Cyprus – Problem Plays

Last year Cyprus’ legal market appeared enviously impervious to the financial crisis. Twelve months later and the Mediterranean financial hub has been hit hard by heavy exposure to the Greek debt crisis and its successive write downs.

In scenes that have been played out repeatedly across Europe – and which are deeply reminiscent of the early stages of the banking collapse in low corporate tax rival Ireland – the island’s sovereign rating has been downgraded to junk status, amid fears that the Cypriot government will be forced to prop up its toxic debt-laden banks, curtailing its access to the international debt markets.

But Cyprus is not rolling over yet. Local lawyers are moving to take advantage of a significant increase in foreign investment work as Cyprus’ government takes measures to cut red tape, including pushing through new legislation to secure its future as a pre-eminent trusts centre. With emerging markets work and energy deals on the rise, including tenders for one of the largest gas finds in years underway, firms will have to be able to respond and adapt to this market flux, but can they?

Domestic doldrums

For Cyprus’ leading law firms, which typically maintain a balance between local and foreign work, the domestic market is currently characterised by a lack of liquidity. Local banks have found themselves in desperate financial straits. Their exposure to Greek debt accounts for roughly 165% of the island’s gross domestic product (GDP). All banking assets, including foreign assets, total 925% of GDP. This has led to banks effectively cutting off new funding to a large chunk of local law firms’ clients.

‘The banking sector fall has been felt really badly by everyone, there is no liquidity in the market and banks don’t extend loans to medium or small sized companies,’ comments George Pamboridis, founding partner of Pamboridis.

The island’s sovereign rating has been downgraded to junk status, amid fears that the Cypriot government will be forced to prop up its toxic debt-laden banks, curtailing its access to the international debt markets.

The lack of liquidity has caused a dip in local instructions for the local players. At Harris Kyriakides, head of corporate Michalis Kyriakides says: ‘The lack of liquidity caused many projects to be put on hold as well as reduced the number of commercial acquisitions on a local level.’

A further local partner added: ‘We need more clients; I told one of my partners the other day to go out and find more clients.’

Existing clients are proving slow or unable to pay their bills and exerting pressure on their legal advisers to lower fees. Christos Mavrellis, company and commercial head at Chrysses Demetriades & Co, notes: ‘What we have experienced is first of all a difficulty in collecting and a pressure to cut or reduce fees.’

Firms that have typically had relaxed payment terms with trusted clients are having to tighten up those arrangements, and one local partner comments: ‘I have a client who owes me money and I told him when you pay me I’ll work for you, and he’s shouting but it’s too bad.’

‘People are really beginning to feel the squeeze,’ adds Lellos P Demetriades Law Office intellectual property partner Achilleas Demetriades.

The conveyancing market has also been hard hit, with law firms reporting that the once steady flow of business has now dropped to almost nothing.

Alexandros Tsirides, litigation and company partner at COSTAS TSIRIDES & CO, says: ‘The local market is struggling and conveyancing is dramatically down both in terms of local purchases and foreign purchases.’

A recent phenomenon, however, is the flock of Middle Eastern high-net-worth individuals who have started buying properties in Cyprus as it entitles them to a temporary residence. This is attractive should they need to escape the turmoil in their home countries.

‘We have at least two clients who want to come here and start buying up properties, which allows the owner a temporary residence permit in case they need to come here in an emergency,’ says Demetriades.

Meanwhile, the shipping industry that put Cyprus on the map before it developed as a major financial centre is also depressed. At maritime and admiralty firm Haviaras & Philippou, senior partner Andreas Haviaras’ outlook isn’t positive: ‘Suffering is a mild word. Some years ago there were 450 to 500 maritime cases before the Supreme Court, now they don’t exceed 30 to 40 a year.’

Not only is the shipping industry suffering at the hands of global markets but it is losing out to less expensive competitors such as the Suez Canal. According to Haviaras, one of the major issues for Cyprus has been the ban by Turkey on ships that fly the Cypriot flag entering its ports, leading to many ships changing flag to jurisdictions such as Malta or Gibraltar.

‘I don’t think that many ship owners with operations in the Mediterranean would like to exclude Turkish ports from the places they like to visit,’ says Haviaras.

