Issue 129, December 2017 by The Institute of Certified Public Accountants of Cyprus

No. 129 | december 2017

The Funds

Industry

the views of members of the board of cifa, the chair of cysec and the minister of finance

in Cyprus

DISTRICT POST OFFICE CY-1901 NICOSIA, CYPRUS

The Journal of the Institute of Certified Public Accountants of Cyprus

POSTAGE PAID LICENCE no.33 SEALED UNDER PERMIT no. 133 ΠΕΡΙΟΔΙΚΟ ΤΑΧΥΔΡΟΜΙΚΟ ΤΕΛΟΣ ΠΛΗΡΩΜΕΝΟ ΚΛΕΙΣΤΟ ΕΝΤΥΠΟ ΑΔΕΙΑ ΑΡ. 133 ΑΔΕΙΑ ΑΡ. 239

EY celebrates 80 years in Cyprus

ACCOUNTANCY CYPRUS

C O N T E N T S THE PERFECT STORM By Theodoros Hadjistyllis

CAN INTERNAL AUDITORS BECOME TRUSTED ADVISORS? By Michalis Mylonas

FIGHTING CORRUPTION By Agis Taramides & Katerina Ioakim

42 44

48 50 52

accounting & audit

54 56 58

THINKING AHEAD

60 62

CYPRUS BANKING SYSTEM CHALLENGES By Lenia Georgiadou

CONSUMPTION AS AN ECONOMIC INDICATOR By George Andreou

PRIVATE SECTOR DEBT By Savvaskis C. Savvides

EXPENDITURE RULES: IMPORTANCE AND LIMITATIONS By Demetris Georgiades

NON-PERFORMING LOANS: SOLUTIONS & COMMON PRACTICES By Constantinos Kypriotis

LABOUR PRIORITIES FOR 2018 By Lena Panayiotou

UNEMPLOYMENT AND THE INFLEXIBLE LABOUR MARKET By Tassos Anastasiades

THE SIGNIFICANT ROLE OF THE EIB IN CYPRUS By Savia Orphanidou

24 08 economy

VAT IS IN THE AIR By Panayiotis Panayi

taxation

INSTITUTE NEWS

THE FUNDS INDUSTRY IN CYPRUS

COVER STORY

Cyprus is becoming one of the fastest growing investment fund centres in Europe, thanks to its prompt response to legislative and regulatory requirements and a VWURQJ Ã&#x20AC;QDQFLDO VHUYLFHV VHFWRU ZKLFK LV DW WKH IRUHIURQW of industry developments. Members of the Board of CIFA express their views on the state of the funds industry in Cyprus and propose ways of helping it thrive in the coming years. We also present a detailed look at the industry by Demetra Kalogerou, Chair of CySEC, and Harris Georgiades, Minister of Finance.

ISSUE 129 DECEMBER 2017 YEAR-ROUND TOURISM IS KEY

DECISION TREES

HEADHUNTING SECRETS FOR PROFESSIONALS

By Demetris Stylianides

COMBATING UNETHICAL CONDUCT

By Aristodemos Yiannakas

USING EUROPEAN FUNDING PROGRAMMES TO DEVELOP TOURISM By Panagiotis Moiras

VALUING SMES By Tasos Arisistidou

THE 70:20:10 MODEL By Michael Karasavvas

By Demetris Ergatoudes

Interview with Chryso Tsokkou, Director, A.Tsokkos Hotels Public Ltd

76 78

BIG DATA: IMPLICATIONS FOR COMPETITION LAW By Athina Patera

FINANCIAL FAIR PLAY By Christos Antoniou

IS BRAND LOYALTY )($6,%/( ,1 72'$<·6 DIGITAL WORLD? By Andrie Penta

THE MOUNTING CHALLENGES OF PROVIDENT FUNDS

management

Editor-in-Chief Ninos Hadjirousos, FCA

CONFIDENCE RETURNS TO THE MARKET Interview with Constantinos Savvides

DYNAMIC EVITALISATION OF REAL ESTATE By Pantelis Leptos

96 98

FREEHOLD OR LONG LEASEHOLD?

By Antonis Loizou

INVEST IN REAL ESTATE FOR YOUR RETIREMENT By George Mouskides

80 82

100

real estate

By Dr. Sotiroula Liasidou

Interview with Antonis Skoullos, Country Manager, Oracle Cyprus

102 ict

86 86

business in cyprus

8 90 92

Editor Tasos Anastasiades, B.Sc., M.A. (Econ) The Institute Council Marios Skandalis (Chairman) Stavros Pantzaris (Vice-Chairman) Maria Pastellopoulou (Secretary) Members Andreas Andreou, Demetris Vakis, Christos Vasiliou, Karlos Zangoulos, Pieris Marcou, Philippos Raptopoulos, Spyros Spyrou, Demetris Taxitaris, Nicos Chimarides, Odysseas Christodoulou General Manager Kyriakos Iordanou Address 11 Byron Avenue, 1096 Nicosia, Cyprus Mailing Address P.O.Box 24935, 1355, Nicosia, Cyprus Tel: +357 22870030, Fax: +357 22766360 e-mail: info@icpac.org.cy www.icpac.org.cy The publication is prepared by

RECOGNIZING THE NEED FOR DIGITAL TRANSFORMATION

By Christos Michaelides

GETTING CLOSER

ISSN 1450-2380

BUILDING A BETTER WORKING WORLD

Next Generation of Family Business Leaders Embraces Digital Change; Governments Ignoring Fiscal Policy Effect on the Young, Say Europeans;

In-house Editor-in Chief John Vickers

104

professional news

Coordination Pan Charalambous Art Direction Anna Theodosiou Design Alexia Petrou, Marios Kouroufexis Marketing Executive Kevi Chishios

Interview with Stavros Pantzaris, Country Managing Partner, EY Cyprus

mOBODJBM TFSWJDFT

Managing Director George Michail General Manager Daphne Roditou Tang Media Manager Antonis Antoniou

TABLE TALK Savvas Savvides, CFO of Akiva Asset Management Ltd, is also the National President of Round Table Cypprus for 2017-2018.

PVU PG PGmDF

MEET THE CFO Anthoulis Papachristoforou, Group CFO, Logicom Public Ltd

108

Commercial Manager Neofytos Constantinou Contact us for advertising Pavlos Giorkas pavlos.giorkas@imhbusiness.com Tel: +357 22505555, +357 22505566, Fax: +357 22679820 Address 5 Aigaleo St., Strovolos 2057, Nicosia, Cyprus, P.O.Box 21185, 1503, Nicosia, Cyprus Accountancy Cyprus is published quarterly by the Insti[\[L VM *LY[PÄLK 7\ISPJ (JJV\U[HU[Z VM *`WY\Z HUK PZ ZLU[ free to all members if the Institute as well as to a large number of other persons, companies and organisations. 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.

ACCOUNTANCY CYPRUS

THINKING AHEAD

By Kyriakos Iordanou, General Manager, ICPAC

NEW YEAR GREETINGS

n behalf of the Institute, I extend our best wishes to everybody for a prosperous and productive New Year. Looking back at 2017, it is evident that it was a year full of challenges, changes and hard work, as well as a creative and constructive one. ICPAC was called upon to address and manage – successfully, in my opinion – a number of significant and complex matters relating to the accountancy and auditing profession and to the economy of the country in general. Undoubtedly, the most important matter on which ICPAC worked with great rigour and care was the preparation of the new Auditors Law and the transposition of the relevant EU Directives and Regulations into national legislation. At the same time, ICPAC dedicated a substantial part of its time and efforts to the harmonisation of national legislation with the 4th EU AML Directive, and actively participated in the preparation of the relevant bill. Without question, these two pieces of legislation constitute the cornerstone of our work as professional accountants. ICPAC’s Council remains focused on both of them, as there is still some way to go before their finalization and effective implementation. In addition, the Institute was in constant and direct communication with the House of Representatives and the Government on issues relating to other EU initiatives (such as the Common Corporate Tax Base) and the Panama Papers, thus contributing significantly to the formulation of a national position. ICPAC also made a pivotal contribution, via its Council, Management and Committees,

to matters relating to the wider development of the economy, direct and indirect taxation, the provision of administrative services, insolvency practice, the public sector, regulatory compliance and AML, the energy sector and, in general, the promotion of the country as a credible international business centre. I believe it is fair to say that our profession deserves a modest slice of the credit for the overall impressive performance of the economy in 2017! During the year, the Council also approved the new Vision and Strategic Goals of the Institute. In this framework, during 2017 ICPAC hosted and/or participated in several important international events, promoting the local accountancy profession, itself and Cyprus. Furthermore, ICPAC signed new bilateral agreements for cooperation with prominent international organizations. ICPAC is to strengthen its management team, so as to better address the growing needs of its Members, as well as to carry out its new institutional responsibilities and tasks. Hence, new office space has been acquired and the present offices are about to be renovated in order to best accommodate the operations of the Institute and additional staff. The Council has also decided to enhance the provision of technical support to Members, through the introduction of more helplines and more focused and specialised professional development and training. Pursuant to its own declaration regarding digital transformation, ICPAC has upgraded its computer systems in order to achieve greater efficiency and effectiveness in servicing Members and in carrying out its routine tasks. So, as of 2018 Members will be able to administer their personal CPD details via the website and manage their participation in seminars and other activities organized by

