of a business
for greater efficiency and significant cost savings.
4.Improving Operational and Financial Management
During times of scarce liquidity, like the present,
it becomes paramount to seek out alternatives
to reduce the financing needs of the company’s
operations. For this reason the company must explore various avenues at its disposition for reducing the company’s long term operating needs, divesting non-essential assets, increasing company
resources and cutting overhead; but should not
proceed with indiscriminate cost cutting.
Times of crisis are opportune for analyzing
what elements are not going to be adding value in the future, and therefore dispensable,
and which are vital, and must absolutely be
preserved.
Conclusion
More than ever, the present crisis in Cyprus demands an approach that manages short term
needs while staying focused on the strategic issues for companies.
It remains, therefore, fundamental that the management of companies take the lead and maintain
strategic coherence even in the most turbulent
of times. This has been the key factor for companies, which not only survived past crises, but
came out ever stronger.
In times of crisis, the need arises to scrutinize the
company’s internal operations in order to improve
short term profitability. Further to optimizing production processes, reducing the number of products or/and services offered by the company can
be considered. The benefit is that inventory and
production costs are minimized while maintaining
NOTE
Rakis Christoforou is the first qualified accountant in Cyprus to hold the CFF (Certified in Financial Forensics) and ABV (Accredited in Business Valuation) Certifications. He is also the Vice Chairman of the Economic Crime and Forensic Accounting
(ECFA) committee of The Institute of Certified Public Accountants of Cyprus (ICPAC). Rakis is a member of many professional associations including CISI (the UK Chartered Institute of Securities and Investments), AICPA (American Institute of
Certified Public Accountants), CGMA (Chartered Global Management Accountants), ACFE (Association of Certified Fraud
Examiners) and ICPAC. [email protected]
67
Business
How to differentiate a small firm
By John O’ Donnell,
FCA*
Most firms of chartered accountants look
very similar. And – so far as clients are
concerned – one firm of accountants is the
same as another as is the work undertaken. While many of your clients may come
from referrals from existing clients, and you
might prefer this method of introduction,
you will, no doubt wish to gain clients from
other sources.
Your website is likely to be something that
is important to you. Your current clients will
refer to it and new clients will check it before meeting you. It is quite easy to make
a presentable, professional website which
shows you in the way you would like. We
recommend having good professional photos of the principals on the website so the
clients can picture you. We now see more
firms with videos and client testimonials, either written or video. Make sure it is done
professionally and that the messages you
want to give to clients are carefully included.
Include the services that you carry out and
explain in sufficient detail what you do. It
is easy to assume that clients know what
compliance work is. Larger companies
might do – but smaller clients won’t. So
target your market and explain carefully
what you do which is relevant to them. And
consider how and whether you can differentiate what you do from your competitors,
either by clear explanation of the service,
the pricing or anything else which makes
you stand out.
How do you advertise in other ways? Many
firms advertise in local papers. Some accountants appear on local radio, either in
adverts or as interviewees in radio programmes. We recommend that you only do
this if you are comfortable however.
ate your firm.
Most firms of accountants use the colour
blue in their logo. A few firms deliberately
use different colours to stand out and it
can be very effective. Consider this carefully and, if you do so, consider the effect of
the colour. Clearly there may be a political
or social undertone of some colours. But it
can be very effective to set a different tone
and we have seen this used very effectively.
Branding your firm’s templates is easy and
can ensure that all staff use your firm’s
standard templates rather than Microsoft’s.
Using a style guide for the way people write
is more difficult to achieve but can have the
effect of making your firm’s presentation
look the same, whoever has drafted the letter or report.
Perhaps in an international market, it is important to focus on how you are perceived
in the markets in which you wish to do business. And if you are operating internationally, your website is likely to be even more
important as you are using it to provide information of value to the reader. If you have
up-to-date information being shown on the
side or at the top or bottom (news, financial indices etc) this can make your site a
‘favourite’ for potential as well as actual clients. Consider also giving a topical tip of
the month. Make sure that translations are
effective and that the phrases you use are
appropriate and correct from the international perspective too. 
NOTE: This is the first in a series of articles
by John O’Donnell FCA, practice consultant from ICAEW. John visited Cyprus in
June and was one of the presenters at the
Nicosia and Limassol ICPAC-ICAEW-CABA
presentations.*
Do you give presentations? Some firms offer budget seminars for clients to attend.
Again, if you are not comfortable in this
setting, do not use it. But if it will work for
you, it may be a valuable tool to differenti*John O’Donnell FCA is the Practice Consultant for Members’ department of ICAEW and visits firms to consult them on practice management, practice succession planning and also undertakes compliance reviews for the firms. He is not a member
of the regulatory team at ICAEW. John has 21 years’ experience of compliance and consultancy work with member firms in
the UK and the Channel Islands.
68
Business
“Best way to conquer stage fright is to know what you’re talking about”
Becoming a compelling speaker
By Demetris
Stylianides
DipLC, CTM, CL,
FAIA, FCCA, CPA,
International
trainer
NLP
Whether we’re talking in a team meeting or
presenting in front of an audience, we all
have to speak in public from time to time.
We can do this well or we can do this badly,
and the outcome strongly affects the way
that people think about us. This is why public speaking causes so much anxiety and
concern.
The good news is that, with thorough preparation and practice, you can overcome your
nervousness and perform exceptionally well.
This article explains how to achieve exactly
that!
The importance of public speaking
Even if you don’t need to make regular presentations in front of a group, there are plenty of situations where good public speaking
skills can help you advance your career and
create opportunities.
For example, you might have to talk about
your company at a conference, make a
speech after accepting an award, or teach
a class to new recruits at your firm. Public
speaking also includes online presentations
or talks; for instance, when training a virtual
team, or when speaking to a group of clients
in an online meeting. Being a good public
speaker can enhance your reputation, boost
your self-confidence, and open up countless
opportunities.
However, while good public speaking skills
can open doors, poor speaking skills can
close them. For example, your boss might
decide against promoting you after sitting
through a poorly-delivered presentation. You
might lose a valuable new contract by failing to connect with a prospect during a sales
pitch. Or you could make a poor impression
with your new team, because you trip over
your words and don’t look people in the eye.
Strategies for becoming a confident speaker
What’s great about public speaking is that
it’s a learnable skill. As such, you can use
the following strategies to become a better
speaker and presenter.
Plan Appropriately
First, make sure that you plan your communication appropriately and think about how
you’ll structure what you’re going to say.
When you do this, think about how important
a book’s first paragraph is; if it doesn’t grab
70
you, you’re likely going to put it down. The
same principle goes for your speech: from
the beginning, you need to intrigue your audience.
For example, you could start with an interesting statistic, headline, or fact that relates
to what you’re talking about. You can also
use story telling as a powerful opener but
remember that it has to be relevant to the
area you are talking about. Planning also
helps you to think on your feet. This is especially important for unpredictable question
and answer sessions or last-minute communications.
Practice
There’s a good reason that we say, “Practice makes perfect!” You simply cannot be a
confident, compelling speaker without practice.
To get practice, seek opportunities to speak
in front of others. You could put yourself in
situations that require public speaking, such
as by training a group from another department, or by volunteering to speak at team
meetings.
If you’re going to be delivering a presentation or prepared speech, create it as early as
possible. The earlier you put it together, the
more time you’ll have to practice.
Practice it plenty of times alone, using the
resources you’ll rely on at the event, and, as
you practice, fine tune your choice of words
until they flow smoothly and easily.
Then, if appropriate, do a dummy run in front
of a small audience: this will help you calm
your nerves and make you feel more comfortable with the material. Your audience
can also give you useful feedback, both on
your material and on your performance.
Engage With Your Audience
When you speak, try to engage your audience. This makes you feel less isolated as
a speaker and keeps everyone involved with
your message. If appropriate, ask leading
questions targeted to individuals or groups,
and encourage people to participate and ask
questions.
Keep in mind that some words reduce your
power as a speaker. For instance, think
about how these sentences sound: “I just
want to add that I think we can meet these
goals” or “I just think this plan is a good
one.” The words “just” and “I think” limit your
authority and conviction. Don’t use them.
A similar word is “actually,” as in, “Actually, I’d like
to add that we were under budget last quarter.”
When you use “actually,” it conveys a sense of submissiveness or even surprise. Instead, say what
things are. “We were under budget last quarter” is
clear and direct.
Also, pay attention to how you’re speaking. If you’re
nervous, you might talk quickly. This increases the
chances that you’ll trip over your words, or say
something you don’t mean. Force yourself to slow
down by breathing deeply. Don’t be afraid to gather your thoughts; pauses are an important part of
conversation, and they make you sound confident,
natural, and authentic.
Finally, avoid reading word-for-word from your
notes. Instead, make a list of important points on
cue cards, or, as you get better at public speaking,
try to memorize what you’re going to say – you can
still refer back to your cue cards when you need
them.
Pay Attention to your Physiology
If you’re unaware of it, your body language will give
your audience constant, subtle clues about your inner state. If you’re nervous, or if you don’t believe
in what you’re saying, the audience can soon know.
Pay attention to your body language: stand up
straight; take deep breaths, look people in the eye,
and smile. Don’t lean on one leg or use gestures
that feel unnatural. You can check one of my previous articles on gestures that improve the delivery of
your messages or which gestures to avoid.
Many people prefer to speak behind a podium when
giving presentations. While podiums can be useful
for holding notes, they put a barrier between you
and the audience. They can also become a hiding
place from the dozens or hundreds of eyes that are
on you.
Instead of standing behind a podium, walk around
and use gestures to engage the audience. This
movement and energy will also come through in
your voice, making it more active and passionate.
Think Positively
Positive thinking can make a huge difference to
the success of your communication, because it
helps you feel more confident. Fear makes it all too
easy to slip into a cycle of negative self-talk, especially right before you speak, while self-sabotaging
thoughts such as “I’ll never be good at this!” or “I’m
going to fall flat on my face!” lower your confidence
and increase the chances that you won’t achieve
what you’re truly capable of.
Face your nerves
How often have you listened to or watched a speaker who really messed up? Chances are, the answer
is “not very often.”
When we have to speak in front of others, we can
imagine terrible things happening. We imagine forgetting every point we want to make, passing out
from our nervousness, or doing so horribly that we’ll
lose our job. But those things almost never actually
happen! We build them up in our minds and end up
being more nervous.