However, a new law that has introduced sales tax incentives of up to 80% off for yacht owners in order to attract more wealthy individuals is expected to be beneficial to Cyprus shipping lawyers. According to local firm Stelios Americanos & Co, the sale of a new yacht over 24 metres long with a value of €5.8m would have been taxed at 17% – a total of €986,000 – but under the new leasing scheme (subject to criteria) payable sales taxes will be just €256,360, a saving of €729,640.

While shipping litigation may be down, firms are enjoying the counter-cyclical boost of more mainstream litigation, as investors enter into disputes over payment or terms. Haviaras notes: ‘For the last seven months we have had a lot of incoming litigation from foreign investors who have interests in Cyprus companies and have internal conflicts.’

Elsewhere Michael Chambers & Co, which set up six months ago and is led by former in-house legal consultant Michael Chambers, focuses almost exclusively on international instructions. The firm is advising on the internationally high-profile case of Louise Monaghan, who last year famously rescued her six year-old daughter May Assad Monaghan from Syria after she was abducted from Cyprus by her Syrian ex-husband Mostafa Assad. May was born in Cyprus, where her parents met but later split. Her father abducted May using a cancelled passport and Mrs Monaghan is suing the Cyprus government for poor border crossing controls. Chambers, who is advising Monaghan, says: ‘Louise Monaghan took all the necessary measures to protect her child but because the Cyprus authority hasn’t got the right checks at border crossings her husband was able to take her child.’

The firm is often contacted by foreign clients looking to sue local companies or individuals, something Chambers puts down to its name. ‘Foreigners tend to trust the name more than a local firm with a local name,’ he observes. In its short space of existence, the firm has grown to four fee-earners and is recruiting, including looking for an English solicitor.

With the squeeze well and truly on, in many markets this might trigger a wave of consolidation as firms seek to create efficiencies of scale.

‘We are looking for an English solicitor to employ because of the large amount of foreign clients we’re handling at the moment – they trust English lawyers more than Cypriots and even though they can’t litigate in Cyprus it would be good to have them to meet with the clients,’ says Chambers.

A further firm that has grown in the last few months is 80 fee-earner corporate and tax firm Kinanis. Head of the accounting and tax practice Charalambos Meivatzis says: ‘We cannot say that we have had to take any drastic measures, quite the contrary, our practice continues to grow. There has been slight hiring in our firm.

‘Opportunities exist in most sectors and practice areas. For example, there has been an increase in corporate litigation as well as in corporate liquidation and dissolution.’

Roughly 80% of the work Kinanis advises on comes from international investors who are spotting opportunities due to the market conditions in Cyprus. Meivatzis adds: ‘Despite the current state of the market, cash-rich investors find this period very attractive for new acquisitions and this has created an increase in this area of service.’

However, at least two firms are currently reporting hiring freezes, with one local partner noting: ‘We need to cut costs and there are to be no increases in salaries or bonuses.’

Redundancies are uncommon in this market but rumours are beginning to circulate. ‘Law firms are making secretaries and lawyers redundant, it’s very uncommon but it’s a sign of how bad things are,’ says another local partner.

With the squeeze well and truly on, in many markets this might trigger a wave of consolidation as firms seek to create efficiencies of scale. However, in a market where a majority of even the largest firms are run by first and second generation name partners this is said to be less likely in Cyprus.

Andreas Neocleous, founding partner of Andreas Neocleous & Co, observes: ‘You [typically] inherit your law firm from your family in your name, so it’s difficult to merge. When you get some money or your own clients you open your own offices.’

Similarly, law firms can be expected to remain wedded to the local market, despite the fact that in one leading firm a team of lawyers focusing on international litigation annually generates the same or more fee income than three similarly manned teams focusing on the domestic market.

‘I believe in keeping a certain percentage of the business at a local level,’ says Haviaras.

George Pamboridis adds: ‘If you split your business between local and international clientele it’s very difficult for depression to hit both markets in parallel and now the local market is in recession we can rely on the international markets.’