ICPAC online. ICPAC is and remains one of the most important stakeholders in the economy. As such, it prepared, distributed and explained in person to the candidates in the forthcoming presidential elections a set of specific and structured suggestions, which touch upon the most vital aspects of the economy and society. We note with satisfaction that a good number of our suggestions and comments have been adopted. 2017 now belongs to history and in front of us lies 2018, paved with new and even greater challenges. Given the current conditions in the business and legal environment of Cyprus, the accountancy profession is inescapably entering a new era too. Continuous improvement and further development is a sine qua non. Taking everything into consideration, including the present state of the economy, the Council remains committed to the continuous development of the services provided to Members and Students, to the development of ICPAC as a model professional organization and to serving the public interest. What we definitely don’t stint on is the time, cost and effort needed for the achievement of our strategic goals, to which we are highly committed. Members and Students constitute the principal concern of the Council and Management, hence every activity envisages better serving and safeguarding their interests. We stand ready to confront all the challenges that lie ahead and are more than determined to convert them into opportunities. We are also confident that, with the support of everybody that constitutes the ICPAC family, we shall enjoy a successful, productive, valuable and prosperous new year for the Institute and our profession.

ACCOUNTANCY CYPRUS

INSTITUTE NEWS

NEWS FROM THE BOARDROOM The last quarter of the year was particularly busy for the Council and Management of the Institute, requiring attention and action on a number of very important issues. The Council held three regular and two extraordinary meetings during the quarter in order to accommodate the discussion of all pressing matters. The Instituteâ&#x20AC;&#x2122;s agenda was dominated by the discussions and negotiations regarding the implementation of the newly signed Delegation Agreement with Cyprus Public Audit Oversight Board (CyPAOB) and the potential amendment of the Auditors Law of 2017, aiming at the smooth implementation of the Law. Another very imSRUWDQW VXEMHFW KDV EHHQ WKH Ă°QDOL]DWLRQ RI WKH ELOO WKDW SXUVXHV WR amend the Anti-Money Laundering legislation, by transposing the 4th EU AML Directive. Hence, during the quarter ICPAC held a large number of meetings DQG HQFRXQWHUV ZLWK JRYHUQPHQW RIĂ°FLDOV DQG LQ SDUWLFXODU WKH Ministry of Finance, CyPAOB, political parties and Members of the House of Representatives. The main activities and decisions of the Instituteâ&#x20AC;&#x2122;s Council included the following:

MEETINGS WITH OFFICIALS During the fourth quarter of 2017, the President, Council Members and the General Manager held a number of meetings with Government, political, business and other officials addressing, inter alia, the following: â&#x20AC;˘ During the quarter, the President, Council members and the General Manager met on various occasions with members and staff of the Cyprus Public Audit Oversight Board (CyPAOB) to discuss the effective implementation of the Delegation Agreement signed on 12 September 2017, as well as to promote the amendment of the Auditors Law of 2017 so that any loopholes in its application are avoided. â&#x20AC;˘ As a result of the proposed amendment to the AuditorsLaw of 2017, ICPAC officials held meetings and other

encounters with party leaders, Members of the House of Representatives and government officials. â&#x20AC;˘ ICPAC sent to all the main presidential candidates a set of proposals and suggestions regarding the development of the economy of the country. Following that, the President and the General Manager met with Democratic Rally (DISY) Chairman Averof Neofytou on 20/9/2017, Stavros Malas on 25/9/2017, George Lillikas on 10/10/2017 and Nicholas Papadopoulos on 20/12/2017. In addition, ICPAC was invited to discuss its proposals on 10/11/2017 with the representatives of President Nicos Anastasiades, while on 21/11/2017, Mr Lillikas had a discussion with the members of the Council during its regular meeting.

â&#x20AC;˘ 2-4/10/2017: The General Manager and Amalia Hadjimichael, Head of Monitoring and Compliance, travelled to the UK to meet with officials of ACCA, ICAEW, the Fraud Advisory Panel and the ICSA (Institute of Chartered Secretaries and Administrators), thus enhancing bilateral relationships and working together on new projects. â&#x20AC;˘ 5-6/10/2017: The General Manager and Amalia Hadjimichael, Head of Monitoring and Compliance, participated in the ACCAâ&#x20AC;&#x2122;s International Regulatory Conference. â&#x20AC;˘ 19/10/2017: ICPACâ&#x20AC;&#x2122;s Energy Committee and the General Manager participated in a round table event to discuss the strategy for promoting Cyprus as an energy hub in the region. This event was held under the auspices of the Minister of Energy, Commerce, Industry & Tourism and was attended by the Ministers of Agriculture and Finance and all the relevant stakeholders for the industry. â&#x20AC;˘ The President and the General Manager met with the following to discuss issues of mutual interest, pursuing the further development of bilateral cooperation: â&#x20AC;˘ 24/10/2017: Christos Michaelides, President, Employers and Industrialists Federation (OEB) â&#x20AC;˘ 31/10/2017: Marios Pilavakis, Chairman, Cyprus Stock Exchange â&#x20AC;˘ Chrystalla Georghadji, Governor, Central Bank of Cyprus â&#x20AC;˘ Representatives of the Association of Certified

Financial Analysts, USA â&#x20AC;˘ 16/11/2017: Phidias Pilides, President, Cyprus Chamber of Commerce & Industry â&#x20AC;˘ 17/11/2017: Demetra Kalogerou, Chair, Cyprus Securities and Exchange Commission (CySEC) â&#x20AC;˘ 20/11/2017: Constantinos Yiorkadjis, Mayor of Nicosia â&#x20AC;˘ 30/11/2017: Yiannis Tsangaris, Commissioner of Taxation â&#x20AC;˘ 19/12/2017: Eva Papakyriacou, Superintendent, Unit for Combating Money Laundering (MOKAS) â&#x20AC;˘ 22/12/2017: Michael Kammas, Director General, Association of Cyprus Banks â&#x20AC;˘ The President and the General Manager had the privilege to attend and participate in the 2nd EU Arab World Summit which took place in Athens, Greece. It was an event which attracted the participation at the highest level of all Arab countries, Cyprus and Malta, and was organised under the auspices of the Greek Government. â&#x20AC;˘ 15/11/2017: The General Manager met with the Minister of Finance to exchange views on the bill harmonising Anti-Money Laundering legislation with the 4th EU AML Directive and the proposed amendment to the Auditors Law of 2017. â&#x20AC;˘ A delegation of the Council led by the General Manager met with the Data Protection Commissioner to discuss the implementation of the new forthcoming revised legislation, as a result of the EUâ&#x20AC;&#x2122;s General Data Protection Regulation.

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ACCOUNTANCY CYPRUS

INSTITUTE NEWS

OTHER IMPORTANT MEETINGS AND ACTIVITIES COUNCIL’S MAIN DECISIONS • At its meeting on 21/11/2017, the Council accepted the resignation of Antonis Vassiliou and thanked him for his valuable contribution during his tenure. The Council wishes Mr Vassiliou every success in his professional and personal endeavours. • The Council worked diligently to promote the effective implementation of the Delegation Agreement with CyPAOB, on the one hand, and the rectification and amendment of the Auditors Law, on the other. ICPAC’s comments and suggestions were presented in the analytical and extensive correspondence with the House Finance Committee,the Minister of Finance and CyPAOB. • The Council instructed the General Manager to send a letter

to the Minister of Justice and the President of the House Legal Affairs Committee regarding the declaration by state officials of their financial position. • The Council also decided on the revision of certain parts of the Regulations of the Institute, as presented in the Members Handbook, in order to facilitate the smooth operation of the Institute. • The Council also decided to seek tenders for the revision of the disciplinary process and regulations, in order to provide greater efficiency and adhere to the requirements of the Auditors Law. • The Council decided to carry out the readiness assessment exercise to better prepare for the upcoming new legislation pertaining to the EU’s General Data

2ND EU ARAB WORLD SUMMIT, ATHENS ICPAC had the privilege to participate in the 2nd EU Arab World Summit which took place on 9-10 November in Athens, Greece. The President of ICPAC, Marios Skandalis, was amongst the speakers at this very high-level event, which was attended by Heads of State and Ministers of all the Arab Countries,

Greece, Cyprus and Malta, as well as by other important personalities and business people from the EU, the Middle East and North Africa. In his presentation, Mr Skandalis described the benefits that Cyprus offers international businesses and noted that it can be the conduit between Arab and European businesses.