Many people cite public speaking as their biggest
fear, and a fear of failure is often the main reason.
Public speaking can lead your “fight or flight” response to kick in: adrenaline courses through your
bloodstream, your heart rate increases, you sweat,
and your breath becomes fast and shallow. Although these symptoms can be annoying by changing your mindset, you can use nervous energy to
your advantage.
First, make an effort to stop thinking about yourself, your nervousness, and your fear. Instead, focus on your audience: what you’re saying is “about
them.” Remember that you’re trying to help or educate them in some way, and your message is more
important than your fear. Concentrate on the audience’s wants and needs, instead of your own.
If time allows, use deep breathing exercises to slow
your heart rate and give your body the oxygen it
needs to perform. This is especially important right
before you speak. Take deep breaths from your
belly, hold each one for several seconds, and let it
out slowly.
Crowds are more intimidating than individuals, so
think of your speech as a conversation that you’re
having with one person. Although your audience
may be 100 people, focus on one friendly face at a
time, and talk to that person as if he or she is the
only one in the room.
Videotape your speeches
As you watch the video of the speech you delivered,
notice any verbal pauses, such as “ums”. Look at
your body language: are you swaying, leaning on
the podium, or leaning heavily on one leg? Are you
looking at the audience? Did you smile? Did you
speak clearly at all times?
Last, look at how you handled interruptions, such
as a sneeze or a question that you weren’t prepared
for. Does your face show surprise, hesitation, or
annoyance? If so, practice managing interruptions
like these smoothly, so that you’re even better next
time.
Conclusion
If you speak well in public, it can help you get a job
or promotion, raise awareness for your team or organization, and educate others. The more you push
yourself to speak in front of others, the better you’ll
become, and the more confidence you’ll have and
remember that studies have shown that “the human
brain starts working the moment you are born and
never stops until you stand up to speak in public!”
71
Business
Management by exception
By Demetris
Ergatoudes*
Management by exception
Management by exception is the practice of examining the financial and
operational results of a business, and
only bringing issues to the attention of
management, if results represent substantial difference from the budgeted
or expected amount. For example,
the company financial controller may
be required to notify management of
those expenses that are the greater of
€10.000 or 20% higher than expected.
Its purpose
The purpose of management by exception is to
only bother the management with the most important variances from the planned direction of results
of the business. Management will presumably
spend more time attending to and correcting these
large variances. The concept can be fine-tuned, so
that smaller variances are brought to the attention
of lower-level managers, while massive variance is
reported straight to senior management.
This method can also be used by governments,
which, instead of dealing with routine matters,
should focus on serious budget deviations and
take, in time, the necessary corrective actions.
Preparation
A manager, in order to be able to take the correct
decision, must have all the necessary information
regarding the subject for which he has to decide.
To this end he needs numerical data, which will be
processed into a form suitable for decision making,
i.e. the data are transformed into information, by
quantitative analysis. To accomplish this, a number
of steps are involved:
• the selection, collection and organizing of basic
data
• the summarizing of essential features and relationships between variables, and
• the determination of patterns of behaviour, outcomes or future tendencies.
72
nique. These are:
• It reduces the amount of financial and operational results that management must review, which is a
more efficient use of their time.
• The report writer linked to the accounting system
can be set to automatically print reports at stated
intervals that contain the predetermined exception
levels which is a minimally-invasive reporting approach.
• This method allows employees to follow their
own approaches to achieving the results mandated
in the company’s budget. Management will only
step in if exception conditions exist.
Disadvantages
There are several issues with the management by
exception concept, which are:
• This concept is based on the existence of a budget against which actual results are compared. If
the budget was not well formulated, there may be
a large number of variances, many of which are irrelevant, and which will waste the time of anyone
investigating them.
• The concept requires the use of financial analysts who prepare variance summaries and present
this information to management. Thus, an extra
layer of corporate overhead is required to make the
concept function properly.
• The concept is based on the command-and-control system, where conditions are monitored and
decisions made by a central group of senior managers. Instead there may be a decentralized organizational structure, where local managers could
monitor conditions on daily basis, and so there will
be no need for an exception reporting system.
• The concept assumes that only managers can
correct variances. If a business were instead structured so that front line employees could deal with
most variances as soon as they arise, there would
be little need for management by exception.
This places quantitative methods at the heart of
business, decision making, planning and control.
External information of quantified nature is also required by decision makers. This include:
• size of the market
• market share
• nature of customers
• supply of raw materials and compounds.`
Conclusion
All organizations can use management by exception. When routine work results in acceptable performance there is no need to bother the management. Properly trained subordinates should have
no problem delegating authority and allowing people to manage their own work, so that managers
can be able to devote their expertise and attention
to non-routine problems. Some managers have
trouble allowing their subordinates to make decisions because of control issues, but this psychological barrier will hinder their careers.
Advantages
There are several valid reasons for using the tech-
*Demetris Ergatoudes is a retired (2006) Senior Manager of Popular Bank and fellow to the Chartered Institute
of Bankers, London.
Commitment to Excellence
ADIT
The Advanced Diploma in International Taxation (ADIT),
awarded by the Chartered Institute of Taxation
This unique specialised Diploma is aimed at those pursuing a career in International Taxation in the
corporate area. Holders of the Diploma are entitled to use the designatory letters "ADIT" after their name.
Globaltraining offers tuition for:
● Paper 1: Principles of International Taxation
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● Paper 3: Transfer Pricing
For further information, please visit: www.globaltraining.org
or contact: [email protected] or +357 25383682
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www.globaltraining.org
Taxation
The moral aspect
of Tax:
Does Tax avoidance equal Tax Evasion
in turbulent economic times?
Tax was once more high on the agenda during the most recent G8 meeting that took
place earlier this month in N. Ireland under
the presidency of the United Kingdom.
By Costas Markides,
Board Member
KPMG
The reason Tax was (again) on the spotlight,
is closely related to the recent revelations
that surfaced in the global media on whether
large multinational corporations pay their
“fair” share of tax in the country in which
they do business. The issue of tax fairness
makes a lot of sense and it does actually
sound like a very reasonable and logical argument to the general public who also happens to be the people who ultimately decide
through their vote on whether a political person stays in office or not. It is therefore easy
to make the inference on why the level of
taxation actually paid by large multinational
corporations.
Multinational corporations are often in the
spotlight for their constant strives to minimize the amount of tax that is legally due in
various countries as a result of their cross
border business. In order to do that, corporations often engage in premeditated tax
planning. Minimization of the tax liability in a
legal way, was pre-crisis era the norm. After
all, paying more taxes than legally due does
not make you a patriot.
With the global economy in ruins however,
tax is now becoming a reputational issue.
As a result, giants like Apple, Google, Vodafone, Amazon and Starbucks, just to name
a few, have all received their fair (or unfair)
share of negative publicity in the last few
months. They have been wrongly accused
of using legal means to achieve an immoral
outcome (that of paying a lower amount of
tax than the amount of tax that would have
been due) had they not taken account of
the differences that arise in the tax and legal systems between countries, as the Irish
Prime Ministers Mr. Enda Kenny phrased it
in a politically correct way.
74
It is inferred from the above, that the issue
of “morality” inevitably also arises in the field
of Taxation. Talking about the “moral” tax
obligations of companies however will not
solve the issue. The primary responsibility
for adopting clear and concise rules within
a fair, leveled and well defined tax and legal
framework rests with the respective Governments and it is for the taxpayers to live
and abide by to those rules. Tax planning
which can lead to Tax savings (avoidance)
is by all means, within the letter of the law
but against its spirit, according to its critics.
Tax avoidance however should not be elevated and equaled to Tax evasion. Although
aggressive tax planning should be avoided
since it can be perceived as being on the
border of Tax evasion, the general idea is
that tax planning used prudently can be a
win-win situation for Governments, shareholders and taxpayers at the same time.
We have repeatedly heard the US president
declaring the war on Tax Havens (Cyprus
not being listed as such, for the sake of clarity) in an effort to curb and restrict instances
of Tax avoidance and even Tax evasion.
(The latter being illegal and condemned by
all) Such tough rhetoric however, often embraced by the Governments of the UK, Germany, France and others, can only have limited impact and be viewed as selective since,
as pointed out meaningfully by Mr. Adam
Bell, Chief Minister –Isle of Man, the first
place that the US must look is the tiny state
of Delaware, with a population of 900.000,
a minimal corporate franchise tax of some
$250 and home to more than 1,000,000
companies, with half of those featuring on
the Fortune 500.
Taxation
Shifting the balance from direct to indirect taxes:
perspectives and challenges
By Varnavas Nicolaou
Director
Indirect Tax Services
PwC Cyprus
76
The spread of Value Added Tax (VAT) or
Goods and Services Tax (GST) across the
world is continuing at a rapid pace. Their
design is constantly under review too for
jurisdictions already having them; fundamental reforms are being contemplated by
India and China, the latter moving swiftly to
the transition from business tax to full VAT.
Across the Pacific, the US is still considering VAT with no major changes expected
in the near future. Customs and excise duties and other levies, typically not identified
as taxes in the traditional sense and usually buried in cost of goods, are also gaining
profile, while the impact of environmental
taxes, albeit still not comparable to that of
more traditional taxes, is surely set to rise.
consumption and real estate taxes, would
improve incentives to work, save and invest.
It further emanated that, with globalisation
leading to increased mobility of capital and
income, VAT is neutral as to the locality of
economic activity and income whereas high
rates of corporate income tax discourage
investment and present an incentive to shift
income to lower tax jurisdictions. In addition, the increasing influence of multi-territory indirect tax systems triggers an even
stronger shift of the balance away from direct taxes. For instance, the application of
the EU VAT regime is a requirement for EU
membership, while joint VAT action is also
envisaged by the GCC and CIS states.
Snapshot of taxes in current
global landscape
The financial crisis has made countries
consider carefully the composition of their
tax revenues and assess the best way of
introducing austerity measures. The IMF,
the Organisation of Economic Cooperation
and Development (OECD) and the European Commission promote the shift from
direct to indirect taxes to help solve the crisis, by reducing costs on businesses to render them more competitive. Currently, VAT
in the OECD countries accounts for 20%
of total tax revenue, a 70% increase since
the mid 1980s, excise duties accounting
for 11%. As regards environmental taxes,
little has yet been raised in revenues. Overall, revenues from indirect taxes are now
very close to direct taxes such as personal
income tax (25%) and corporate income
tax (8%). Furthermore, the 155 or more
countries with a VAT system are already
being joined by others fairly committed to
introducing one (e.g. Malaysia) and actively
considering VAT plans (e.g. Gulf Cooperation Council states). These changes pose
particular challenges for traders operating
in those territories as well as for businesses
engaged in international transactions.