However, at COSTAS TSIRIDES & CO, where 65% of instructions come from international markets, the ambition is to seek out more overseas work. Tsirides says: ‘Our aim is to look outwards to foreign investment and the international litigation.’

One local partner adds: ‘It is always better to have international business than local. It’s more stable and they respect the services industry more than the locals and it is not so difficult to explain the value.’

Bank Bailouts and the International Markets

In March, ratings agency Moody’s downgraded Cyprus’ sovereign rating to junk and gave the island a negative outlook, leaving the doors open to further downgrades. Moody’s added: ‘Overall, the fragile market confidence in Cyprus, which has already led to a loss of access to international debt markets, is likely to continue, with a high potential for further shocks to funding conditions for the sovereign and the domestic banks.’

Alecos Markides, senior partner at second tier dispute resolution and intellectual property firm Markides, Markides & Co, says: ‘Once an economy considered a risk-free investment destination within the European Union and eurozone, attracting flows of foreign direct investments (FDIs), Cyprus is today struggling to access the financial markets for financing its public deficit and is seeking cash injections from Russia and China.’

Moody’s downgraded Cyprus’ sovereign credit rating three times last year, with the latest downgrade following that of Standard & Poor’s in January, also to junk status.

Local lawyers have inevitably felt the impact of these successive downgrades and loss of confidence in the market. ‘The fact that the banks have come to the point of being downgraded repeatedly has had a negative impact on new business coming in, especially deposits with Cyprus banks,’ comments Mavrellis.

One partner adds: ‘A lot of people I know have taken their money from Cyprus banks and put it in Barclays.’

While new business coming in has been affected, a mass exodus of funds in Cypriot companies has yet to happen. Even client uncertainty has, for the time being at least, stabilised. ‘There was an initial anxiety among clients whether their investments were safe or not but now I feel they are relaxed and we don’t see any side effects,’ says Haviaras.

Local lawyers have inevitably felt the impact of these successive downgrades and loss of confidence in the market.

While the banking crisis has had a negative knock-on effect on local instructions, there are two exceptions. Chrysses Demetriades is currently bidding alongside a London firm to win an instruction advising on a confidential rights and bonds issue. Elsewhere, Andreas Neocleous & Co is acting for the trustees of Odella Resources, the biggest shareholder in the Bank of Cyprus, including taking on a heavily involved, behind-the-scenes role in negotiations to appoint a new governor and address corporate governance issues before injecting a further lifeline of capital. Odella Resources is owned by Russia’s Dmitry Rybolovlev, who last year sat at number 79 on Forbes’ list of the world’s billionaires. Rybolovlev is a key client of the firm.

As Cyprus’ banks struggle to meet EU recapitalisation targets, local lawyers are speculating what could happen next, with one local partner commenting: ‘They [the banks] are ripe for takeover.’ However a further partner says: ‘Who would take over a bank that is practically bankrupt? It’s not only the losses, it’s the E12bn to E15bn worth of loans in Greece.’

There is an underlying confidence within the legal community that Cyprus is not destined to experience turbulence on a par with Greece or Portugal.

‘The fact is that Cyprus is a rather small, flexible economy,’ comments Kyriakides. ‘The sound banking sector, the well-established tourism industry and the quality and reputation of the service sector in Cyprus have maintained an acceptable level of economic activity on the island.’

Most of Cyprus’ lawyers are confident that the country is not on the precipice of a banking collapse. Mavrellis says: ‘I believe the most crucial issue for Cyprus now is whether the banking sector will be able to come up with a solution to the capitalisation adequacy issue.

‘We hope the banks will manage without the state interfering but whatever happens lawyers will have work.’

Cooking on Gas

Aside from the fact that the island will take over the EU presidency in the second half of 2012 – and no-one can envisage the EU president being bankrupt – there is one very good reason why Cyprus’ legal market exudes a high degree of optimism and underlying confidence in the short-term future.

Last December, Texas-headquartered oil and gas exploration company Noble Energy announced the discovery of between five and eight trillion cubic feet of gas to the south of the island, enough to satisfy the energy needs of Cyprus for 180 years and transform the island into an energy supplier.

