Cyprus imposes capital controls

28 March 2013

Banks in Cyprus have reopened today but the government has imposed tight restrictions on outward money transfers.

The text of a decree setting out the capital controls was taped to the windows of bank branches when they opened at noon. They restrict cash withdrawals to EUR300 per day, travellers leaving Cyprus can carry away a maximum of EUR1,000 (though some sources say EUR3,000).

Cheques issued in Cyprus cannot be cashed but must be negotiated through a bank account. Cheques issued by a foreign bank can be cashed, though.

But more significant for foreign investors is the block on all private overseas bank transfers. Although businesses are permitted to make foreign transfers of less than EUR5,000, any larger commercial transfers must be approved by Cyprus' central bank. Approval will be withheld if the transfer threatens the source bank's liquidity position. Companies will be allowed to pay for imported goods only after they have provided documentary proof.

Decisions will be made, after much scrutiny, on payments above EUR200,000 and will be formulated on a case-by-case basis. Payroll payments and foreign transfers to cover overseas students' living expenses will be permitted if the payer can provide proof, and they are limited to EUR5,000 per quarter. Monthly credit and debit card bills of up to EUR5,000 can also be paid off in cash.

No withdrawals will be allowed from time deposits.

The restrictions apply to all currencies and all bank accounts, including the Cyprus operations of foreign banks. They are imposed under Section 5(1) of the Law Providing for the Imposition of Restrictions on Transactions under the Emergency of 2013, enacted by parliament last week. Contravention of the restrictions is a criminal offence punishable by a fine of up to twice the value of the offending transaction and by a five-year prison sentence.

The authorities insist that the emergency rules have only been imposed temporarily to prevent a bank run. The initial period is officially seven days, though two weeks is thought to be a more likely timescale. However, some economists point to similar ‘temporary’ controls imposed in Latin American countries that have lasted years.

The European Commission has approved the capital controls as permitted under EU law, as long as they are temporary, and are proportionate to the crisis.

‘The restrictions apply only to banking and monetary transactions involving the Cyprus banking system,’ commented the Cyprus law firm Andreas Neocleous. ‘They do not affect corporate or other structures which do not use the Cyprus banking system.’

The Cyprus crisis has brought private banks a surge in the number of high-net-worth clients looking to move money, said Venetia Lean of Luxembourg-based private bank Banque Havilland.

‘A large part of the Russian business world will now be under pressure to re-organise its affairs,’ said Philip Hanson, an Economist at Chatham House. ‘Payment flows will be impeded for some time and most observers think Cyprus will cease to function as an offshore financial centre,’ he added.

 

Sources

 

Reuters

Reuters (2)

Reuters (3)

Telegraph

Andreas Neocleous

Andreas Neocleous (2)

City AM

Forbes

 

 


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