Focus on the EU: Need for ongoing redesign of the EU VAT regime
Necessary safeguards for business and tax
authorities should be enacted in a number
of critical areas to substantially reduce the
significant VAT gap within the EU, estimated at EUR 107bn annually. The tax authorities should also improve the cooperation
between them in:
• Transfer pricing and customs valuations
• Compliance and enforcement, including
information exchange
• Capacity building with focus on developing the right knowledge, skills and tools for
civil servants to administer viable tax systems
The OECD identified that strategies to combat VAT fraud must be aligned and countries should collaborate more in establishing best practices in VAT administration and
compliance. Looking ahead, the OECD International VAT/GST Guidelines are set to
deal with:
• Practical ways of ensuring VAT-neutrality
• Application of the destination principle on
B2B and B2C cross-border supplies of services and intangibles
• Anti-abuse provisions
• Mutual cooperation and dispute resolution
VAT is a growth-friendly tax
The OECD performed a series of studies
during the period 2006-2012 to examine
which economic policy reforms could lead
to growth. It transpired that policies shifting
the tax mix to less distorting taxes, such as
Pivotal challenges in the horizon for indirect taxes
The need for continuous redesign and finetuning of indirect tax regimes will undoubtedly give rise to a number of challenges for
businesses.
Environmental taxation is set to increase in incidence, scope and magnitude
The environmental tax base is expected to
broaden as governments seek new ways to raise
revenues and transition towards sustainable development while responding to climate change
and energy scarcity challenges. Environmental
tax rates could thus increase to levels that make
“business as usual” activities uneconomical and
instigate a drive for technological adaptation and
innovation. Such taxes can become a hidden cost
to businesses.
Transitioning to new VAT/GST regimes
Key players such as China, India and the Middle
East, are in the process of changing substantial
parts of their tax regimes towards a more VAT/
GST-focused approach. New transactions envisaged by businesses should better take into account such upcoming changes to avoid subsequent surprises. In addition, key changes in the
EU regime for B2C supplies of certain services
will take effect in 2015, while fundamental reform
is expected to also arrive, following the white paper on redesigning the system.
Customs and trade considerations in business
structure changes
Multinationals will likely be called to assess their
operations and priorities around the world in view
of the rapidly changing world economy. This might
mean a transactions restructuring or shift in economic activity towards new jurisdictions, impacting the customs and trade part of the business.
It would therefore be wise to have the answers
before embarking on restructuring journeys.
Tax authorities’ approach
In times of falling government revenues, tax authorities will look to ensure that all taxes due are
timely collected. The inherent complexity of application of indirect taxes, where minor differences
in the interpretation of transactions can lead to
widely different tax treatments and results, coupled with cumbersome administrative procedures
in place, give rise to substantial revenue risks and
high compliance costs for businesses.
Being innocently caught up in tax fraud
In order to minimise fraud revenue loss, tax authorities may impose blanket rules on legitimate
businesses, such as onerous reporting obligations
or joint and several liability. To avoid an increased
burden on legitimate traders, governments should
do a thorough impact assessment of such measures and consider changing their approach to
risk management (e.g. better screening of VAT
registration applications to understand who is trying to enter the VAT system) and fraud detection.
Cashflow impacts on business
The OECD advocates that indirect taxes should
be neutral with no cost to businesses. However,
in countries where the tendency is to manage
governmental cash by postponing refunds for valid deductions, the refund process for businesses
can be onerous, involving costly court action if
this is the only or speedier route to recovery of
taxes.
Poor quality of data processed by financial systems of businesses
Financial systems must reflect the latest legislative developments and accountants inputting the
data need to be appropriately trained and supervised as the capture of information at point of
sale must be absolutely correct. Businesses then
need that data to be processed for indirect tax
reporting in an efficient and effective manner.
Complexity versus compliance
Internationally, indirect tax rules are becoming
more complex and cumbersome. Businesses are
often penalised for errors due to submission of
inaccurate returns caused by lack of clarity in the
law and compliance process. Where a business
operates in multiple jurisdictions, all operating different place of supply determination rules, with
different tax rates, different numbers of payments
and different reporting enforcement arrangements, the level of misstatement risk run by the
organisation can be particularly high.
What does the future hold for indirect taxes?
The spread of indirect tax systems around the
world has continued, whether as new taxes or
as replacements of other narrower forms of consumption tax. In the 2013 Paying Taxes study,
undertaken by PwC and the World Bank, it was
identified that a consumption tax is currently in
place in 155 of the 184 (84%) countries surveyed. This number is set to rise further in the
future. At the same time, countries vary considerably in how much they see the potential of taxing
consumption, with implicit tax rates varying from
15% (Spain) to 31% (Denmark). One thing is,
nevertheless, clear for businesses: unless they
consider the future make-up of their tax bills,
they will not be geared up with the right systems
and resources to manage them effectively. This
might necessitate a fundamental rethinking of the
structure of their tax function and their broader
finance and procurement departments so as to
ensure they actually identify the tax costs which
need to be controlled. 
77
Taxation
OECD publishes sweeping Action Plan
on tax Base Erosion and Profit Shifting (BEPS)
On July 19, 2013 the Organisation for
Economic Co-operation and Development
(OECD) published an action plan (‘the
Plan’) that seeks to address the perceived
flaws in international tax rules and close tax
gaps. The Plan contains 15 separate action points or outputs.
By Joanne Theodorides
Senior Manager
Direct Tax Services
PwC Cyprus
The G20 has driven the BEPS project, and
many of its members’ tax revenue authorities have actively participated in the development of the Plan. The Plan was formally
submitted to the summit of the G20 leaders
in early September and has been the focus
of much media coverage.
The Plan calls for fundamental changes to
the current mechanisms and the adoption
of new consensus-based approaches, including anti-abuse provisions designed to
prevent and counter BEPS. These generally fall under the following three areas:
•New international standards to ensure the
coherence of corporate income taxation at
the international level
•A realignment of taxation and relevant
substance to restore the intended effects
and benefits of international standards
•Further transparency, certainty and predictability for businesses
The Plan takes the approach of building
on, rather than abandoning, longstanding
rules of international taxation. However, the
Plan recommends targeted, fundamental
changes to those rules.
A number of countries have been considering their own responses to BEPS. Any unilateral action makes the broad acceptance
of the Plan more uncertain but all the more
vital – as such unilateral action could clearly
result in double taxation.
According to the Plan, most of the actions
will take one to two (or more) years to complete. However, it may take considerably
longer to fully apply these changes in practice. There are indications that the BEPS
project and related developments already
are leading to a material shift in the behavior of tax authorities.
Governments, tax revenue authorities, and
78
business will all have a material role to play
over coming months if the proposed changes are to be implemented.
Taxpayers should monitor the progress of
the OECD workstreams. Taxpayers proactively should perform internal risk assessments of their existing and planned
structures, considering the increased focus
on ‘substance’ and the potential for more
transparency and public disclosure of their
tax return information and allocation of
profits around the world.
An overview of the Plan’s 15 separate action points or outputs is set out below.
1. Address the tax challenges of the digital economy The Plan calls for a review
of different business models and a better
understanding of value generation in the
digital sector. It also suggests that the tax
challenges raised by digital business may
be addressed more by an indirect tax response. Issues raised by digital business
include; the lack of tax nexus under current
rules; the attribution of value created from
the generation of marketable location relevant data; the characterization of income;
the application of related source rules; and
the effective collection of VAT/GST.
2. Neutralize the effects of hybrid mismatch arrangements The need for action on hybrids is illustrated by the use of
such instruments to achieve unintended
double non-taxation or long-term tax deferral (e.g., by generating deductions without
corresponding income inclusions) due to
mismatches in domestic laws. The expected outputs include changes to the OECD
Model Double Tax Treaty provisions to prevent undue benefits under treaties for such
hybrid arrangements and consideration of
changes to domestic laws, primarily in relation to deductibility.
3. Strengthen Controlled Foreign Company (CFC) rules The Plan notes that the
OECD has done no significant work in this
area and indicates that the OECD wishes to
see uniform CFC rules to counter BEPS in
a more comprehensive manner.
4. Limit tax base erosion via interest
deductions and other financial payments The Plan focuses on excessive tax deductible payments such as interest and other financial payments. The expected output is
recommendations for the design of rules to prevent BEPS
through the use of interest deductions and other financial
payments. A second output is the development of transfer
pricing guidance for the pricing of related party financial
transactions.
5. Counter harmful tax practices more effectively, taking into account transparency and substance Unlike the
Plan’s other actions, this action point concerns the actions
of governments, not corporations. The work is to develop
effective solutions towards countering harmful regimes
more effectively, accounting for factors such as transparency and substance. There are three expected outputs;
(i) a review of member country regimes, (ii) a strategy to
expand participation in this area to non-OECD members,
and (iii) revised criteria on harmful tax practices.
6. Prevent treaty abuse The Plan identifies a series of
measures to ensure that taxpayers cannot inappropriately
use bilateral treaties to generate double non-taxation for
an activity. The action is primarily to develop anti-abuse
clauses for use within treaties and anti-avoidance rules that
jurisdictions can implement via their domestic tax systems.
7. Prevent the artificial avoidance of Permanent Establishment (PE) status The Plan identifies two specific
areas of OECD concern related to the PE test. The first
concern is with commissionaire arrangements where the
Plan suggests there may be a shift of profit from one country to another, in circumstances where there is no substantive change in the functions performed in the first country.
The second concern is where Multi National Corporations
(MNCs) artificially fragment their operations among multiple group entities to qualify for the exceptions to PE status
for preparatory and auxiliary activities. The work on these
issues will also address the related profit attribution issues.