While there was only limited interest in the first round of tendering for licences to explore the area for oil and gas, the success of Noble Energy saw a second round of bidding, opened by the government in February, far more hotly contested. EU regulation dictates that once the government has officially opened the tendering process parties have three months to submit interests and, in order to stay in the running, must purchase published information at a cost of E1m. Eighty-one companies have expressed an interest in buying the information. George Pamboridis says: ‘This demonstrates that all those who have come forward are serious partners and not people trying to fish for information.’

Pamboridis, which counts Cyprus-based EDT Offshore among its oil and gas clients, has teamed up with DLA Piper’s energy practice in both London and the US on energy ventures in the region. The firms have agreed to collaborate unless prevented by conflicts. The benefits for Pamboridis are clear, that it has access to one of the largest firms in the world, including DLA’s clients, people, know how and provision of secondments. For DLA, it is being given exposure and introductions to Pamboridis’ extensive energy contacts in the region. George Pamboridis works closely with DLA London energy and infrastructure partner Charles Morrison and DLA is funding the secondment of one of Pamboridis’ 20 lawyers to its London team, as part of an on-going agreement. George Pamboridis says: ‘We have teamed up with DLA subject to conflicts on a case by case basis.’

The relationship is highly unusual. While other firms have good relationships with one firm, they don’t have exclusive agreements.

The discovery of gas, the prospect of discovering more, and what George Pamboridis describes as ‘very good indications’ that oil will also be discovered has drawn the attention of the international community.

Firms including Chrysses Demetriades, Andreas Neocleous & Co and Harris Kyriakides have a role advising energy companies involved in the second tendering process for the oil field, while Pamboridis looks set to advise two bidders. The firm is representing a Chinese consortium with an interest in upstream exploration and midstream processing of oil and gas, as well as an Indian consortium which is hoping to submit a bid for one or more plots in the Cyprus Exclusive Economic Zone via a joint venture with a Cypriot company.

‘It [the tender process] will be a political decision. There is a criteria but at the end of the day the government of Cyprus will spread the risk,’ says Neocleous.

Certainly, the hot contention by Turkey that plots 1, 3, 4 and 5 in the Exclusive Economic Zone fall within its territorial waters promises to make the process considerably more complex and is expected to deter larger oil and gas companies, particularly those who have continuing business in Turkey. One local partner comments: ‘The government is likely to award the plot to a company that has military backing.’

The development of the new gasfield is expected to throw up numerous mandates as Cyprus sets up from scratch the infrastructure needed to see it become a major gas supplier. Here too Pamboridis has an early role advising a consortium on the development of a E10bn liquefaction plant for gas to be exported. The firm is also acting for a separate local consortium on a bid for the pipeline to join the natural gas well to the onshore plants. Harris Kyriakides has also been approached on infrastructure deals.

The discovery of gas, the prospect of discovering more, and what George Pamboridis describes as ‘very good indications’ that oil will also be discovered has drawn the attention of the international community. In addition to visits from politicians from Russia, China, France, the US and the UK, Cyprus also enjoyed a historic first visit from German Chancellor Angela Merkel last year.

The discovery looks set to change the geopolitical climate of Cyprus, although it may not be the immediate panacea to the banking crisis that some expect. Neocleous says: ‘In the next eight to ten years Cyprus will be an energy centre.’

As Cyprus and Israel further strengthen their relations following the discovery of hydrocarbon deposits in their respective exclusive economic zones, it is looking promising that Cyprus will become the new energy gateway for Europe. During a visit by Israeli President Shimon Peres last autumn, the two countries signed four bilateral agreements on renewable energy and energy efficiency, industrial research and development, telecommunications and archaeology.

Electricity and renewable energy

It is impossible to look at Cyprus’ renewable energy market without first revisiting the events of last summer, when 98 containers of explosives stored on the Evangelos Florakis naval base in Mari, Larnaca, exploded, killing 13 people and severely damaging the island’s largest power station. The station was responsible for supplying 60% of Cyprus’ electricity and, as a result of the explosion, much of the island was without power and blackouts were ordered to conserve power.

Local lawyers are unanimously scathing in their criticism that the island’s worst peacetime military incident was caused because the government allowed these explosives to be stored near to a main power station. However, in their assessment of the knock-on effect on business, and in particular the renewable energy market, they are more divided.