• ACCA delivered two workshops to members of the Regulatory and Disciplinary Committees on 5 and 6 December 2017, respectively, in order to update them on the latest information and practices followed in the UK. • The President and the General Manager attended the statutory members assembly of Accountancy Europe on 5-6/12/2017. • During the quarter, ICPAC representatives appeared before Parliamentary committees dealing with matters relevant to the Institute. • There was significant activity regarding the

revision of anti-money laundering legislation. There have been a number of meetings and exchanges of views on the proposed bill, the discussion of which commenced in September in the House of Representatives. • Both the President and the General Manager had various meetings during the quarter with other officials, stakeholders and MPs on issues relating to the Institute and the profession. • ICPAC officials attended various business events and general meetings of related organisations and bodies in Cyprus.

ACCOUNTANCY CYPRUS

INSTITUTE NEWS

SERVING SOCIETY With the President of Life Education Centre.

With the President of the George Psaras/Round Table Association for Children with Liver Diseases.

Through its Limassol-Paphos Coordinating Committee, ICPAC co-organised the Limassol Autumn Festival on 13-15 October 2017, the proceeds of which were donated to charities, namely The George Psaras/Round Table Association for Children with Liver Diseases, Life Education Centre (Mentor Units) and The Centre for Preventive Paediatrics. In addition, ICPAC continued its customary Christmas donation of gifts to children in need and distress in Nicosia, Limassol and Larnaca.

NEW MEMBERS 4529

GEORGIOS NEOPHYTOU

ACCA

4564

CONSTANTINA PANAYIOTOU

ACCA

4531

ANASTASIA KALAITZAKI

ACCA

4565

VASILIA TTIKKOU

ICAEW

4532

IACOVOS IACOVOU

ACCA

4566

GIORGOS PAPANIKOLAOU

ACCA

4533

ELIAS NIKOLAOU

ACCA

4567

KYRIACOS LOUCAS

ACCA

4534

ANDREAS KYRIACOU

ICAEW

4568

GEORGE KENTAS

ACCA

4535

ANTONIS CHRISTOPHIDES

ACCA

4569

PANAGIOTA KARATZI - LIAGKONI

ACCA

4536

ANTONIS PANAGIOTOU

ACCA

4570

CHRISTOS ZACHARIA

ACCA

4537

ARTEMIS KONTZIONI FASOULI

ACCA

4571

GEORGE VASILIOU

ICAEW

4538

STEPHANIE SOFOKLEOUS

ACCA

4572

CHRYSOSTOMOS MAROKI

ACCA

4539

PHILIPPOS CLEANTHOUS

ICAEW

4573

MARIOS YIOUFKAS

ACCA

4540

MARIA HAVADJIA

ACCA

4574

PANAYIOTA TOMAZOU

ACCA

4542

MYRIA PANAYIOTOU

ACCA

4575

CHRISTODOULOS GEROSIMOU

ACCA

4541

ANDREAS IOANNOU

ACCA

4576

FROSO MENIKIOTI

ICAEW

4543

OVIDIU RADU

OTHER

4577

NICOLA EROTOKRITOU

ACCA

4544

STELLA ALEXANDROU

ACCA

4578

MICHALIS EROTOKRITOU

ICAEW

4545

CHRISTOS NICOLAIDES

ACCA

4579

KOULKHATER AGOPIAN

ACCA

4546

EFSTATHIOS CHRISTOPHI

ICAEW

4580

MARIA MICHAEL

ACCA

4547

CHRYSTALLENI PETRAKKA

ICAEW

4581

ELENI PHOTIOU

ACCA

4548

PARIS DEMETRIOU

ICAEW

4582

PRODROMOS KYRIACOU

Article

4549

STELIOS ANTONIADES

ACCA

4583

CHRISTAKIS SHIAKALLIS

4550

CHARALAMBOS NICOLAOU

ICAEW

4584

ANDREAS ALEXANDROU

4551

NAFSIKA KOUALI

ICAEW

4552

MARIA KKOUTA

ICAEW

Re-registrations

4553

ANTIS ZINONOS

ACCA

1607

Costas Christodoulou

AICPA

4554

EVDOKIA PITSILLOU

ICAEW

2815

Andria Georgiadou

ACCA

4555

MARIA IOANNIDOU

ACCA

3295

Polina Zopiati

ACA

4556

CHRYSTALLENI ADAMOU

ICAEW

3598

Marios Michaelides

ACCA

4557

MARIA MASOURA

ICAEW

4558

CHARILAOS PALAZIDIS

ICAEW

Removals

4559

STAVROS KADIS

FCCA

3192

Nicoletta Kynigou

ACCA

4560

DIAMANTO TSOLAKI

ACCA

3891

Maria Michael

ACA

4561

PETROS HADJIPROCOPIS

ICAEW

4562

IAN BEECH

ICAEW

Passed Away

4563

NIKOLAS ANASTASIOU

ACCA

398

Yiannis Nicolaides

ACA

ACCA

ACCOUNTANCY CYPRUS

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ACCOUNTANCY CYPRUS

OPINION

LETâ&#x20AC;&#x2122;S FOCUS ON OUR NEIGHBOURHOOD! THERE IS MUCH TO BE GAINED BY INCREASING COOPERATION WITH THE COUNTRIES OF THE MIDDLE EAST

By Kyriakos Iordanou, General Manager, ICPAC

n November, the President of the Institute and I had the privilege of participating in the 2nd EU Arab World Summit in Athens. This event, organized by the European Parliament under the auspices of the President of Greece, aims at gathering together the political and business leaders and of the Arab countries as well as EU Member states. It was a tremendous experience for us, as we were attending the summit for the first time. Even more impressive was the fact that ICPAC President Marios Skandalis was one of the three speakers from Cyprus, together with the President of the Repub-

lic and the Governor of the Central Bank. The Middle East and the eastern end of the Mediterranean form an intersection of cultures, beliefs, trade and business. It is a region of huge prospects and opportunities but, unfortunately, it is also an area of turbulence. By putting aside differences and fostering cooperation, respect and trust, tremendous opportunities will arise, prescribing a truly prosperous future for the region and its people. Cyprus has been in this neighbourhood ever since its emergence from the sea. It has always been a bridge between Middle East and Europe, located at the cross-

roads of three continents â&#x20AC;&#x201C; Europe, Asia and Africa. At the same time, it is a crosssection of civilisations and cultures. Cyprus has served as a prominent trade hub throughout several millennia of history. Furthermore, being located at the South-Easternmost edge of the EU means that Cyprus is the bridge that links Middle East and Europe. It can very easily be the conduit for Arab businesses going into Europe, whilst it can also be the reverse, that is, for European companies to expand their operations into the Arab countries. Trade and business activities can stretched from our small island to the four points of

CYPRUS, AS THE CLOSEST EU MEMBER STATE TO THE REGION, CAN PROVIDE NEIGHBOURING COUNTRIES WITH THE NORMS, VALUES AND COMFORT OF THE EU the horizon. Over the last few decades, Cyprus has positioned itself as a credible and competent international business centre. This has entailed a series of legislative and other actions, including, inter alia, bold tax reforms, the adoption of international accounting

ACCOUNTANCY CYPRUS

standards, changes to the business mentality, and a focus on other international business activities, such as shipping and other financial services. Hence, both European and Arab companies can facilitate their business operations via Cyprus, enjoying all the benefits and advantages offered. What was truly an eyeopener for me at the summit was the “revelation” of the region’s tremendous business activity and potential: massive construction projects, trade, technology, energy and business opportunities in all countries, from Iraq to Morocco. Whilst undergoing significant political and cultural development, the dominant countries of the region (i.e. Saudi Arabia and Egypt) constitute huge construction and development sites. Iraq and Syria, as the victims of terrible warfare, need immediate reconstruction. The Gulf countries remain business hubs and offer particular potential. With regard to our profession, we saw the Arab countries imposing VAT on goods very recently whilst, as of 1/1/2018, the biggest player of all, Saudi Arabia, introduced the mandatory preparation of financial statements for all companies, irrespective of size, based on