8. Assure that transfer pricing outcomes are in line
with value creation – intangibles The action point in this
area is to develop rules to prevent BEPS by moving intangibles amongst group members. The work will involve
adopting a broad and clearly delineated definition of intangibles; ensuring appropriate allocation of profits in accordance with value creation; developing Transfer Pricing (TP)
rules or special measures for transfers of hard-to-value intangibles; and updating the guidance on cost contribution
arrangements.
with value creation – risks and capital The action point
in this area is to develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group
members. The work will focus in particular on adopting TP
rules or special measures to ensure that inappropriate returns do not accrue to an entity solely because it has contractually assumed risks or has provided capital, implying a
clear ‘substance’ agenda. The rules to be developed also
will require alignment of returns with value creation
with value creation – other high-risk transactions The
action point in this area is to develop rules to prevent BEPS
by engaging in transactions that would not realistically occur between third parties. This will require clarification of
the circumstances in which transactions can be recharacterized. The Plan also requires clarification of TP methods, in particular profit splits in the context of global value
chains and, as with the prior two transfer pricing actions,
includes not only refining the TP rules but the possibility of
adopting “special measures.” The work also will aim to provide protection against common types of tax base-eroding
payments, such as management fees and head office expenses.
11. Establish methodologies to collect and analyze
data on BEPS and the actions to address it The Plan
notes the lack of hard evidence to quantify the amount of
corporate tax revenue that governments lose because of
BEPS and seeks to correct this and to enable analysis of
the implemented actions’ impact.
12. Require taxpayers to disclose their aggressive tax
planning arrangements Domestic ‘disclosure initiatives’
to require the reporting of arrangements largely set up to
deliver a ‘tax benefit’ (to be widely defined) will be encouraged. There will be a particular focus on international tax
structures and sharing such information between jurisdictions.
13. Re-examine transfer pricing documentation The
Plan proposes to reexamine TP documentation to ensure
transparency for tax administrations, bearing in mind the
costs for business. The rules to be developed will include
a requirement that MNCs provide all relevant governments
with needed information on their global allocation of the
income, economic activity, and taxes paid among countries
according to a common template.
14. Make dispute resolution mechanisms more effective The action is to agree on ways to resolve disputes
where mutual agreement procedure (based on the OECD
Model Double Tax Treaty) does not work or is not applied,
including the use of arbitration.
15. Develop a multilateral instrument This action point
focuses on the need for a legal basis for jurisdictions to
implement many of the Plan’s other action points. The ability to develop an instrument that overrides existing treaties
or alters a number of treaties at once would make it easier
for jurisdictions to implement the necessary changes. 
79
Internal Audit
Internal Audit in the Public Sector
By Andreas
M. Lambrianou
Commissioner of Internal
Audit of the Republic of
Cyprus
Today, organizations in both the private
and the public sector operate in an environment that involves risks of every form
capable of preventing an organization
achieve its objectives and for which an
organization’s Management is required
to take appropriate action. According
to modern methodologies and prevailing
notions of governance, a rationally organized, reliable and efficient management and control system implies the existence of three distinct levels of control
namely the internal control procedures
(internal controls), the internal audit and
the external audit.
The first level of controls includes all
internal control procedures that Management, in the case of Public Service e.g. a Ministry /
Department / Service, has designed and implemented in
ensuring that its day-to-day operations are conducted in
an orderly and efficient manner. Management is therefore solely responsible for the design and implementation
of control procedures they believe are most appropriate
in preventing and detecting errors which include, for example, the checking of an invoice before executing the
respective payment. It is worth noting that in the Annual
Reports of the Auditor General of the Republic one often
encounters findings relating to significant shortcomings
and weaknesses of such control procedures since they
either do not adequately cover all risks, the control procedures are no longer appropriate because they do not
serve their primary purpose, or that they no longer function the way they were indented to. The Department of
Control at the Ministry of Communications and Works is
an example of such an internal control procedure existing
in the Public Sector.
The internal audit as a second level of control is an independent, objective, assurance and consulting activity designed to add value and improve an organization’s
operations. Generally, internal audit helps an organization accomplish its objectives by bringing a systematic,
disciplined approach to evaluate and improve the effectiveness of risk management, control and governance
processes. Internal audit is conducted through a professional approach aiming at evaluating the control environment of an organization and the risks it faces which may
dissuade it from achieving its objectives. This evaluation is an ongoing procedure aiming towards strengthening the control environment, the various procedures and
the avoidance of errors and inefficient practices. Internal
audit has therefore not only become an integral part but
is considered as the cornerstone and backbone of a correctly structured and coherent management and control
system and in essence acts as a “safety net” for ensuring
that the organization complies with Laws, Regulations and
best practices. Furthermore, in individual cases where internal audit units exist within an organization, the internal
audit cooperates with them and evaluates the procedures
and methodology they use and makes recommendations
to improve the way they work.
The external audit as a third level of control conducted
by the Auditor General, is extended beyond the financial
audit which verifies the accuracy of the receipts and payments, and covers the issue of conformity with the Law,
that is whether the receipts and payments are made ac-
80
cording to the Laws and Regulations and the Budget
which is approved by the House of Representatives. It
also examines the efficiency and effectiveness of the administration of the auditees. In contrast to the internal audit, the Auditor General submits annually a Report to the
President of the Republic, who lays it before the House
of Representatives. Both the internal and external audits
therefore contribute to the good governance of an organization promoting compliance with legality while improving transparency, accountability and the functioning of the
management and control processes.
The Republic of Cyprus recognizing the necessity for the
modernization of the Public Sector and taking into consideration the competitive environment of the European
Union and the new requirements imposed by the rules
of good governance, established the independent Internal
Audit Service as the central Internal Audit Authority for
the Public Sector, with the Internal Audit Law of 2003.
The Service acts as the central authority for internal audit
in the Public Sector and has in recent years successfully
performed audits in various Ministries / Departments /
Services of the Public Service which have resulted in a
series of constructive recommendations to the respective
stakeholders for the implementation of appropriate procedures for the strengthening of the management and
control systems. To this effect, the Internal Audit Service
has achieved significant innovations such as the conducting of “Horizontal Audits”, i.e. audits covering horizontal
issues which relate to the functions of a number of government Services or even the entire Public Service and
the conducting of specialized Information Technology and
computer security audits aimed at strengthening and improving the security of information systems.
Upon recognizing the need to strengthen its overall efforts
towards the provision of high quality internal audit services
to the Public Sector, the Internal Audit Service proceeded
to modernize its strategic planning during 2011 and 2012,
via the creation on a pilot basis, of two decentralized internal audit units in the Ministries of Education and Culture
and Energy, Trade, Industry and Tourism. The implementation of this pilot program was extremely successful as
it yielded significant and practical benefits to both Directorates General of the above mentioned Ministries. This
program is the basis for assessing the future creation of
separate internal audit units in each Ministry under the
central independent Internal Audit Service, which will be
coordinating and directing the various internal audit units
on matters such as standards, methodology and best
practices.
The difficult economic conditions that we are facing nowadays render the Internal Audit Service of the Republic
a very valuable and precious tool in the hands of each
audited organisation as well as the Public Service in its
entirety. Through the independent, objective and consulting activity that the Service provides, it strengthens the
management and control systems and improves the risk
management and governance processes of audited organisations, so that they can achieve their objectives with
economy, efficiency and effectiveness. Especially in times
of economic crisis, internal audit adds value to the Public
Service through its suggestions for the suitable redesign
of procedures and mechanisms so that less resources
- human and capital - are required in achieving the set
objectives while contributing to the overall efforts for the
restructuring and modernization of the Public Service.
Fraud
Urgent need for electorate
accountability and transparency
Part B
By Maria KrambiaKapardis *
In the first part of the article issued in the
June issue of Accountancy a number of
suggested measures addressed electorate
accountability and political corruption. In
part B of this articles a number of suggestions are made for improved transparency
and accountability in the fields of : (a) institutional setting, law enforcement and judiciary, (b) public administration, and (c) state
- controlled entities.
The Judiciary in Cyprus is held in high esteem by the general public as they are generally considered incorruptible. However,
they are grossly under-staffed and under
resourced.
A Coordinating Body Against Corruption
was set up a decade ago under the chairmanship of the Attorney General. This body
meets on an ad hoc basis. It is suggested
that it meets on a regular basis and has a
strategic action plan.
The Police Force have implemented a number of improvements in the area of police
corruption. It is believed that what is needed,
for the time being, is for the Police and the
Defense Force to raise their moral, be paid
higher salaries and have improved working
conditions, otherwise, there is a risk they will
attempt to raise their income by accepting
bribes. It is suggested, if members of the
police force wish to have a second job due
to their low pay, then they should disclose
the source and the income received to the
Police Chief, so as to prevent conflict of interest and to ensure no undue influence.
There is currently no institutional body in
Cyprus dealing solely with corruption detection, investigation, prosecution and
prevention. There is no hotline available for corruption victims to raise
the alarm. Thus, there is an urgent
need for the development of an
Independent Commission Against
Corruption. This body ought to have
investigative authorities and have its
own budget. It should not be just a
watchdog but a blood hound with full investigative powers and the means to pro-
82
ceed to prosecution of offenders. The various investigative committees appointed in
the past, or suggested by various politicians
as the solution to the problem will prove
once again to be unsuccessful and will not
combat corruption and mismanagement,
nor will such committees be in a position to
punish the offenders.
It is also believed that an Anti-Corruption
Commissioner should be appointed so as to
regulate all policies and procedures carried
out, implement a National Strategic AntiCorruption Action Plan and ensure all anticorruption regulations are enforced.
Finally, as recommended some years ago
by the EU Commission and applauded by
TI-CYPRUS in 2011, a Whistleblowing
Protection Legislation ought to be enacted in order to protect both public and
private sector employees who wish to blow
the whistle on a corrupt or illegal act.
Once the “tone at the top” is set by the
President, Ministers and MPs, then the public servants will follow and comply with the
newly established norm of values, attitudes
and behaviour.
TI-Cyprus recommends the following actions as far as the public sector:
1.Whilst TI-C welcomes the implementation of a Code of Conduct for public servants this is not sufficient unless there is:
(a) an Ethics Officer to address issues and
complains as they surface, (b) a Disciplinary
Committee to investigate the formal complaints and take action and (c) formal training for all the public servants to be better
acquainted with the Code.
2.There is currently no cooperation between government bodies or institutions.
This was evident after the Mari explosion.
This is also re-enforced by the fact that
the Auditor General’s Audit Report repeats
the same identified weaknesses year after
year, and officials do not implement any improvements suggested. TI- Cyprus, therefore, suggests that a coordinating body
(perhaps the Ministerial General Directors)
should be established and it ought to
meet monthly so as to ensure that all issues
are addressed within a reasonable time and where there is
a need, it will coordinate actions with various ministries.