George Pamboridis says: ‘You would be in the middle of a closing and Cyprus would drop off the radar, with no BlackBerry or e-mail [access]. You can’t work like that and we had to have a generator shipped over from England.’

Undoubtedly the immediate disruption to business was enormous, as the country was subjected to continual blackouts. Attention is now being directed towards rebuilding the power station. Demetriades says: ‘Prices of electricity went up and instead of the government focusing on tendering for renewable energy they are rebuilding the old power station.’

‘You would be in the middle of a closing and Cyprus would drop off the radar, with no BlackBerry or e-mail [access]. You can’t work like that and we had to have a generator shipped over from England.’ – George Pamboridis, founding partner, Pamboridis

However, for Haviaras & Philippou the number of renewable energy deals has increased incrementally, including currently advising on the development of a wind project in Cyprus and advising an undisclosed Cyprus company on a solar and wind energy project in Bulgaria.

According to Haviaras, the Mari explosion has provided a boost for renewable energy deals, as the licensing process has been made easier. ‘After [Mari] the licensing became easier so as to allow entrepreneurs to bring new energy to the country,’ says Haviaras.

Negotiations are taking place over further renewable energy projects within Cyprus and Haviaras said: ‘I expect in 2012 there will be quite a lot of announcements.’

The Mari incident has also spun out further instructions as the government attempts to compensate for the shortfall of electricity in the short term. Pamboridis is representing Florida-based company APR Energy on its bid to supply the government with additional power this coming summer. The government is being advised by its internal legal department. The company is on the government’s shortlist of tenders and is involved in the final stages of negotiation. George Pamboridis says: ‘On 1 July Cyprus takes over the presidency of the EU and the last thing you want during the summit of the foreign ministers is a power failure. I don’t think it would go down very well, especially if it is 45 degrees outside.’

Emerging markets

While the energy sector is a particular focus for emerging markets companies – George Pamboridis for one is advising both an Indian and a Chinese consortium on energy bids – elsewhere firms are reporting a significant uptick in interest and instructions.

Tsirides is advising on a number of deals originating from the Middle East in the health and IT sectors, including setting up a health service in the Middle East through Cyprus holding companies. A double taxation treaty with the UAE, which was ratified in September last year and will come into effect this June, will make it easier for Cyprus-based companies to do business in the Middle East, according to Tsirides.

An EU and competition firm, meanwhile, has advised on two tax structures for Indian companies looking to use Cyprus as a tax base between England and India.

According to Emily Yiolitis, managing partner of Harneys’ Cyprus office, Aristodemou Loizides Yiolitis, the emerging markets are increasingly attracted to Cyprus. The firm has almost no domestic work, and outside of its core Russian client base, it is looking to expand into new jurisdictions to the South, East and West.

‘We are looking to grow in jurisdictions like the US, South Africa (where Cyprus again has a very good double taxation treaty) and I’m just back from China. It’s an exciting time for Cyprus and there are lots of opportunities worldwide for more use of Cyprus as a back office for international transactions and investments into Europe,’ says Yiolitis.

In 2011 the firm set up two funds for Indian clients in Cyprus and has seen an increase in interest from Polish investors. ‘We are seeing Polish interest in funds and have done one IPO of a Cyprus company on the Warsaw Stock Exchange and are now looking to list a Polish company on the London Stock Exchange. There is a hub using Cyprus generally as a gateway for doing things in other jurisdictions as a special purpose vehicle,’ says Yiolitis.

‘For China it’s growing – I wouldn’t say it occupies more than 2-3% but it is growing and we have an office in Hong Kong as a stepping stone into China,’ she adds.

Even where there is no double taxation treaty in place, Cyprus is proving popular. Yiolitis says that because of the tax neutrality of Cyprus, even where it doesn’t have a double taxation treaty, it makes an effective gateway into and out of Europe.

