Cyprus is making a strong bid to become the main off-shore base for investment funds which target the Middle East. It is part of a strategy designed to make the island nation the financial and transport hub of the eastern Mediterranean. Josh Martin reports.

When a high-powered group of Cypriot businessmen and government officials hosted an investment conference in New York this past June, one of the more interesting documents they distributed was a guide for mutual funds interested in setting up shop.

The guide not only spelled out Cyprus’ new law governing offshore funds; it contained a full application so that interested parties could begin the approval process immediately.

The law — officially known as the International Collective Investment Schemes Law No. 47 (1)/99 — allows international mutual funds to draw on a full menu of benefits if they base themselves in Cyprus.

The advantages are tempting: Low taxes, safe environment, easy access to countries where the investments are made. And all this in a land where government keeps its distance; as one Cypriot accounting executive coyly put it: international financial services companies in Cyprus “are not over-regulated or unduly restricted...”

Under the previous legal regime, international mutual funds would only go through Cyprus in the form of “feeder” funds (subsidiaries of large money centre-based mutual funds). A number did so; over the years, the Central Bank approved 250 such funds.

But the Central Bank is now signalling they want more than just financial table scraps.

“Our objective is to upgrade the depth and breadth of the offshore financial sector,” says Andreas Philippou, chief senior manager of the Central Bank’s Banking Supervision and Regulation Division.

“Previously, mutual funds took advantage of low taxes through the feeder funds,” he adds. “Now we want the funds themselves to be domiciled in Cyprus.”

International fund managers have begun to respond: the Central Bank of Cyprus reports that the first mutual fund was approved in April. Since then, a dozen others have been given the go-ahead.

“It’s a very exciting development,” says a Cypriot banker. “It’s opening a lot of doors that weren’t open before, encouraging foreign financial institutions to use Cyprus as a regional base.”

That is precisely what the new law was meant to do. The aggressive push to attract mutual funds is part of a broad policy aimed at establishing Cyprus as the key financial and transport hub in the eastern Mediterranean. It complements similar earlier efforts to attract shippers, insurance companies and banks.

The mutual funds that sign on under the new law will help generate more white collar employment, and are expected to have a ripple effect on related economic sectors

If the Cypriots are successful, billions of dollars of mutual fund investments will be affected. The international funds being targeted routinely manage investments in high-risk areas, such as the Russian republics and the Levant, through offshore subsidiaries. Such regional funds, once based in Lebanon, were moved to London and elsewhere during that country’s civil war; few have gone back.

The Central Bank of Cyprus argues that the island nation is now precisely the kind of safe and stable haven from which those funds can be managed.

Cyprus is already the brass-plate capital of the Levant. Since 1975, more than 50,000 offshore companies have been registered in the island, including 2,400 investment companies and 11,800 shipping-related firms.

Numbers can deceive: Only a small number of those registered companies actually maintain fully fledged offices in Cyprus.

According to the Central Bank of Cyprus, there are now 34 offshore banks (and another four offshore bank rep offices), as well as 30 offshore insurance companies operating from the island nation.

Cypriot bankers and politicians doubt entry into the European Union, expected in 2003, will have any impact on these offshore activities.

“The Cyprus government isn’t worried,” says a Cypriot international banker. “Look at the EU agreements with Luxembourg and Iceland. In the case of Luxembourg, they were given a 25-year holiday from EU banking regulations. For Iceland, it was even better.”

The Central Bank’s Andreas Philippou agrees: “Entry into the EU will not affect the offshore status of the island for many years to come.”

The new international funds law must be viewed in the context of Cyprus’ pending entry into the EU. In the run-up to membership, Cyprus is determined to enter as a sophisticated, high income, ‘white collar’ economy. It is an irony that the island nation, which for most of the 20th century was viewed alternately as the poor cousin of Athens or Ankara, now enjoys a significantly higher standard of living than either of its would-be patron-states. Last year, per capita income in Cyprus was $14,000, while per capita income stood at only $11,000 in Greece, and $6,500 in Turkey.

This has been achieved by carefully developing a stable, service-intensive economy, under the firm but benevolent control of the central government.

Once EU membership is a reality, the government will be compelled to cede many of those controls, especially those over interest rates and currency

Once EU membership is a reality, the government will be compelled to cede many of those controls, especially those over interest rates and currency. So the push is on to make the Cypriot economy as strong as possible at the moment of membership, so it can withstand the challenges of competition within the EU.

For the most part, that membership is expected to be highly beneficial. But Cypriot business leaders expect challenges in key offshore sectors, especially insurance and finance. The bid to attract international mutual funds is designed to buttress and complement those two sectors.

“The law itself,” says one leading accountant, “is designed to balance the need for adequate investor protection against the necessary freedom to manage underlying investments.” It is also, he adds, meant to mark the country’s strongest bid to be a player in global finance: “Cyprus [under the new law] should become an important participant in the business of mutual funds and an attractive place for investors in the EU, Japan and the US.”

Under the new law, funds domiciled in Cyprus can take full advantage of the relatively low cost of doing business (less than half that prevailing in London, New York and continental market centres), as well as the country’s state-of-the-art communications infrastructure. They would also benefit from the low tax rates applied to offshore entities, enhanced by the country’s extensive network of double taxation treaties ( which, one official recently said, “the government wants to expand as fast as possible”).

Of course, international mutual funds can enjoy these benefits only if they set up in Cyprus, under conditions spelled out in the law: Accounting, maintenance of records and share registers must be done in Cyprus. Moreover, the funds can only be set up and operated by non-residents of Cyprus, and no Cyprus resident can own shares in them. For many funds, these should be easy conditions to meet.

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