3.As far as the Accountability of Public Spending is
concerned it is suggested that a holistic risk management
approach is used by the National Audit Office and the Internal Audit Department so as to ensure corruption, inherent and operational risks are identified and ratified. If the
NAO does not have the resources perhaps they can subcontract some of their work.
4.Integrity training should be offered to all public servants
irrespective of rank. Seminars on the Code of Conduct as
well as how to resolve ethical dilemmas should be made
compulsory irrespective of rank.
5.TI-Cyprus believes that public servants ought to be undergoing a three dimension staff evaluation (subordinates to review supervisors, supervisors to review subordinates, and customers/ suppliers/ stakeholders to review
public servants they come in contact with) on an annual
basis. The public servants’ pay raise, promotion or permanency should be subject to the evaluation assessment.
Should the State not have the resources or know- how
to undertake staff evaluations then the process should be
subcontracted to a private company.
6.TI-Cyprus suggests that public servants should be held
financially and personally liable if they fail to take reasonable care and skill in carrying out their duties, and as a
result they cause financial hardship to the State.
TI-Cyprus believes that the privatization of State- Controlled Entities will raise corruption risks. This was the case
in many other EU countries, why should Cyprus be the
exception. The risk is highly dependent on the following
conditions:
• The method and procedures of privatization chosen;
• The current political situation and the capability of governing the country effectively;
• The levels of autonomy of the private sector and its independence from politics;
• The legal and institutional framework; and
• Access to information. Media and civil society ought
to be very careful on how they pass on information and
knowledge about privatizations as it is a subject that is not
easily understood by the average citizen.
As a result, the following measures are suggested:
1.A regulatory board ought to be set up so as to monitor
and supervise the process of privatization.
2.Strengthen the supervisory and regulatory institutions’
capacities and resources.
3.Establish a list with qualified specialists that are able to
evaluate privatization proposals.
4.Create a database regarding all aspects of the privatization process that is accessible by the public in order to
increase transparency.
The appointment to Board of Directors of State- Controlled
Entities should be based on merit rather than on one’s political beliefs. The qualifications required by the specific
Board or Committee ought to be firstly decided and then
there ought to be a public call of who is willing to put his/
her name up for nomination. The process should be reviewed by the internal auditor and the appointment ought
to be made by the Parliament.
As far as governing issues of the Board, it is recommended
that the work of the Board of State- Owned/ State- Controlled- Entity/or Public- Appointed- Committee members
should be evaluated annually. The Board’s work, action
plan, remuneration, and attendance at Board meetings
should be communicated to Parliament, for improved governance. The Boards/Committee’s annual report ought to
be submitted to Parliament which will in turn, evaluate the
members’ performance and determine if he/she ought to
be reappointed.
In addition, the Code of Conduct for public servants ought
to be enforced on this sector as well and a Governance
Code ought to be implemented over and above the Code of
Conduct. Both the Code of Conduct and the Governance
Code ought to specifically make reference to corruption
risks and how the Board addresses such scenarios, as
well as ethical dilemmas. Finally, a strategic plan should
be published by each Board/Committee appointed by the
government. A report should be prepared at the completion of the term of the Board and/or Committee , for public
accountability.
Cypriots have a high educational and professional background, thousands have worked and lived overseas they
are capable individuals to know what needs to be done at
time of crisis. The State should capitalize on that and only
once decision makers place the wellbeing of the country
above their personal gain will this country go ahead after
all “the accomplice to the crime of corruption is frequently
our own indifference”.
Ombudsman. (2013) Οδηγός Συμπεριφοράς και Δεοντολογίας
Δημοσίων Υπαλλήλων. [Online] Available at: http://www.
ombudsman.gov.cy/Ombudsman/Ombudsman.nsf/All/0BE
F79D468209AF4C2257B7B004287DE/$file/οδηγός%20
συμπεριφοράς%20και%20δεοντολογίας.pdf?OpenElement [Accessed 10 July 2013]
* Maria Krambia-Kapardis is an Associate Professor of Accounting at Cyprus University of Technology, Chair of the Economic
Crime and Forensic Accounting Committee and Founding member and Chair of Transparency International Cyprus.
83
Fraud
Cyprus scores high in unprecedented audit
on the national aplication of anti-money
laundering legislation
By Philippos Aristotelous
Advocate/ Partner &
& Elena
Christodoulou,
Advocate
Andreas Neocleous
& CO LLC
In the course of negotiations with the Eurogroup early in 2013 a number of allegations
were made that the financial system in Cyprus was being abused for money laundering purposes as a consequence of allegedly
weak anti-money laundering (“AML”) procedures and laxity in their application. The
Cyprus authorities responded that the AML
regime is constantly reviewed and updated,
fully conforms with, and in certain aspects
exceeds, European and international best
practice. Cyprus’s AML legislation is in line
with the UN Convention (Vienna Convention), the Council of Europe Conventions on
Laundering, Search, Seizure and Confiscation of the Proceeds of Crime, the relevant
EU Directives, the EU Council Framework
Decisions on Freezing and Confiscation and
the Recommendations of the Financial Action Task Force (“FATF”) on money laundering and terrorist financing.
One example of the Cyprus legal framework
being more rigorous than the FATF standard
is in the identification of beneficial owners
and controllers of legal entities. Cyprus requires individuals who control 10% or more
of a legal entity or arrangement to be identified, rather than the 25% threshold specified in the FATF standard and the EU Third
Anti-Money Laundering Directive. Another
example is the power given in the law to the
Financial Intelligence Unit to issue instructions for a transaction to be suspended or
not executed – a feature that goes beyond
international standards.
In order to assess the adequacy of the Cyprus anti-money laundering regime Deloitte,
the international accounting firm, and the
Committee of Experts of the Council of Europe on the evaluation of AML Measures
and the Financing of Terrorism (Moneyval)
were commissioned to undertake an indepth appraisal of the effective implementation of customer due diligence (CDD) and
other AML measures. The nature and depth
of these assessments, which took place in
March 2013, are unique and unprecedented
anywhere in the world.
High level findings were extracted not only
at the level of compliance of Cyprus’s legal
84
framework but also at the level of procedures
which are being applied for CDD purposes
by the banks in Cyprus. The consistency of
statutory and regulatory requirements was
also assessed and evaluated. The assessments generally demonstrated “a solid level
of compliance” across the Cyprus banking
sector but some shortcomings were also
revealed. The complete reports have been
published on the website of the Cyprus Ministry of Finance.
Moneyval’s assessment
The Moneyval assessment team examined
the effectiveness of the banking system in
Cyprus and the effectiveness of CDD implementation by the banks. The key conclusions
and recommendations are summarised in
the following paragraphs.
Moneyval’s assessment confirms that a
significant part of the business conducted
by banks in Cyprus is international and frequently involves complex corporate structures, with different layers of entities sited in
two or more jurisdictions and cross-border
transactions involving counterparties worldwide. Nominee shareholders or directors,
client accounts and cash collateralised loans
are often a feature of this type of business.
Moneyval noted that even though tax incentives are important in attracting business to
Cyprus, few suspicious activity reports have
been submitted by the banks with regard to
tax-related money laundering. The assessors recommended that guidance should
be given on the identification of suspicious
activities related to domestic and foreign tax
evasion.
Business is also attracted by the fact that
the Cyprus legal system is based on English law and provides access to common law
wealth-protection structures such as trusts
which are unavailable elsewhere. Moneyval
estimated that 75% of the international
business in Cyprus is introduced by local
intermediaries. Many of these are members
of the legal or accounting professions, and
are regulated by their professional bodies
for anti-money laundering or anti-terrorist
financing purposes. There are also administrative service providers (ASPs) who until
very recently were unregulated. Moneyval regarded reliance on intermediaries, especially ASPs, as one of the
most important areas of vulnerability, and recommended
that “The supervisory regime for ASPs should be brought
into effect as quickly as possible and the AML/CFT supervision of lawyers and accountants in their role as business
introducers should be further strengthened.”
Overall, however, Moneyval noted that “In general, the
banks interviewed demonstrated high standards of knowledge and experience of AML/CFT issues, an intelligent
awareness of the reputational risks they face and a broad
commitment to implementing the customer due diligence
requirements set out in the law and in subsidiary regulations issued by the Central Bank of Cyprus. Implementation of CDD measures, as described by the banks, appeared strong under most headings.”
Deloitte’s assessment
Deloitte assessed Cyprus’s legal framework in the area of
compliance with CDD requirements and identified three areas as requiring attention, namely client acceptance, monitoring and reliance on third parties.
Nevertheless, Deloitte stressed that Cyprus’s CDD compliance requirements are more detailed and rigorous than in
many other jurisdictions, including other EU Member States
that have also implemented the Third Money Laundering
Directive. With only minor exceptions the files reviewed by
Deloitte consistently contained legible copies of passports,
utility bills and the like. While acknowledging that omissions and exceptions had been identified, Deloitte pointed
out that they were infrequent and that it is extremely difficult, if not impossible for any country to have a system
that conforms perfectly to international AML standards and
which is fully resistant to money laundering.
The leaked “troika” summary
In May 2013 a statement purporting to summarise Moneyval’s and Deloitte’s conclusions, compiled by the “troika”
of lenders, was leaked to the press. It was entirely negative, focusing exclusively on the deficiencies identified
without putting them into context or making any reference
to the positive features identified by Moneyval and Deloitte.
The reaction of the Central Bank of Cyprus
The Central Bank of Cyprus soon issued a detailed refutation of the leaked statement, saying that it made no attempt to provide a balanced summary of the Moneyval and
Deloitte reports but instead quoted from them selectively
in order to support the troika’s prejudices, and that inferences were made which were not included in the original
reports. It stressed that the statement omitted any mention
of the strengths of the AML framework and of the effective
implementation of CDD by banks in Cyprus.
The Central Bank of Cyprus concluded that the troika’s
failure to consult Deloitte or Moneyval and to present a
balanced view of their findings resulted in erroneous and
distorted conclusions in the media, especially the international press.