‘We are looking to grow in jurisdictions like the US, South Africa (where Cyprus again has a very good double taxation treaty) and I’m just back from China. It’s an exciting time for Cyprus and there are lots of opportunities worldwide.’ – Emily Yiolitis, managing Partner, Harneys, Cyprus

The business community is still digesting the government’s announcement in March this year that a Chinese company, Far Eastern Phoenix, has expressed an interest in acquiring the old Larnaca airport to convert it into a major exhibition centre for Chinese businesses, at the same time multinational conglomerate Triple Five has expressed an interest in a series of major investments in the island.

Hermes Airports, the consortium in charge of operating and managing Larnaca International Airport, and Far Eastern Phoenix have signed an agreement providing a multimillion euro investment into the construction of exhibition showrooms and a logistical services centre at the old Larnaca airport building. Far Eastern Phoenix plans to develop a large commercial showroom for Chinese products and a logistics centre. The project will include exhibition areas and a conference centre. It is contemplated that the investment will accommodate around 3,000 companies. Expectations among the business community are that the project will set Cyprus firmly as a gateway for Chinese products to Europe, the Middle East and Africa, as businesses interested in Chinese products and business avoid the inconvenience of having to travel to China.

‘The investment is expected to rejuvenate the surrounding region and provide dozens of new workplaces for Cypriots and foreigners. The old Larnaca Airport premises will be leased for a concession period of not less than 19 years, although an extension of the lease may be possible upon approval by the Cyprus government,’ says Demetriades.

Local lawyers are inevitably alive to the opportunities. Tsirides says: ‘China is an area where Cyprus seems to be managing to attract potential investors. I plan to go out to China in May to introduce Cyprus and explain the advantages.’

Triple Five, meanwhile, is said to be looking at investing in the banking, energy and tourism sectors. The group’s activities include the global development, management and ownership of ventures in fields including shopping centres, tourism projects, municipal planning and development, and oil and gas projects. According to its own literature the group also owns and operates over 1,000 producing wells.

The business community is sitting up and taking note, one partner at a local firm comments: ‘We would definitely hope to have a role.’

But not all are optimistic that the investment will come through. Tsirides enters a cautionary note: ‘There was a lot of talk with Qatar two years ago and nothing happened.’

Russian Politics

When it comes to business with Russia, other countries may be chasing Russian business but Cyprus’ position as its primary international partner appears assured.

The Protocol to the 1998 Double Tax Agreement between Cyprus and Russia was finally ratified by Cyprus in September 2011 and the remaining steps are expected to be completed by the end of this year, meaning that the protocol will come into effect on 1 January 2013.

The ratification is being interpreted as a further step on the road to Cyprus being removed by Russian authorities from their ‘blacklist’ of offshore jurisdictions, allowing dividends received by Russian companies from subsidiaries in Cyprus to qualify for the Russian dividend participation on exemption. This means a 0% tax applying on dividends received in Russia, expected to further enhance the attractiveness of Cyprus as a holding jurisdiction for Russian investors.

Mavrellis comments: ‘It has created a certainty as to whether it is going to happen and removes any fears that there could be a cancellation of the treaty.’

‘Russian work is still a big part of our business, not only in the corporate sector but a lot of international litigation is accounted for by Russian clients.’ – Alexandros Tsirides, litigation and company partner at COSTAS TSIRIDES & CO

The latest statistics from the Central Bank of Russia reveal that Cyprus has remained the single largest beneficiary of Russian investment in the world, irrespective of the ratification of the treaty between the two countries. However, the level of investment has been increasing. In 2008 FDI was at an all-time low of $8.8bn, increasing to $9.7bn in 2009, $18bn in 2010 and last year reaching $18.2bn. To put that in perspective, FDI from Russia into the UK was $3.9bn in 2008, decreasing to $2bn in 2009 and $1.2bn in 2010, before seeing a marginal increase to $1.3bn last year. To the US, meanwhile, Russian FDI was $7.3bn in 2008 but fell dramatically over the same period and last year was just $1.1bn.

It is unsurprising that the vast majority of Cyprus law firms count at least 20% of their instructions from Russian sources, and for many it is considerably more than that. Tsirides says: ‘Russian work is still a big part of our business, not only in the corporate sector but a lot of international litigation is accounted for by Russian clients.’