ENTERING INTO STRATEGIC AND BUSINESS ALLIANCES WITH OUR ARAB NEIGHBOURS IS SOMETHING THAT SHOULD HAVE BEEN PURSUED LONG AGO IFRS. This is a very important development, as the country seems to be opening a window towards the rest of the business world. How does this affect Cyprus? Well, Cyprus introduced the same legislation back in 1981 and is probably the only country in the wider area that has such requirements in place for all companies. Hence, Cypriot professionals and institutions could very easily provide their expertise on both subjects. In addition, as the whole of the region is under a lot of construction and development, there are specialized needs for professional expertise and knowledge, such as financial management and tax advice. Our country lies close to the Arab world, not only physically but culturally as well. Cyprus, as the closest EU Member State to the region,

can provide those countries with the norms, values and comfort of the EU, whilst becoming their gateway into the EU. By selecting Cyprus as a base and taking advantage of all the benefits that Cyprus offers, many Arab companies could do business in any part of the world, including – dare I say it – Israel. On the other hand, the Arab world could be a vast export destination for Cypriot products and services. It is surely redundant to refer to the energy prospects in the region, so what I would like to highlight are the huge opportunities in the shipping, education and health sectors. For instance, even ICPAC, via its joint examination scheme with ACCA, gives the opportunity to non-EU citizens to obtain an exceptional EU professional qualification, let alone the other academic institutions. Due to the island’s proximity to their home countries, students may opt to study in Cyprus (at a much lower cost than elsewhere) and reap the benefits. So far, we have been looking more to the north and the west, refraining from looking south and eastwards, possibly not recognizing the potential. Well, it is about

time we did it and worked closely within our own neighbourhood. There is a lot to be gained from this in business, monetary and political terms. It is for this reason that we commend and support all the hard work and agreements signed by the Government with neighbouring countries over the last couple of years. Entering into strategic and business alliances with our Arab neighbours is something that should have been pursued long ago. The recent visit by President Anastasiades to Saudi Arabia and the agreements signed with Egypt are of huge importance. We hope that this trend will be further enhanced going forward, with the involvement of the private sector as well, in order to maximise the potential and the benefits. I truly believe that we need to be more involved with the surrounding countries and should try to identify those areas where Cyprus and its professionals have a niche. Focusing on other markets may have worked well until now but there is a lot to work with just outside our courtyard. So, let’s focus on our neighbourhood to open up new horizons and new markets with new allies, converting all the challenges into opportunities! .

ACCOUNTANCY CYPRUS

Institute Committees Update

ADMINISTRATIVE SERVICES COMMITTEE During the fourth quarter of 2017, the Administrative Services Committee covered the following areas: Discussion on the implementation of the 4th AML directive. The Committee continued to be updated on the status of the finalization of the implementation of the 4th AML directive and, in particular, discussed extensively UBO and trust reporting requirements, limitations on cash transactions and obligations on reporting companies under trust arrangements. As advised, the final draft of the law has been prepared and sent to Parliament for discussion and enactment. Initial discussion on the provisions of the 5th AML directive. The Committee was informed of the main provisions of the 5th AML directive and started discussing how these may have an impact on the confidentiality aspect that Administrative Service Providers (ASPs) have always been concerned about. In particular, the Committee discussed how provisions that may create issues for ASPs may be adjusted in the context of the main objective of the directive. As this is still in the early stages of discussion, the Committee will become directly involved when asked to comment. Drafting of a sample engagement letter for administrative services. The wording of an engagement letter that will cover the scope of provision of administrative services was completed, circulated and discussed extensively among members. Due to the complexity of the issues involved, it required more time for completion than originally anticipated. The final version was prepared to be sent to the management of ICPAC for further consideration and review. General Data Protection regulation. The Committee discussed extensively the regulations circulated by the competent authorities addressing data protection and decided to come up with a more detailed plan of action during the first quarter of 2018. As the regulation will become effective in May 2018, the Committee believes it has enough time to be well prepared with comments and suggestions for the smooth implementation of the regulation.

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Neophytos H. Neophytou Chairman

Costas Christoforou Chairman

SHIPPING COMMITTEE

LARNACA-FAMAGUSTA COORDINATING COMMITTEE

In the 4th quarter of 2017, the Committee continued to participate in various working groups, including the Ministry of Transport Shipping Incentive Schemes & Ship Registry Pricing Policy and the Cooperation Enhancement within the Cyprus Maritime Cluster working groups, set up with a view to developing a national shipping strategy. It also continued to discuss industry issues such as freight taxes, the Department of Merchant Shipping (DMS) forms (MSTTs), the restructuring of the DMS, and other matters. The Committee also discussed the structure and terms of reference of a Maritime Advisory Committee proposed to be set up in conjunction with the proposed establishment of the Deputy Ministry of Shipping.â&#x20AC;?

During the final quarter of 2017, the Committee coordinated three seminars: â&#x20AC;&#x2DC;E-invoicing in Cyprusâ&#x20AC;&#x2122;, â&#x20AC;&#x2DC;Transaction Monitoring â&#x20AC;&#x201C; A Practical Guideâ&#x20AC;&#x2122; and â&#x20AC;&#x2DC;VAT: Recent amendments to the VAT Law N.95(I)/2000â&#x20AC;&#x2122;, all of which were held at the Golden Bay Hotel, Larnaca.

Sylvia Loizidou Chairwoman

Christos Antoniou Chairman

ACCOUNTANCY CYPRUS

VAT COMMITTEE

EDUCATION COMMITTEE

The Committee continued to deal with a number of outstanding issues, as well as looking at new issues brought to its attention. Since our last report, the Committee participated in various meetings with the Commissioner of Taxation and attended meetings of the Parliamentary Finance Committee to comment on the provisions of the proposed amended VAT Act regarding: • The imposition of VAT on the leasing of immovable property to persons exercising taxable activities, • The imposition of VAT on undeveloped buildable land by persons exercising an economic activity, • The application of the reverse charge procedure with regard to the transfer of buildable land and new or semi-completed buildings under a loan restructuring procedure. Following the publication of the above amendments in the Government Gazette on 13 November 2017, in response to the Commissioner’s request, the VAT Committee prepared and submitted comments in relation to the content of i. a VAT circular clarifying the provisions of the Land Bill with regard to the leasing of immovable property, ii. a Notification that needs to be submitted when a person elects not to charge VAT on the leasing of immovable property; and iii. the Regulations defining undeveloped buildable land. The following matters were discussed with the Commissioner of Taxation during a meeting held in October 2017: • Various VAT issues faced by administrators/liquidators. • The argument for not abolishing Article 11B, in relation to the application of the reverse charge mechanism on services in the construction industry. • The current practice followed by the Tax Department in relation to VAT group registration and the possibility of non-legal persons, as well as branches of holding companies, to be able to join a VAT group. • VAT treatment of Commitment and Allotment contracts in the hotel industry. • VAT treatment of short-term and long-term leasing of villas and other holiday apartments. • VAT treatment of services to passengers travelling on international flights/voyages. The Commissioner of Taxation promised to examine all of the matters discussed and revert with his position. Following the meeting, Circular 217 was issued clarifying the Commissioner’s position on liquidators’ fees. The Committee, in cooperation with the Education Committee, has scheduled a number of seminars commencing in December 2017, in order to keep members of ICPAC abreast of recent developments in the VAT area.

During the fourth quarter of 2017, the Committee held three monthly meetings to discuss the organization of training seminars. Overall, 10 training events were organized in all cities during the fourth quarter of 2017, as follows: October 3: Seminar on AML challenges and Developments and Economic Sanctions. Half-day training, Limassol. October 16 & 18: Seminar on The Funds Industry in Cyprus: Half-day training, Nicosia and Limassol respectively. November 7, 9, 10: Seminar on “Transaction Monitoring – A Practical Guide”. Half-day training, Limassol, Nicosia and Larnaca respectively. December 7: Seminar on Negotiation skills. Half-day training, Nicosia. December 11, 15 & 18: Seminar on the New VAT Law regarding land and rents. Half-day training, Limassol, Nicosia and Larnaca respectively.

Harry Charalambous Chairman

Akis D. Kolokotronis Chairman

ACCOUNTING STANDARDS COMMITTEE During the fourth quarter of 2017 the Committee continued with the implementation of its action plan and dealt with the following: Completed Projects • Amendments to IFRS 2: Following a request, we provided feedback to the European Commission on the possible impact of the adoption of the proposed amendments to IFRS 2. • Insurance Companies and Solvency II: The subcommittee concluded that the adoption of Solvency II will have no impact on the Financial Statements of insurance companies. The Tax Committee is dealing with possible tax impact. • Discussion paper of the International Accounting Standards Board for changes in disclosures in financial statements: The sub-committee prepared a summary with regard to the impact of the Discussion paper of the International Accounting Standards Board for YHR changes in the disclosures in financial statements. For the time being, no additional actions will be initiated on this Discussion paper. • Disclosure of non-financial and diversity information by large undertakings and groups: The Committee Chairman held meetings with the Directorate General for European Programmes Coordination and Developments regarding the application of amendments to the Companies Law as a result of the harmonization of Cyprus legislation with European Directive 2014/95/EU, relating to the disclosure of nonfinancial and diversity information by large undertakings and groups. • Definition of Turnover for categorization of Companies into small, medium and large: The Committee received a legal consultation from ICPAC’s lawyers with regard to the definition of turnover for the purposes of classification of companies into small, medium or large as per the Companies Law.