The position of the Cyprus authorities
Like the Central Bank of Cyprus, the Cyprus government
has argued that the allegations made against Cyprus were
politically motivated and based on unsubstantiated suspicions rather than objective data. It has pointed out that prior
to the 2013 review Moneyval had carried out four separate
routine assessments of Cyprus’s anti-money laundering
regime, all of which were favourable. The assessments
praised the Cyprus authorities for their proactive approach
and disclosed a very low level of suspicious activity or suspicious transactions, obviating the need for any follow-up
investigation. Furthermore, Cyprus has never appeared on
the FATF list of countries identified as having strategic deficiencies in their AML system.
In order to improve the effectiveness of anti-money laundering measures the Cyprus government believes that
more work is needed on an international level to harmonise different countries’ legislative and practical anti-money
laundering regimes and align them with international standards. At the international level there is a need for the implementation of the revised FATF recommendations, and
of the draft Fourth Directive in the EU. Moreover, increased
international cooperation, not only with the exchange of information but with the mutual recognition and enforcement
of court orders, freezing and confiscating of assets, is an
essential step towards a more effective global system.
Finally, the government has reaffirmed its commitment to
continue implementing all measures, legislative or practical, required to improve the effectiveness of measures to
prevent money laundering or terrorist financing, in accordance with the recommendations of the relevant international bodies. It has also made clear that Cyprus will implement measures surpassing international norms if this is
necessary and appropriate.
The government-owned Cyprus Investment Promotion
Agency (“CIPA”) has welcomed the publication of the
Moneyval and Deloitte reports, hoping that it would end
misinformed speculation, and noted that Moneyval’s report
acknowledged that its review had been so thorough that
“no country could emerge totally unscathed”
Conclusions
The summaries prepared by the troika on the one hand and
the Cyprus authorities on the other show a very different
interpretation of the same reports. While the Cyprus authorities understandably seek to present the country in the
best possible light they do nevertheless acknowledge the
deficiencies identified in the reports and express a commitment to deal with them. The troika summary makes no
attempt to present a balanced view, being merely a rehash
of the negative findings of the reports, many of which are
presented out of context. Publication of the reports will, at
least, enable anyone who is interested to decide for himor herself.
85
Fraud
Global Corruption Barometer:
The Cypriot Perspective
By Christina Neophytidou*
Every day, all over the world, ordinary people
bear the cost of corruption. Not only do people
pay the costs of corruption directly, but their
quality of life is also affected. When powerful groups buy influence over government
decisions or when public funds are diverted
into the coffers of the political elite, ordinary
people suffer; and as public trust plummets,
worldwide corruption rises. Transparency International said in a press release that there
exists “a crisis of trust in politics and real concern about the capacity of those institutions
responsible for bringing criminals to justice”1
and has warned Europe to address corruption
risks within the public sector as a means of
tackling the financial crisis.
Transparency International (TI), the world’s
foremost organization on fighting corruption,
is a global movement with more than 100 national chapters worldwide which aims to raise
awareness and establish methods of tackling
corruption and measuring its harmful effects.
TI visualizes a world where the government,
businesses, civil society and the daily lives
of people are free of corruption. Since public
views on corruption are of critical importance
as they offer significant insight into how corruption affects lives around the world, TI believes it is crucial to present the public’s views
on corruption – for it is they who suffer its direct and indirect consequences. At the same
time, Transprency International encourages
the public to play an active role in stopping
corruption and imporving governance by engaging in the fight against corruption.
Transparency International - Cyprus (TI-C),
Cyprus’ national chapter of the Berlin-based
anti-corruption watchdog, is a non-governmental, politically independent and non-forprofit organization which aims at combating
corruption. Among its main priorities, is to
raise awareness of the harmful effects of corruption and encourage people to join the fight
against corruption.
In the context of its activity, TI-C collaborated with 107 chapters to conduct the annual
report for the Global Corruption Barometer
(the Barometer). More specifically, the Barometer is a survey focusing on the public’s
perceptions and experiences of corruption in
the country in which they live, while also it examines the frequency of reports of bribery in
different sectors and institutions. It seeks to
measure the perception of corruption in each
country, which is nurtured by the lack of public
auditing, briberies, the funding of political parties and tax evasion, among other factors. Significantly, TI’s GCB also provides insights into
how willing and ready people are to act to stop
corruption. TI’s Global Corruption Barometer
has been conducted globally since 2003 and
now runs its 8th edition. It is the largest crosscountry survey to collect the general public’s
views on, and experiences of, corruption. The
2013 Global Corruption Barometer, reflects
the responses of 114 270 people surveyed in
107 countries, and offers the greatest country
coverage to date. TI’s Barometer differs from
the Corruption Perceptions Index as the latter
relies on the views of experts and reflects the
perception of informed observers on corruption within in the public sector and politics
The Global Corruption Barometer Survey in
Cyprus was administered from September
2012 until February of 2013 and had a sample
size of 570 respondents in all major towns of
Cyprus. The survey was conducted via online
interviews. All the age groups were represented in the study, population younger than
19 years old (24%), 20-64 years (63%), and
65+ (13%).
During the last two years, corruption numbers have increased, along with the number
of people whom now reveal distrust toward
their governments and law enforcement agencies. According to Reuters, before the 2008
financial meltdown, 32% of people world-wide
believed that their governments were effective
in tackling corruption. However, 5 years later,
figures have fallen to just 23%. The average
results across the European Union from the
20 countries surveyed found that 52% of
people believe that corruption increased in the
past two years and 36% perceived that the
situation stayed the same whilst 12% thought
that it had decreased. It appears that Cypriots
perceive a growing trend with regards to corruption as the GCB 2013 survey found that
71% of respondents believe that corruption
has increased over the past 2 years. In addition to that, a 79% of Cypriots believe that
corruption is a serious problem in Cyprus.
As a matter of fact, the majority of Cypriots
(68%) surveyed perceive that personal contacts within the public sector are very important to get things done, whereas a whopping
1 Transparency International Secretariat (9/7/2013), Bribe paying still very high worldwide but people ready to fight back, Available at: http://www.transparency.org/
news/pressrelease/bribe_paying_still_very_high_worldwide_but_people_ready_to_fight_back [Accessed 4/8/2013]
2 Transparency International (2013), GCB 2013 Key Findings, Available at: www.transparency.org.nz/index.php/.../185-gcb-2013-key-findings [Accessed 4/8/2013]
3 Transparency International (2013), Global Corruption Barometer: Report, Available at: http://www.transparency.org/gcb2013/report [Accessed 5/8/2013]
86
90% of the interviewees strongly believe that the Cypriot
government is run by a few big entities which are acting in
their own best interests. “When there is widespread belief
that corruption prevails and that the powerful in particular
are able to get away with it, people lose faith in those
entrusted with power”2 Transparency International said.
It is important to note that from the countries surveyed in
Western Europe, Cyprus scored the highest regarding the
influence of ‘Big Interests’.
When asked regarding the effectiveness of the government in fighting corruption, the vast majority of the Cypriot
interviewees (83%) believe that the government’s efforts
are ineffective.The majority of people around the globe do
believe that their government is ineffective at fighting corruption. In comparison to the other 22 countries surveyed
in Western Europe, the perception that the government is
ineffective in its efforts to fight corruption was the highest
in Cyprus.
Public institutions, which are essentially entrusted to protect people, indeed suffer the worst levels of bribery as
the Global Corruption Barometer reveals. On the global
scale, an estimated 31% of people who came into contact with the police report having paid a bribe. With regards to the extent of corruption in institutions, the Cypriot
interviewees felt that the following institutions are corrupt/extremely corrupt: political parties (91%), the parliament (76%), the police (76%), media (68%), public officials (59%), medical and health services (54%), military
(54%), religious bodies (44%), business (37%), judiciary
(38%), education system (27%) and NGO’s (20%). Key
findings of the Global survey indeed reveal that around
the world, political parties, which are supposed to be the
driving force of democracies, are perceived to be the
most corrupt institution with an average score of 3.8 out
of 5.“As political parties require money in order to run their
campaigns, one of the big corruption risks for political parties, is how they are funded”3 Transparency International
(2013:19) wrote in its Global report. Funding coming from
individuals and organizations entails big corruption risks
as it can have a large influence on the actions and decisions of those parties at a later stage. As a result, “Politicians themselves have much to do to regain trust”4 Transparency International said in a release. Reuters Online5
stated that the Barometer findings show a crisis of trust in
politics and real concern about the capacity of those institutions responsible for bringing criminals to justice.
The key findings from the 107 countries taking part in the
2013 Global Corruption Barometer suggest that bribery
is indeed widespread as more than one in four people
(27%) report having paid a bride in the last 12 months
when interacting with key public institutions and services.
Out of the 22 countries taking part in the GCB survey
from Western Europe, Cyprus ranked 6th with a 19% regarding the amount of paid briberies to service providers.
According to the respondents, the majority of bribes in
Cyprus were paid to medical and health services (14%)
and land services (13%). The most common reason to
justify the payment of bribes amongst the respondents
was to speed things up (60%) while a 32% stated that it
was the only way to obtain a service.
On the other hand, TI notes in its Global Corruption Barometer Report that two-thirds of those who were asked
to pay a bribe said they had refused. According to Huguette Labelle, chair of Transparency International, “Bribe
paying levels remain very high worldwide, but people
believe they have the power to stop corruption and the
number of those willing to combat the abuse of power,
secret dealings and bribery is significant”. She adds that
“governments need to make sure that there are strong, independent and well-resourced institutions to prevent and
redress corruption. Too many people are harmed when
these core institutions and basic services are the word
about undermined by the scourge of corruption.”6
Respondents were then asked about their willingness to
get involved in the fight against corruption. On a more
positive note, 74% of the Cypriot respondents said that
they believed that ordinary people can make a difference
in the fight against corruption. Nearly 9 in 10 surveyed say
they would act against corruption. The majority of people
from all over the world said that they would be willing
to speak up and report an incident of corruption. When
asked more directly regarding the different ways that they
could fight corruption, 96% stated that they would be willing to sign a petition asking the government to do more
to fight corruption, 84% are willing to spread the problem
of corruption through social media and 81% are willing to
take part in a peacefull protest against corruption. This
means that people are now more sensitive to the problem of corruption and cannot afford to brush this problem
aside anymore.