According to Yiolitis, the confidential nature of many Russian business people means that they prefer doing business in Cyprus than on their home soil. ‘We did some market research on setting up in Moscow but we found out that most of our Russian clients prefer to deal with offshore firms. From a point of view of practicality they prefer to deal with one based in Cyprus than in Moscow,’ she says.

The double taxation treaty will introduce an important change in tax treatment of the sale of shares in a company of one country, where that company has more than 50% of its immovable property in the other country. In that case the country where the property is situated will also have taxing rights on the gain. It is not known what impact this change will have on business with Russia. It conforms with the Organisation for Economic Co-operation and Development  (OECD) model on taxation and Cyprus should at least be on a level playing field if Russia makes good on its undertaking to amend all other treaties with countries regarded as investors in Russia so as to adopt the same OECD model.

Offshore interests

Meanwhile, Harneys is looking to expand in Cyprus. Currently totalling 15 fee-earners, including four partners – which Yiolitis points out is a sizeable offering in Cyprus terms – the firm increased its numbers in February with the transfer of Harneys senior BVI-qualified regulatory lawyer Aki Corsoni-Husain.

The office, which provides banking, finance, corporate, commercial and tax law, is looking to hire two to three further fee-earners this year and is moving into larger premises to accommodate its expanding size.

‘We had a big increase in work last year and we don’t have any more space,’ says Yiolitis.

The transfer by Corsoni-Husain to Cyprus may go some way to answering critics who say there is little cross-atlantic interaction between Harneys’ BVI, Cayman and Anguilla offices and Cyprus. Yiolitis says the office does get a lot of work from the other Harneys offices and vice versa: ‘We find it very successful.’ The move will enable the firm to provide advice on BVI funds in Cyprus, overcoming the challenges of the time difference between the two – the BVIs start the day seven hours later than Limassol.

‘Our main focus on Cyprus is in transactions which involve a Russia or BVI component, so primarily for Russian and BVI work.’ – John Collis, chairman, Antis Triantafyllides

Harneys’ Cyprus office also receives its instructions largely from the UK’s Magic Circle firms, particularly Allen & Overy. This has changed little, Yiolitis says, since Aristodemou Loizides Yiolitis’s tie-up with Harneys. Yiolitis is convinced that none of the large UK firms would be interested in setting up shop on the island: ‘I think Cyprus acts as a back office and I’m not sure there would be enough work for a London firm to set up in Cyprus and do what they traditionally do in London or Moscow or any other big financial centre, particularly in view of the fact that Cyprus costs are generally much lower so to have a relocation [of a top UK or US firm] would not make sense at this time.’

However, the establishment of a local presence by rival offshore firms is another matter altogether. Rumours abound of offshore firms in talks to set up ‘best friends’ relationships or enter into mergers with Cypriot firms.

‘There have been rumours about various offshore firms approaching local firms for mergers or “best friends” agreements and I’m sure some are in place and maybe we just haven’t heard about them yet,’ Yiolitis says. ‘But I do expect developments in this area because Cyprus is really used a lot for offshore structures and it does make sense for the offshore firms to move here.’

At Conyers Dill & Pearman, which has a ‘best friends’ relationship with top tier Cyprus firm Antis Triantafyllides & Sons, chairman John Collis says: ‘Cyprus is a very important jurisdiction, and our clients encounter it regularly. However, our main focus on Cyprus is in transactions which involve a Russia or BVI component, so primarily for Russian and BVI work.’

Arbitration Centre

Neocleous hopes that a further draw to the international community will be the arbitration centre in Limassol he has put his name and collateral behind. It will be registered and have its secretariat and accommodation formalised before the end of the year.

The credentials of the individuals heading the arbitration centre are impeccable: its chairman is former UN Secretary-General and Egyptian diplomat Boutros Boutros-Ghali; its vice chairman is the ex-Cypriot president Georgios Vasos Vassiliou; Neocleous himself is the secretary.

The centre will be divided into an arbitration and mediation department, each with its own panel and council, and leading mediator, Quadrant Chambers barrister Michel Kallipetis QC, is already a confirmed council member. As its third limb, the centre is in the process of identifying an educational institute that it will be affiliated with for the further education and training of arbitrators and mediators.