ACCOUNTANCY CYPRUS

• Revision of Companies Law checklist: We completed the English version of the updated Companies Law Checklist, which was amended due to the recent amendments in the Companies Law, as a result of the transposition of the EU Accounting Directive into domestic law. The updated Companies Law Checklist was sent to ICPAC and is expected to be circulated to our members in January 2018. Ongoing Projects • Amendment to the Cyprus Companies Law for compliance with the Accounting Directive: The Committee submitted the proposed amendments to the Law (article 142) for compliance with the Accounting Directive. The amendments have not yet been published in the Government Gazette. • Restriction on distribution on development costs: The EU Accounting Directive, which has been transposed into the Companies Law, entails provisions based on which no distribution of profits takes place unless the amount of the reserves available for distribution and profits brought forward is at least equal to costs of development not written off and recognised under ‘Assets’. The Committee concluded that a legal consultation with ICPAC’s lawyers is required for some interpretation to assist in understanding how the above provision affects upstream Oil & Gas companies and how the definition of ‘development costs’ captures other balance sheet items such as costs relating to intangible assets arising in the context of IAS38. • Technical Circulars 29 and 40: The subcommittee is in the process of issuing a combined technical circular as a result of the recent amendments to the Companies Law.

Yiannis Leonidou Chairman

COMPLIANCE COMMITTEE The main initiatives undertaken by the Committee during the 4th quarter of 2017 were the following: • Organisation of a seminar in cooperation with the Cyprus Fiduciary Association on “AML Challenges and Developments and Sanctions Compliance” • Organisation of a seminar on “The 4th and 5th AML Directives Challenges & Transaction Monitoring” • Lobbying for the inclusion of the necessary improvements in the draft amended law on “The Prevention and Suppression of Money Laundering Activities Law” which was submitted to Parliament and is due for approval. The following projects are in progress: • Drafting of a Case Study Pack covering the proper handling by auditing and fiduciary services firms of cases relating to Money Laundering and Terrorism Financing • Drafting of Guidance on “Source of Wealth” • Organisation of a workshop on “Tax Structures and how they affect the due diligence which needs to be performed by Financial Institutions” in cooperation with the Tax Committee and the Cyprus Banks Association. Niki Charilaou Chairwoman

PUBLIC SECTOR COMMITTEE During the fourth quarter of 2017, the Committee held three meetings and carried out the following activities: 1.The Committee met with the Acting Director of the Public Administration and Personnel Department (PADP) of the Ministry of Finance. During the meeting a number of issues were discussed that are of the interest to the Institute’s members who work in the public and the wider public sector. Representatives of the Committee had a meeting with PAPD officers and discussed in detail the possible upgrading of the recognition of ICPAC membership in the public and broader public sector. PAPD officers confirmed

that ICPAC membership is – and will continue to be – incorporated into all new Terms of Employment of a financial nature in the central government. Treasury and Ministry of Finance officers were asked to clarify the accounting treatment of the requirements of the new legislation concerning the payroll of officials in the broader public sector that are seconded to the central government. 2.On November 8, the Committee organised a seminar Nicosia in cooperation with the Education Committee on “Main Changes to the Legal Framework of Public Procurement”. The speaker was Philippos Katranis, Head

of Public Procurement Directorate of the Treasury of the Republic. 3.The Committee Chairman, who is also a member of the Public Sector Committee of Accountancy Europe (ACE), updated members on the meeting of the Public Sector Group of ACE held in Brussels on October 5, 2017, regarding recent developments in relation to European Public Sector Accounting Standards (EPSAS) and International Public Sector Accounting Standards (IPSAS), as well as other issues concerning public sector financial management. Marios Hadjidamianou Chairman

ACCOUNTANCY CYPRUS

Building a strategy today can empower your tomorrow

 

Multi-Employer Aon Hewitt Provident Fund



COVER STORY

THE FUNDS INDUSTRY I IN CYPRUS

ACCOUNTANCY CYPRUS

lthough the funds industry is relatively new to Cyprus, it is expected to be one of the major pillars of the country’s financial industry in the future. Cyprus is becoming one of the fastest growing investment fund centres in Europe, thanks to its prompt response to legislative and regulatory requirements and a strong financial services sector, which is at the forefront of industry developments. Data published by the European Fund and Asset Management Association (EFAMA) showed that worldwide regulated open-ended fund assets increased by 4% in the second quarter of 2016 to €38.11 trillion. As an EU Member State, Cyprus benefits from the harmonisation of EU financial services regulations and serves as a convenient ‘bridge’ offering competitive access to Europe, the Middle East and Africa. In 2014, Cyprus modernised and significantly enhanced its offering of Alternative Investment Funds, one result of which was that the regulation of all investment prod-

ucts, asset managers and investment firms falls under the jurisdiction of the Cyprus Securities and Exchange Commission (CySEC). With the enactment of the AIF Law, Cyprus now offers the full spectrum of legislative frameworks to all fund products. Cost efficiency is a notable benefit that makes investors favour Cyprus. According to Costas Christoforou, Managing Director of CyproFund Administration Services Ltd, the estimated annual operating costs of running an AIFM based in Cyprus are in the range of €150,000€200,000 per year, making Cyprus perhaps the most cost-effective jurisdiction in Europe. For instance, the annual average executive director compensation can be around €50,000 and for non-executive directors around €10,000 while the monthly rental cost for premium office space in Nicosia or Limassol falls within a range of €15-20 per square metre. Other benefits include highly qualified people offering the level of expertise required to support the fund and asset manager, and established experience in professional services. There are thousands of experienced and well qualified accountants and lawyers and English, the primary business language, is used extensively. A large number of firms offer regulatory services such as compliance, internal auditing, reporting and risk management solutions to AIFMs. Also there are highly experienced fund administrators offering complete administration solutions including fund accounting and NAV calculation, transfer agency, financial reporting and FATCA/CRS reporting. On the following pages, Members of the Board of CIFA express their views on the state of the funds industry in Cyprus and propose ways of helping it thrive in the coming years. We also present a detailed look at the industry by Demetra Kalogerou, Chair of CySEC, and Harris Georgiades, Minister of Finance, both of whom addressed the gighly successful 3rd International Funds Summit, organized by CIFA in Limassol in October 2017.

ACCOUNTANCY CYPRUS

COVER STORY

Cyprus: A Modern and Attractive Investment Fund Jurisdiction

here is no doubt that Cyprus is welcoming and safe place to spend a holiday, enjoy retirement, buy a holiday home, send the children to school and to live. But Cyprus is also an excellent place to do business and at the very core of the comparative advantages of Cyprus is its human capital. It is the skilled workforce, it is the hub of knowledge, it is the experience of a versatile industry cluster. One should also mention the access of Cyprus to European and regional markets, and the comparatively low set-up and running costs. For instance, Cyprus is the largest ship man-

agement centre in the EU, with shipping business actually growing in the last few years, despite global challenges. But there are also other significant sectors, beyond tourism and real estate, including education, health and energy, both renewables and offshore natural gas. The latter has already seen significant involvement of global energy players. And of course, Cyprus also has a very well developed financial and business services sector, which includes audit and legal services, banking, and administration. It is the resilience and good prospects of these productive sectors which has enabled our economy to achieve a strong recovery. The Cyprus economy

grew by 2% of GDP in 2015, by 3% in 2016 and is currently growing at a rate which exceeds 3.5% of GDP. This is significantly higher than the EU average and the outlook remains positive. The primary objective of our policy has been to maintain conditions of macroeconomic stability, and to offer support and incentives to the private sector. Our commitment to tax certainty has been pivotal. We have maintained corporate tax at 12.5%, and have implemented more than 15 policies reducing or cancelling taxes and introducing new tax breaks and incentives. These include a notional interest deduction for new equity in-

vested in any Cypriot company, a tax break for innovative companies, and an attractive

Cyprus has gained recognition as an attractive fund domicile with a potential for further significant growth

ACCOUNTANCY CYPRUS

By Harris Georgiades, Minister of Finance

non-domicile tax framework. Even when we were under an IMF/EU programme a few years ago and had to eliminate a very significant budget deficit, we made sure that no new taxes would be raised, focusing instead on spending cuts. The fiscal situation has now improved significantly, we have been operating with a balanced budget since 2014 and public debt is coming down fast. Cyprus has also been among the first wave signatories to all the key international tax information exchange programs and has been steadily widening its network of bilateral tax treaties.