The majority of respondents (74%) believe that ordinary
people can make a difference in the fight against corruption . With regards to the willingness of reporting an
incident of corruption, 86% of the respondents stated that
they would. Of those respondents that would be willing
to report, 37% said that they would report the incident
to a general government hotline, 23% directly to the institution, 17% to an independent non-profit organization
and 18% to the media. The respondents that would not
report the incident, believed that it would make no difference (48%) and some of them even stated that they
would be afraid of the consequences (47%) have they
reported the incident. From all the countries surveyed at
an EU level, Cypriots were the people which stated to be
the most afraid of the consequences of reporting corruption. This last finding supports the suggestion made by
TI-Cyprus that a Whistleblowing Protection Legislation is
long overdue.
* Christina Neophytidou, Cyprus University of Technology,
and GCB research team member of Transparency International - Cyprus
5 Kirschbaum, E., (2013), Crisis of confidence in government handling of corruption, survey shows, Reuters Online, Available at: http://in.reuters.com/article/2013/07/09/corruption-transparency-media-idINDEE96803020130709 [Accessed 5/8/2013]
87
Fraud
Fraud is increasing: A cause of concern
Two of the leading professional services
and audit firms in the world, KPMG and
Ernst & Young (‘EY’) have recently conducted two very interesting studies with
respect to fraud.
By Nicolas Pavlou*
The EY survey focused primarily on how
fraud is perceived and tackled within a
business and the KPMG fraud barometer
focused on the identification of common
fraud patterns with emphasis on the UK
market.
Even though the surveys were conducted
separately and on varying dimensions of
fraud, there are some interesting and common findings which provide a very helpful
insight into the fraud spectrum given the
current market conditions and how businesses and the people that comprise them
are affected. A summary of the two fraud
surveys is provided below as well as links to
the full reports.
& Antonis Bargilly*
The EY 2013 FRAUD SURVEY – Navigating today’s complex business
risks
The Europe, Middle East, India and Africa
Fraud Survey conducted by Ernst & Young
in November and December 2012, reveals
that companies may be resorting to unethical practices in response to challenging
market conditions. The survey offers a detailed understanding of how fraud and corruption is perceived in developed and rapidgrowth markets.
The level of pressure on today’s business
88
is beyond doubt. There is instability across
many markets, sluggish or minimal growth
in others and an aggressive enforcement
environment around the world.
The survey asked over 3,000 board members, executives, managers and their teams
across 36 countries about the nature of this
pressure. The results make for uncomfortable reading.
The resulting report discusses three clear
messages that are delivered through the
survey:
• Feeling the pressure.
Executives and their teams are under increased personal pressure to stimulate
growth and profit in extremely challenging
conditions.
• Unethical conduct (including fraud,
bribery and corruption in response to
this pressure) is not just a hypothetical
risk.
One in five respondents have seen financial
manipulation occurring in their companies.
Fifty-seven percent believe that bribery and
corruption are widespread in their countries.
• Compliance programs work, but not
well enough.
Companies that do not keep asking the
right questions and demanding answers
are exposing themselves to significant risk.
The survey found that businesses that manage the risk of fraud, bribery and corruption
most effectively share some interesting and
common features:
• They own the problem. Boards and senior management acknowledge that the risk is real for them
and their business.
• They deal with the issues. Teams across businesses, functions, geographies and grades understand that the risks are relevant to them and their
work.
• They communicate the risks and the benefits.
The costs of fraud, bribery and corruption are understood at an individual level. Behavior is not only limited by controls, but is driven by a common culture.
• They focus effort. Squeezing efficiencies out of
shrinking resources is a necessity in today’s environment. Identifying specific risks and focusing resources on these is therefore increasingly important.
• They ask questions and demand answers.
Management is not afraid to ask difficult questions
or turn over stones, knowing that what is hidden
cannot be ignored.
The survey found that businesses that manage the risk of fraud, bribery and corruption
most effectively share some interesting and
common features
The KPMG Fraud Barometer
KPMG in the UK has issued the first of the two biannual fraud barometers for 2013. The bi-annual
fraud barometer – drawing on over 25 years worth
of data - is the longest running study of its kind in
the UK identifying fraud patterns. Its purpose is to
help industry to both remain alert to new threats and
respond appropriately and proactively to fraud risks.
Following the decline of 2012, fraud is once again on
the rise, with the most recent data highlighting the
supply chain as a particular target for professional
criminals. In line with overall national crime statistics,
the data shows that fraud is overwhelmingly committed by men, with 86% of frauds in 2013 committed
by men, and by people over 35 (responsible for 95%
of frauds in 2013).
The key findings of the Report indicate the following:
• Value of fraud up 38% to £516m for H1 2013,
compared with £374m for H1 2012, with average value of cases jumping from £2.8m to £3.5m
Fraud cases totaling over £0.5bn were recorded in
the first half of 2013, up over a quarter on the previous year, according to KPMG’s latest ‘Fraud barometer’, but a more sinister theme has played out
this year with professional criminals becoming the
biggest perpetrators – responsible for frauds totaling
some £290m, up from £110m in 2012.
• Supply chain fraud is a huge financial cost but
also causes real human damage Supply chain
frauds worth £61m were recorded; up from less than
£1m in 2012. In addition to financial cost, these can
cause human harm.
• Investor fraud almost quadrupled from £19m
to £74m Fraud committed against investors also
saw a huge increase in 2013, with frauds totaling
£74m coming to court.
Conclusion
The EY study shows that bribery and corruption issues around the globe continue to challenge even
the most robust compliance organizations. Across
jurisdictions, sectors and functions, individuals are
feeling increased and direct pressure.
The KPMG UK Barometer indicates that governments and financial institutions are really bearing the
brunt of the cost of fraud with £405m suffered in
2013 compared with £271m in 2012. One of the
main drivers for the losses to financial institutions
was loan and mortgage fraud, up from £59m in
2012 to £160m.
It is evident that, especially in times of economic
distress, fraud related activities are rising; forensic
accounting and fraud auditing disciplines are now
becoming more important and relevant than ever. 
The full EY survey can be found and downloaded at:
http://www.ey.com/GL/en/Services/Assurance/
Fraud-Investigation---Dispute-Services/2013EMEIA-Fraud-Survey---Navigating-todays-complexbusiness-risks
The full KPMG barometer can be found at:
http://www.kpmg.com/UK/en/IssuesAndInsights/
ArticlesPublications/Pages/fraud-barometer-2013.
aspx
“The views and opinions expressed herein are those of
the authors and do not necessarily represent the views
and opinions of KPMG International Cooperative (“KPMG
International”) or KPMG member firms or EYGM Limited
nor any other member of the global Ernst & Young organization.”
*Nicolas Pavlou, Member of the ECFA Committee of
ICPAC, Senior Manager, Assurance, Ernst & Young Cyprus Limited
*Antonis Bargilly, Member of the ECFA Committee of
ICPAC, Principal, Management Consulting, KPMG Limited
89
ΙΤ
Benefits of cloud computing
IBSAC Intelligent Business Solutions
Ltd is the first company in the island
that provides cloud solutions. Currently
we are a leader on Microsoft office365
installations in the island and we are
rapidly expanding our clientele. Microsoft Office365 is the cloud solution
of Microsoft and we are fully certified
to sell, install and maintain these services.
Cloud computing are services delivBy George
ered from third-party companies in the
Agathangelou*
Internet on pay-as-you-go schemes.
Hence, in the past people would run applications
on their local devices, cloud computing provides
the ability to run applications or services on a remote location. Some of the benefits of cloud computing are the following:
1.Flexibility: When a company needs more resources, cloud provides the ability to get these resources with a “click of a button” and without any
significant costs since there is no need for additional hardware or licenses.
2.Disaster recovery: Using cloud computing, there
is no need to have complex business continuity
plans and disaster recovery sites. Due to the size of
cloud computing providers, they have all the disaster recovery and business continuity plans so they
make sure that in case of a disaster, your business
will be “on-production” on a 24/7 basis.
3.Updates and upgrades: All of us know that updating or upgrading our servers is a very time consuming process and also it is not a trouble-free
task. Using cloud computing, you do not need to
worry for the new updates or even the upgrades of
versions of the software you are using since all the
testing and implementation of these tasks are carried out by the cloud provider without any additional
cost.
4.Pay what you use: One of the most important
benefits of cloud computing is that you pay for
what you use. There is no need for initial costs
since within a few minutes or hours a company can
purchase and start using the necessary services
from the cloud. On this case, you do not need to
purchase and maintain large IT systems in-house in
order to be able to expand. If you need more, you
buy more services “on-the-fly”.
5.Document control: When a company uses the
cloud for file storage, there is no need to send
emails to each other to review documents, spreadsheet, etc. You just locate the specific file in the
90
cloud, do the changes you need and save it. Automatically, a new version is created in case you
need to use the version without your changes and
also any person in the company can access it to
add his/her comments.
6.Collaboration: Using cloud computing, your organization is able to collaborate using instant messenger, video conferencing, teleconferencing and
also online meetings. For example, people from
different locations can have an online meeting with
a power point presentation.
7.Work from anywhere: With the cloud computing,
there is no need to be at the office to work. Your
laptop, mobile device, tablet or your home PC can
become your office. Since all your data is located
on a central location (in the cloud), you can access
them from anywhere. Do changes on a spreadsheet while you are in the bus and drop an email to
your colleague at the office to review it, or accept
your office telephone calls on your laptop or smartphone.
8.More secure: Even though many companies do
not trust the cloud, security is much higher in the
cloud than on equipment that is located at your office. This is a fact since cloud-computing providers
have specialized personnel that their job is only to
safeguard their clients data. Is it more safe to have
an IT person that is not specialized to IT security to
manage your in-house systems or is it more secure
to have 10-15 IT security specialist that the only
thing they are doing is to make sure that the cloud
environment is secure?
9.Competitiveness: Using the cloud, small and medium size businesses are able to have functionality
of large organizations at a fraction of cost. Instead
of installing and maintain IT systems in-house, you
can have the same or even more functionality with
a small monthly fee.
10. Reducing running expenses: Did you check
how much you pay per month or year for your servers or server? Very roughly, for a small tower server
you spend approximately 750 Euros per year on
running expenses such as power, air-conditioning,
antivirus software, backup, hardware failures and
maintenance. If you have several servers at your
company, do the math.
* George Agathangelou
Professional Services Director
BSc CIT, MSc CSN
MCTS, MCSA, CCSE, CITM, DCUCSS, RSA CCE
HP-ASE, HP-APS, HP-ASP, STS, VSP, VTSP
IBSAC Intelligent Business Solutions Ltd
To achieve greater heights,
choose your partners wisely.