According to Neocleous, the centre, which has adopted the United Nations Commission on International Trade Law rules, will undertake international arbitrations and mediations, including interstate border disputes.

‘We have observed penetration in the market by some non-organised people who have nothing to do with the profession and we would like to have them regulated so we know they will not bring a bad reputation to Cyprus.’ – Christos Mavrellis, company and commercial head at Chrysses Demetriades & Co

Neocleous is convinced there is a gap in the arbitration centre map that only Cyprus can fill, commenting: ‘In between London and Singapore, there is nothing else. We have to cover this gap. Why us? Because we are the only Anglo Saxon system and an international business centre. And because I think we can do it and we have the determination.’

Increased regulation

The government is being urged to introduce facilitative legislation and the legal profession is welcoming of new initiatives and entrants, but when it comes to fiduciary services the profession is currently demanding that the government crack down on unregulated service providers which risk bringing the island into disrepute.

The fiduciary services industry is currently unregulated in Cyprus, with the exception of law firms, which are regulated by the Bar Council. Neocleous says: ‘We have to protect only people regulated by the authorities.’

The domestic downturn has exacerbated the situation and the number of cases of malpractice is on the rise.

Mavrellis says: ‘We have observed penetration in the market by some non-organised people who have nothing to do with the profession and we would like to have them regulated so we know they will not bring a bad reputation to Cyprus.’

The Trustee Regulation Bill is currently on its eighth reading, with little progress being made as it meets resistance from fiduciaries, accountants and even the Cyprus Bar Association. Lawyers and the Association alike argue that they are already regulated to advise, however Neocleous says: ‘We are regulated for legal work. This is not legal work. It’s an important part of the business but it’s not law.’

A further sticking point is which entity will act as the regulatory body and the supervising force behind the Bill.

Outward expansion

As Cyprus’ leading law firms increasingly engage with the outside world there are still very few to have made the transition into foreign markets. Of the top tier banking and finance and corporate firms, a number have a presence in Athens but no further afield. However, the minority that have made the move are expanding.

Andreas Neocleous & Co has offices in Russia, Ukraine, Prague, Budapest and Brussels and is closely eyeing the emerging markets, including currently considering setting up an office in Qatar. In the Ukraine, Neocleous has ambitions to become a leading law firm and the local office is deliberately carving out a name as a local firm with only a representative Cyprus office to avoid being labelled as just doing offshore work.

There is also a significant difference between the firm’s strategy for Western and Eastern Europe, where Andreas Neocleous & Co last year bought boutique Greek firm GS Kostakopoulos & Associates in Brussels. The new operation will serve the purpose of keeping an eye on the political capital of Europe, staffed initially by only three to four people and eventually only around one lawyer. Neocleous says the firm has no intention of practising local law in the region, or indeed in Western Europe, where clients are generally so well served.

Local lawyers know they have to do much to improve their laws and crack down on bureaucracy if they want to compete with financial centres at the highest level.

At Pamboridis, meanwhile, the firm last year announced its intention to launch in London and at the beginning of March this year the Mayfair office officially opened with one fee-earner. The office has been set up to accommodate Pamboridis’ existing London contacts, particularly DLA Piper, but also to target high-net-worth Russian and Ukrainian investors and introduce the London market to the more complex services offered by its fiduciary arm Prudens Group. The ambition is to expand the office to around three or four fee-earners.

George Pamboridis says: ‘More sophisticated high-net-worth individuals want to use Cyprus and they are not just going to need a shell to buy a house.’

As Cyprus continues to fight for global recognition, local lawyers know they have to do much to improve their laws and crack down on bureaucracy if they want to compete with financial centres at the highest level. So too will much of Cyprus’ immediate success depend on the success of its banks to recapitalise and successfully implement austerity measures to bring finances back under control.

The island’s presidential campaign began in March and elections will take place in February 2013. Between fighting for a term in office, staving off a banking crisis and acting as president of the EU, one wonders how much time the government will have to push ahead with other initiatives.

However the wheels have already been set in motion on a number of groundbreaking developments, and backed by the ambition and determination of this small island, 2012 promises to be a year full of opportunity. LB

caroline.hill@chillmedia.co.uk