THE FUNDS INDUSTRY These are all favourable factors which complement the efforts of the industry and are enabling Cyprus to make strides as a modern and attractive investment fund jurisdiction, one which can act complementary to the other well-established EU fund domiciles. Over the last few years, there has been a collective effort led by the industry, which is represented by the Cyprus Investment Funds Association (CIFA), with the support and involvement of the Government and CySEC, the Regulator, aiming to further fine tune the legal and administrative framework. This has enabled Cyprus to gain recognition as an attractive fund domicile with a potential for further significant growth. Currently, in a new bill which will amend and improve the Alternative Investment Funds Law, we propose the introduction of registered funds not authorized by the Regulator, thus enabling a much faster set-up and marketing. We also propose the introduction of limited partnerships with

a legal personality as alternative investment funds vehicles, offering advantages in terms of versatility and structure. At the same time, we are working with CySEC on formulating legislation which will introduce licensed and regulated Mini-Managers, below the European Directive thresholds, as well as legislation on licensed and regulated Administrators. Let me assure you that our commitment to promote reform and to continue working for a stable, business friendly economic environment remains strong. We acknowledge that more needs to be done and we know that maintaining the competitive edge of an economy requires a never-ending reform effort. For instance, fully understanding the significance of an efficient judiciary in the functioning of an open economy like ours, we are moving ahead with the establishment of a new, specialized Commercial Court, and with a major investment in e-justice, as part of a broader judicial reform. Fully realizing the importance of credible regulation and supervision we have been enhancing the capacity of CySEC and we are proceeding with the establishment of a new independent and unified supervisory authority for the insurance and pension fund sector. Fully acknowledging the need for public administration to become more efficient, we are channeling significant investment into e-government and shall soon be promoting new legislation aiming to simplify and expedite licensing procedures for new investment. Within the framework of this broad effort, we shall continue working closely with the industry and the Regulator in order to cre-

We shall continue working to create the circumstances that will allow the further expansion of the Funds Industry in Cyprus ate the circumstances that will allow the further expansion of the Funds Industry in Cyprus. A thriving Funds Industry will not only create opportunities for investors and professionals, but will also provide additional financing instruments for investment across the business sectors of Cyprus. Let me express once again the commitment of our Government to work in the direction of ensuring that Cyprus remains a stable and safe jurisdiction, an attractive base for business and investment, continuously building bridges of co-operation and standing firmly in favour of open markets and free trade. (Taken from the address by Finance Minister Harris Georgiades to the 3rd International Funds Summit, held in Limassol on 29 -31 October 2017)

ACCOUNTANCY CYPRUS

COVER STORY

How CySEC Views the Funds Industry

CySEC places great emphasis on the development of the collective investment and asset management sector due to the numerous advantages it generates for the Cypriot economy as an alternative form of finance, explains CySEC Chairwoman Demetra Kalogerou.

he task of establishing an integrated regulatory framework for the development and the governing of the collective investment sector in Cyprus, spanning the last 5 years, was made possible by the efforts of CySEC, in close collaboration with the Ministry of Finance and the valuable contribution of CIFA. The national legal framework was harmonized with the fourth European UCITS Directive in 2012, with the fifth Directive following suit in April 2016. This triggered the approval of the Open-Ended Undertakings for Collective Investment law that regulates the

establishment and operation of UCITS funds and UCITS fund management companies. In 2013, the Alternative Investment Fund Managers Directive was also transposed into national legislation. This AIFM Law regulates the establishment and operation of fund managers that handle funds in excess of â&#x201A;Ź100 million and has made possible the passporting of these services to the rest of the EU. Cyprus ranks second in the European Union in terms of adopting the European legal framework, in line with our commitment to adopt the latest EU Directives as swiftly as possible. We remain at the forefront of the latest European financial legislation, making

Cyprus a safe, responsible and competitive place to do business globally. In July 2014, CySEC was designated the competent authority for Alternative Investment Funds, which were previously regulated by the Central Bank under International Collective Investment Schemes. Pursuant to the enactment of the Alternative Investment Funds Law, AIFs and their managers are authorized and regulated by CySEC under a more modern and comprehensive regime. The enactment of the AIF Law made possible the establishment and operation of alternative investment funds that, subject to certain conditions, can be marketed to Retail and Well

Informed/Professional Investors. In its effort to make the whole investment fund regime in Cyprus even more attractive, CySEC promotes changes to the legal framework governing collective investment schemes in Cyprus.

AIFS The AIF Law regulates the establishment and operation of two types of funds, namely Alternative Investment Funds and Alternative Investment Funds with Limited Number of Persons. AIFs may be established as common funds, variable or fixed capital investment companies and limited partnerships and can be marketed to Professional Investors. They can also

ACCOUNTANCY CYPRUS

Demetra Kalogerou

be marketed to well-informed and retail Investors, subject to certain conditions. A single Depositary must be appointed for each AIF, which is established either locally or in another EU Member State or in a third country – I stress that when the AIF is managed by an AIFM, the rules for the appointment of a Depositary under the AIFMD apply as well. CySEC has recognized the fact that an internally managed AIF has a dual role, as a fund and the fund manager, while an externally managed AIF is a vehicle, through which investor capital is raised. Hence, CySEC considers that the initial capital for authorisation will be necessary only for self-managed AIFs, since they also act as the fund’s manager. The initial capital for self-managed AIFs, authorised under the AIF Law, will be €125,000. However, the assets of both externally managed and internally managed AIFs must reach €500,000 within the first 12 months of their operation. Moreover, internally-managed AIFs shall separate, hierarchically and operationally, their risk management function from their portfolio management function. We believe that better regulatory compliance is achieved when both a compliance officer and an internal auditor are present in such structures; therefore they will have to play an important role as well, in order to assist the AIF achieve full compliance with the new regulatory regime. The new legislation will also clarify that, when the AIF is self-managed, its Board of Directors will be comprised of at least 2 executives and 2 non-executive directors.

The collective investment sector is expected to contribute substantially to the further progress of our country`s economy In addition, AIFs are subject to the CySEC Categorisation Directive, which specifies the investment policy of such funds, depending on the category of investors to which they are addressed or marketed. Those addressed to retail investors may be Real Estate AIFs, Venture Capital AIFs, Money Market AIFs, Capital/Performance Guarantee AIFs, Capital Protection AIFs and Fund of Funds AIFs. The AIFs which are addressed to professional or well informed investors can be Real Estate AIFs, Money Market AIFs, Venture Capital AIFs, Fund of funds AIFs and Loan origination AIFs.

AIFLNPS The second type of fund structure that can be established under the AIF Law, AIFLNPs, may be established as fixed or variable capital investment companies and limited partnerships. Compared to AIFs, which can be marketed to retail investors, AIFL-

NPs can only be marketed to professional and well-informed Investors, and the maximum number of investors that an AIFLNP can have is 75. As already mentioned, an internally managed AIFLNP has a dual role (fund and fund manager), and therefore the legislation will introduce an initial capital requirement for internally managed AIFLNPs of €50,000. Compared to AIFs, which must raise €500,000 within the first 12 months of their operation, the assets of the AIFLNPs must reach €250,000 within the first 12 months of their operation. Unlike AIFs, a Depositary may not be appointed when (a) the total assets of the fund do not exceed €5 million, or (b) the number of unit-holders is limited to five, or (c) the number of unit-holders is limited to 25 and only 10% of the fund’s total assets are subject to custody, and each unit-holder has invested at least €500,000 in the fund. The new legislation will also clarify that, when the AIFLNP is self-managed, its Board of Directors shall be comprised of at least one executive and two non-executive directors.

REGISTERED FUNDS The Alternative Investment Funds Law will facilitate for the first time what are known as “registered funds”. These funds will be registered in a Registry but will neither be authorised nor regulated directly by CySEC. Instead, their supervision and monitoring will be performed by the AIFM managing the Registered AIF. Registered AIFs can take many forms, and they can be

ACCOUNTANCY CYPRUS

COVER STORY

either of the open or closed-end type, and they can be established as a common fund, as an investment company with either variable or fixed capital or as Limited Partnerships. These investment products, insofar as they are not directly regulated, will be available exclusively to professional and well-informed investors. There is no initial capital requirement for these funds but, like AIFs, they will have to raise €500,000 within their first 12 months of operation. Registered AIFs cannot be setup as Money Market Funds, Loan Origination Funds or Funds of Funds. Lastly, the AIFMD Depositary rules apply, since they will be placed under the management of an AIFM. When, subject to certain exceptions, the Registered AIF is not placed under the management of an AIFM, the Depositary can be established either locally or in another EU Member State or in a third country. We trust that these changes will encourage the setup of more funds in Cyprus, safeguard investor protection and the healthy growth of the market.