Audit | Tax | Advisory
ΙΤ
The Excel Wizard
Question: Can we have multiple functions within an IF() function?
Wizard: The IF() function is a simple, yet
clever and interactive function which even
a novice user may find manageable. Particularly interesting are the cases where
we utilize multiple functions within a main
IF() function.
Take, for example, the case of a telecom
retailer wishing to identify the operating
systems used in smartphone purchases
and differentiate between, say, Android
and Windows Phone, in column G:
By Stratos
Panayides,
BA(Econ),
ACA – Training
Consultant at
AKTINA
In addition to the basic syntax of the IF() function, in this case you also need to know the following:
• How to use the COUNTA() function
• How nested IF() functions work
The entry in G2 reads:
=IF(COUNTA(B2:D2)>0;”Android”;IF(COUNTA(E2:F2)>0;”Windows Phone”))
COUNTA() is suitable for counting any type of non-empty cells (numerical or non-numerical). Having an IF() function within another is also permitted, up to the number of 64 such nested functions in recent Excel versions:
92
Real Estate
Selling your property today
By Antonis
Loizou
F.R.I.C.S.
Antonis Loizou
& Associates
Ltd – Real Estate
Valuers & Estate
Agents
94
During these difficult times that we are all
experiencing, there are numerous sellers
of real estate and very few buyers around.
For those individuals who wish to sell their
real estate/home, one should be better prepared than before, when buyers are knocking at one’s door. For those who wish to sell
their property, we have prepared a short list
of “things to do”, prior to launching the sale
which, we hope, might help to sell the property at a faster rate, or, at least, be better
than the competition.
• Prepare your building to be in a presentable state. This is especially so for older
properties, which might need repainting,
both internally and externally. First impressions are of a paramount importance.
• If your home/property has some sort of
problems, e.g. dampness, electrical, plumping problems, repair them ahead of time. It
will not be a miss if you call in a licensed
electrician to check the electrical installation
and a plumber to do the same. Get some
sort of a certificate that they have checked
the installation and it is O.K.
• If you have a garden, do it up, get rid of
the weeds and make sure that the garden is
well looked after. Dead trees etc should be
removed since it is better to have a garden
with no trees, than ageing/dead trees at the
time of inspection.
• Check that your fireplace works and the
central heating is working as well as your
A.C. units.
• If you have a pool, keep it sparkling clean
and be sure that the pool equipment is in
good working condition.
• If you have a building permit in hand, keep
a copy to hand out, or if you have a deed,
have a copy in hand.
• If your property is rather aged, get a civil
engineer’s report on its structural stability.
• If in communal projects, get your payments right in terms of the monthly maintenance cost/common charges.
• Be ready to answer on what the property
taxes and the Municipal ones are.
• Get a valuation report regarding the sales
price of your property. If you sell it for less,
it is a plus for the buyer.
• If no title you must explain to the potential buyer why you do not have the deed, but
make sure to inform him at what stage the
procedure is.
• If a resale with no title, discuss with the
developer/previous owner, whether he is
prepared to enter into a cancellation agreement (with you) and a new sales agreement
with the new buyer (you have the option to
have an assignment, but see our previous
report on the subject). Also if in mortgage,
to provide the new buyer with a mortgage release and more importantly if he is prepared
to offer a corporate guarantee for the new
buyer’s financing bank.
• If you have done some sort of extensions/
illegal modifications, he should be informed.
Honesty in such deals helps considerably, as
opposed for the new buyer to find out himself later or during the negotiations/investigation process, since he will not trust the
deal in any case (and sue you afterwards).
• Offer a reasonable excuse why you are
selling – e.g. because you will buy a bigger/
smaller property, going home, getting old to
look after the garden, children have grown up and wish to
live elsewhere etc etc.
• Do not appear to be a desperate seller – e.g. do not say
“we cannot afford it”, or “our business is bad”, or “the bank
mortgage installments have gone beyond our affordability”
etc etc. The buyer will then push you for bigger discounts.
• Be prepared psychologically that you will be asked for
a substantial discount. So you have to weigh the delay in
sale, as opposed to your own particular problem (e.g. Bank
pressure etc).
• If you place a for sale sign outside with your own tel.
no. etc, be prepared that you will have all sorts of irritating people calling in, (knocking on your door at all times)
even those who do not wish/interested to buy, but to prove
themselves important that “you need him”. If you do not
have the “stomach” for such behavior, use the sign of an
estate agent. So if you are asking say €300.000 and the
interested person has only €150.000 to invest, the estate
agent will save you from the trouble.
• Make sure that during the deal closure, that you have
paid the EAC/water/property and local taxes/telephone
etc. It is not the first time that a deal is closed and the
new buyer gets a bill from the authorities, which is your
responsibility. Make sure also that you are “clean” in terms
of common expenses charges (if any).
• If you use an agent, make sure that he is a licensed one,
since, if he is not, you will not be allowed to deduct from
your Capital Gains tax the sale commission. Do not believe
that the illegal agents’ commission will be counted as an
advertising expense. It will not.
• Do your homework relating to your capital gains liability
beforehand. Some people change their mind when they
realize their tax liability. If you carried out alterations/improvements, make sure that you have the relevant receipts
(needed by the Capital Gains tax people).
• If you have tenants make sure that there are out. Statutory ones who are offered security of rent and tenure and
as such getting them out, it is not an easy task affecting
demand, sales period and your property’s value.
• Decide whether you are selling your property with the
furniture or not and provide a price with and without the
furniture or, we suggest in the sales price have a value for
the house and value of furniture, since furniture and equipment are tax exempt, say the house is sold for €300.000
out of which €30.000 furniture and equipment.
• Avoid by all means gazumping even if it is at your loss.
Another buyer may not be in the horizon, let alone the
agent’s right to sue you from a lost commission and placing a stop sale order for your unit.
• If present with the buyer at inspection, try to bring out
the good points of your property – e.g. the views, quiet,
family neighborhood, proximity to shops and restaurants,
accessibility and offer some sort of advice why your property is of a good price since others are selling much more
(your agent should do it, but make sure that he knows).
• Avoid wine and dine yourself with the prospective purchaser. It shows signs of a weakness. Let the agent do it.
• Avoid lying and prefer to say “I do not know”. If you lie
and you are found out, the deal is lost. Prefer to say “I will
check this and come back to you”.
• If you have a mortgage which you can pass on to the
buyer, this is an asset but agree beforehand with your
Bank.
• Do not try to impress a potential buyer how many Russians or British etc live in your complex, stress more how
many locals live in the project area. The feeling is that
“locals know better” and of course no British buyer does
not want to live in another “little” England or amongst other
Russians (if a Russian is your client) for many reasons.
• Try to behave in a calm way and not be overbearing to
the buyer and help out where it is needed and do not appear to be eager to sell your property at whatever price.
Buyers sense this, we can assure you. Avoid calling the
buyer every other day.
• If you opt for an agent, use a well known name and you
can say to the buyer that if my X agent is acting on my
behalf for Y price, it means something. Cowboys estate
agents will say to would be buyers all sort of stories to get
a deal, but then you might be in trouble with a law suit for
misrepresentation by your agent.
• If wife/husband/children, do not want to sell for their
own reasons, try to get them out of the way during inspection. There is nothing more disheartening for a new buyer
to feel that he is causing a family problem.
• Under the table payments should be avoided, since, the
illegality apart, the new buyer will have to meet a problem
later on. It happens however, but as long as you know
the score beforehand. A new buyer will look upon this as
suspect of fraud, but, then, it helps him also. So explain
the plusses and minuses for doing this, if you so want.
• Some agents, in order to get your listing, will quote a
sales price much higher than the market value and if you
decide to give them exclusivity, say, for 6 months, you are
to lose. If you have a “correct” agent follow his advice and
decide whether you want to sell at this price of not. Do not
get carried away by a high price with no commitment by
the agent in the event of exclusive appointment.
• Do not try to pull a fast one on an agent – e.g. the agent
introduces to you a buyer and you conclude the deal without the agent knowing. The agent has the right to block
the sale and sue you for damages, leaving the buyer cold
with a deal and you with a blocked property.
• Etc etc
The list is endless but we hope we have indicated to you
how one should manage a sale, in the hope that this will
help conclude a faster/better deal.
95
Real Estate
Property owners...The poor relatives
The big majority of property owners in Cyprus belong to the middle class.
Civil servants, bank employees, those in
the semi-governmental sector and mid-size
businesses make up most of the property
owners’ sector.
Major property owners are only a very small
percentage of the population.
By George Mouskides
General Manager, FOX
Smart Estate Agency
Licensed Estate Agent,
US Certified Public
Accountant
In spite of all these facts the state, unfortunately, is placing everyone, the mega rich
and the middle class, in the same bucket.
Had the government wanted to go after the
major players they would have taken into account someone’s overall wealth, (bank deposits, stocks and bonds, immovable property, vehicles, boats, etc), while at the same
time also factoring into the equation someone’s obligations and liabilities. This should
be the starting point for imposing taxation.
Instead of following this practice the state
agreed with the Troika to impose taxes in
the region of €104 million on property ownership.
Which are the various taxes a
property owner has to pay?
• Income tax and a defense levy on collected rents
• Municipal taxes as well as Sewerage
charge for the property
• Whenever a property is sold a 20% capi-
96
tal tax on profits is imposed
• If someone buys a property, a transfer fee
of max. 8% on the price is paid and if the
sale is of a newly-built building Value Added
Tax is imposed.
It is abundantly clear by now that buying or
selling real estate in Cyprus is highly overtaxed, (one of the steepest in the EU).
The property tax had been relatively low up
to now and so shaped to affect only about
11,000 owners. This figure is now bound to
increase and affect the vast majority of property owners.
Do we honestly want Cypriot as well as foreign investors to put their hard-earned cash
in the real estate sector? If the answer is yes,
the segmented and erratic approach of taxation is not the path to take. We should rather
devise a just and simple taxation framework,
attractive to real estate investors. This is a
time for incentives, not new taxes.
In today’s market rent prices are taking a
dive, their collection becoming increasingly
difficult and taxes and levies are multiplying.
This is a time when property owners are
watching their properties’ value diminish
daily and their selves becoming the poor relatives of Cypriot society. We hope the government will make a serious and educated
assessment of all these factors and take the
proper actions.

AccountancyCyprus

Transcription

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