This measure aims at creating a competitive market for investment funds and their managers in Cyprus. Mini-managers will be able to manage authorised AIFs and AIFLNPs, and subject to certain exceptions, Registered AIFs. In parallel to these amendments, CySEC has concluded its examination regarding the creation of a regulatory framework for fund administrators, as suggested by CIFA. The text of the proposed amendments to the Partnership Law and the Companies Law will be submitted for legal vetting to the Law Office by the Ministry of Energy, Commerce, Industry & Tourism. Also, the draft of the MiniManagers Law is being finalized by CySEC and will be submitted to the Ministry of Finance shortly. We believe that these substantial improvements will create all the necessary preconditions for the growth of the collective investment sector which is expected to contribute substantially to the further progress of our country`s economy.

MINI MANAGERS

Although the legislative framework was completed only relatively recently, there is good growth of the sector. At the moment, CySEC regulates a number of Cypriot Undertakings for Collective

CySEC will introduce the establishment of a new category of investment managers, the “mini-managers”. These managers will be licensed to operate below AIFMD thresholds.

THE UCITS AND FUNDS MARKET IN CYPRUS

Investment in Transferable Securities (UCITS), foreign UCITS, UCITS Management Companies and more than 113 Alternative Investment Funds, out of which 32 invest directly in Cyprus. The Alternative Investment Funds are managed by 87 Fund Managers, of which 19 are Alternative Investment Fund Managers that can each manage funds over €100million of assets. By the end of 2016, total Assets under Management were around €2.7 billion, 38.97% of which were placed in Private Equity Funds, 21.98% in Real Estate and 18.03% in Hedge Funds. At the same time, UCITS strategies are concentrated on transferable securities (91%). Interest in the set-up and authorization by CySEC of Alternative Investment Funds is still strong. The establishment and operation of these organisations in Cyprus is expected to

contribute substantially to the economy in various ways, such as injecting capital into the real economy and providing an alternative source of funding, something that is widely used abroad. To assist the process, we have made changes within CySEC to make the processing of applications more efficient and faster. In particular, additional staff were assigned to the relevant department and improvements were introduced in the procedures. It is worth mentioning that CySEC authorized the setup of one of the few EuVECA Funds, which complies with the relevant European Regulation on Venture Capital Funds. The said fund aims to invest in Cypriot innovative start-ups to attain a more competitive edge in the global marketplace, and consequently, strengthen the Cypriot economy. Recognising the need to protect venture capital from certain AIFMD rules that are unsuit-

We remain at the forefront of the latest European financial legislation, making Cyprus a safe, responsible and competitive place to do business globally

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MiFID II, PRIIPs Regulation and Fourth AntiMoney Laundering Directive (4AMLD) are likely to impact those involved in investment funds able for the sector, such as high capital requirements and the obligation to appoint a depositary, European legislators adopted the European Venture Capital Fund (EuVECA) Regulation. Its aim is to allow venture capitalists to market their funds to investors across the EU through a voluntary EU-wide passport without having to meet all of the demands of the AIFM Directive. The new EuVECA Regulation (EuVECA II) contains several helpful changes that address issues raised by Invest Europe members. These include greater flexibility in eligible investments, a reduction in costs by limiting the impact of host fees and charges and an enlarged scope for the regime. In an ever-changing regulatory environment, the fund industry will be impacted by the new changes. MiFID II, PRIIPs Regulation and Fourth Anti-Money Laundering Directive (4AMLD) are likely to impact those involved in investment funds.

MIFID II DIRECTIVE The implementation of the Investment Services and Activities and Regulated Mar-

kets Law of 2017 that harmonizes Cyprus law with MiFID II and comes into effect on 3 January 2018 also affects UCITS management companies and external Alternative Investment Fund Managers (AIFMs) who have extended their authorisations to include portfolio management and, potentially, non-core services, such as investment advice, only in respect of those extended services. The application of the Investment Services and Activities and Regulated Markets Law is explicitly referred to in the applicable laws governing UCITS management companies and external AIFMs. Moreover, UCITS management companies and external AIFMs should also take into account the provisions in relation to investor protection, such as those relating to inducements, since the new legislative regime prohibits firms that provide portfolio management services from receiving any inducements, except for minor non-monetary benefits, in relation to the provision of these services to clients. Another example relates to the product governance rules that are imposed on

firms which manufacture and/or distribute MiFID type financial instruments or who advise corporate issuers on the launch of new financial instruments or sell financial instruments and services to clients. These obligations apply to UCITS management companies and external AIFMs to the extent they provide these services.

PRIIPS REGULATION The EU Regulation on Packaged Retail and Insurance-based Investment Products (PRIIPs) requires firms to prepare, publish and provide a Key Information Document (KID) in respect of each PRIIP they produce, before it is made available to a retail investor in the EEA. It aims to encourage efficient EU markets by helping investors better understand and compare key features, risks, rewards and costs of different PRIIPs.

4TH AMLD Transparency of beneficial ownership is becoming a familiar theme. The Fourth AntiMoney Laundering Directive (4AMLD) extends the requirements on the holding and disclosure of beneficial ownership information to apply to corporate and other legal entities and trusts, and also requires the information held centrally to be up to date. Undoubtedly, we face Regtech solutions which could be potentially difficult and costly to implement at first, but in the end they will play a crucial role in how companies can thrive in an increasingly more complex regulatory environment. (This article is based on Demetra Kalogerouâ&#x20AC;&#x2122;s address to the 3rd International Funds Summit, held in Limassol on 29 -31 October 2017)

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COVER STORY

We have the capability to increase the assets under management once we have all the pending legislative measures pass through Parliament.

Angelos Gregoriades CIFA - President

How do you view the prospects of the funds industry in Cyprus? The prospects of the fund industry are very promising. Reflecting on the industry trends, the demographic drivers are clear. Not only is the industry likely to be considerably larger in 15 years’ time than it is today, due to trends such as the growth of the middle class, increasing mobility and the growing economic influence of the developing world but, perhaps more interestingly, I believe the industry will have a more important role to play in clients’ lives and society in general. Individuals will need to take greater responsibility for their retirement planning, as it is clear that no one else will do it for them, given the decline of state provision in many countries and continued pressure on the traditional annuity models. This presents an opportunity for the industry to capture clients earlier rather than focusing on attracting clients when they have assets to invest. The net result is likely to be a much broader, younger, more diverse, multigenerational and multi-cultural client base. This opens up a great opportunity as future generations will be more engaged in managing their savings and planning their retirements whilst institutional investors will be calling for greater information,

education, flexibility and certainty. The new business models will demand new skill sets and technology could continue to replace many traditional roles. The industry will need to adjust to the prospect of acquiring talent from different pools and employing a more diverse multigenerational staff which will have a similarly diverse range of expectations. Do you believe that Cyprus can compete with the more established funds jurisdictions such as Luxemburg and Malta? Cyprus offers an alternative fund jurisdiction within the EU, due to its strategic position close to the CIS and MENA region specialising in Alternative Investment Funds. Other EU jurisdictions were in the market for Investment Funds well before Cyprus but we have the capability to increase the assets under management once we have all the pending legislative measures pass through Parliament. Is the current legislation in Cyprus adequate for the development of the funds industry? We all have worked diligently to put the country on a par with other top fund hubs and we are now seeing increasing interest and appetite from investors and fund service providers looking

for EU-regulated jurisdictions. Coming soon is an ambitious additional reform of the legal framework regarding investment funds, including provisions for the introduction of registered funds, partnerships with a legal personality and the introduction of a “Mini Manager” concept for managing assets up to a certain threshold. In the area of taxation, we offer one of the most attractive fund tax regimes in Europe, both at the level of the fund manager and investors, as well as at the level of the fund. This, together with the stabilisation of the banking sector, has been instrumental in the restoration of consumer and business confidence, something that was reflected during the 3rd International Fund Summit in October this year, which was attended by more than 500 participants, of whom 200 were from overseas. Do you have any specific proposals that could make Cyprus an even more attractive location for funds and their management? As noted already, new business models demand new skill sets and technology could continue to replace many traditional roles. These technological changes should be looked at as a oncein-a-generation opportunity to re-imagine and modernize the Funds Industry and, for

this purpose, CIFA has set up a FinTech committee so that experts in the field will monitor technological changes and advise the Board to take action where necessary, to enable the funds industry to grow. At the same time we will keep working with the Government and the Cypriot regulators with the aim of becoming more efficient in implementing new legislative measures as this is a area in which we face considerable delays. To overcome them, the Government should consider setting up knowledge centres at all levels, from initiating new legislative measures to passing them through Parliament as most of these delays relate to the complexity of the new provisions that need to be implemented from time to time relating to our specialized industry. Furthermore, CIFA has encouraged local universities to set up specialized courses to serve the Industry with new graduates and they have responded successfully but we strongly believe that the universities can also play a role as research centres to support the Government and the Regulators in building up knowledge wherever needed, thereby making Cyprus an even more attractive location for funds and their management.

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COVER STORY

Cyprus can design a market strategy to position itself in a way that can compete effectively for new business with the more established centres in Europe.

Andreas Athinodorou FCA, CEO of ATG Fund Services LTD, part of the Aspen Trust Group Chairman of the Fund Administration and Custody Services Committee How do you view the prospects of the funds industry in Cyprus? I strongly believe that the funds industry is one of the key pillars for enhancing the position of Cyprus as a financial centre. Cyprus has been the bridge for successful investments into specific regions like Russia, Central and Eastern Europe, the Middle East, India and others. It is the natural progression to elevate the role of Cyprus from an investment conduit jurisdiction to a Fund destination for attracting investors who target countries that Cyprus has established business and cultural relations. Do you believe that Cyprus can compete with the more established funds jurisdictions such as Luxemburg and Malta? The aim of establishing Cyprus as a Funds jurisdiction is to provide fund managers with an attractive alternative to existing fund jurisdictions such as Luxemburg and Malta. Once we have a clear offering in the Funds industry we can definitely at-

tract a part of the new global funds business that would otherwise find its way into the more established centres. Specifically, Funds that aim at or originate in markets where Cyprus has established working relations are more likely to be established in Cyprus than in other funds centres. Further, we can aim to target funds that launch below the â&#x201A;Ź50 million mark which is, as a rule of thumb, what the Luxembourg funds industry is targeting. Finally we can implement specific strategies that will attract funds in sectors like Blockchain technology, Biotech and Medtech, Real Estate or even the film industry. Despite the difficulties of being a newly established funds jurisdiction, Cyprus can design a market strategy to position itself in a way that can compete effectively for new business with the more established centres in Europe. Is the current legislation in Cyprus adequate for the development of the funds industry? A new legal framework is in the process of being enacted.

Once this framework is in place we shall have the right legislation for the development of the funds industry in Cyprus. Beyond the right legal framework, the regulator must apply this new legislation in such a manner that will allow the industry to unfold and grow. Specifically we need clear processes and procedures by CySEC that will be consistently applied and communicated to Funds industry participants and potential foreign fund promoters. These processes and procedures must be meeting all the requirements of the legislation and, at the same time, address all the commercial issues on hand as compared to other jurisdictions in order for Cyprus to be seen and operate as an attractive funds jurisdiction Do you have any specific proposals that could make Cyprus an even more attractive location for funds and their management? I believe that a stronger Public-Private working relationship between the Regulator/Government on the one hand and CIFA and the

Industry players on the other will enhance the position of Cyprus as a fund jurisdiction. This requires initially a stronger public/regulator commitment to the Funds Industry in the form of hiring more human resources with technical know-how and a commercial awareness of the specific industry. This will facilitate a speedier and more commercially adept approach to new funds business aiming to find its way into Cyprus. Furthermore, it will allow CIFA and the industry players to commit more resources in terms of time and money to promote the funds industry globally in a way that enquiries can find fertile ground to materialise and grow. Any shortcomings within CySEC in terms of people with technical or commercial expertise can be met by CIFA externally hiring such expertise and providing it to the Regulator as and when needed. These are just some ideas on the first steps to be followed to allow a stronger relation between the Public and Private sector that will definitely boost the funds sector.

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Upcoming amendments to the current legislative framework will increase and consequently boost Cyprus’ competitive offering on a worldwide basis.

Andreas Yiasemides Partner & Head of Fund Services, PwC Cyprus How do you view the prospects of the funds industry in Cyprus? The Cyprus funds industry has emerged as an alternative method of financing compared to the traditional financing from bank institutions. Despite overcoming the 2013 economic crisis, Cyprus banks are still reluctant to provide loan financing to individuals and SMEs for investment purposes. In addition, the global investment fund industry has experienced significant growth in recent years, a trend which is anticipated to expand even more rapidly in the coming years. This is evident from the fact that worldwide assets under management are increasing year by year. Investors are also turning to investment funds as they seek diversification of their investments, lower commission fees, less minimum initial capital per investment, liquidity and more regulated and expert portfolio management. By enacting the Alternative Investment Funds Law (AIF Law) in July 2014, as well as transposing the AIFMD into national legislation, Cyprus,has quickly and proactively responded to investors’ demands and is committed to accommodating their business needs in the future. Do you believe that Cyprus can compete with the more

established funds jurisdictions such as Luxemburg and Malta? Despite sharing equal benefits with Luxembourg and Malta by virtue of their membership in the EU (i.e. having an obligation to be compliant with EU Directives and Regulations and being members of the eurozone), Cyprus is still considered to have a considerable advantage for various reasons including but not limited to the following: • Its strategic geographical location between Europe, Middle East, Asia and Africa • More cost-effective setting-up and ongoing operational services • Access to a vast list of Double Tax Treaties allowing for taxefficient structuring of investments • Investment incentives (i.e. Citizenship by Investment) • Simpler, consolidated application forms for CySEC • Tax benefits for High Net Worth individuals and managers. Is the current legislation in Cyprus adequate for the development of the funds industry? The Cyprus regulatory authorities have made great efforts to bring the investment funds legislative framework into alignment with and to have an advantage over the equivalent legislative regimes of other EU

jurisdictions. This was achieved by repealing the previouslyapplicable ICIS Law with the enactment of the Alternative Investment Funds Law in 2014. During the process of drafting the AIF Law, the Cyprus regulatory authorities thoroughly examined the provisions of the equivalent laws in Luxembourg and Ireland. Hence, the Cyprus AIF Law accommodates and addresses any loopholes apparent in the laws of the other EU jurisdictions, while at the same time providing more incentives and benefits for investors, fund promoters and fund managers. In addition, Cyprus also transposed the UCITS IV Directive in 2012, UCITS V Directive in 2016, and the AIFMD in 2013 (allowing the application of “passporting” rights through Cyprus at a comparatively lower cost), becoming one of the first countries to transpose the latter into national law. Together with the upcoming amendments to the existing legislative regime, the Cyprus regulatory framework is considered to be second to none. Do you have any specific proposals that could make Cyprus an even more attractive location for funds and their management? Upcoming amendments to the current legislative framework

will increase and consequently boost Cyprus’ competitive offering on a worldwide basis. CySEC has recently announced its plans for the introduction of: a) The “Registered AIFs RAIFs”, which will not be subject to authorisation by CySEC but to a mere registration with it. b) The “Mini Manager” regime, which will introduce lighter regulation for AIFMs that satisfy certain requirements, i.e. the total assets under management fall below prescribed thresholds. c) The introduction of a Limited Liability Partnership with regard to investment funds with a separate legal personality; In addition, there are pending consultations between CySEC and the private sector regarding the regulation of Fund Administrators in order to ensure higher investor protection and better quality of services. Moreover, debates are being conducted on the introduction of the following new concepts to accommodate the rapidly evolving Cyprus funds industry: • Expanding tax incentives and benefits for fund managers who wish to register in Cyprus. • Alternative and more time-efficient authorisation procedures in relation to applications submitted to CySEC (despite the introduction of an option for a “fast track” procedure).

ACCOUNTANCY CYPRUS

COVER STORY

Christoforos Antoniades

Demetris Taxitaris

How do you view the prospects of the funds industry in Cyprus? The investment funds sector has great potential to develop into a significant industry for the economy of Cyprus and I believe that we can create a reputable, efficient and competitive European domicile for the global fund and asset management industry. There are several reasons supporting the business case, with the global investment industry being already sizeable and growing rapidly. There is scope for entry, hence there is definitely a market opportunity. Cyprus has already made significant progress in this field and possesses all of the attributes required for successful penetration. In numbers, our fund industry is still small but it is exhibiting positive signs for high growth potential with new fund registrations already showing strong momentum.

How do you view the prospects of the funds industry in Cyprus? In my view we need to focus on more specialised segments of the fund industry in order to allow Cyprus as a jurisdiction to gain market share, leveraging on its competitive advantages. The Alternative Investment Fund (AIF) universe appears more promising in this respect compared to UCITS, offering more flexibility and agility. Different types of AIFs can be used more easily as follows: a. as part of structures of single- or multifamily offices b. for specialised private equity projects c. for the funding of start-up projects d. for newly formed funds aiming at gaining interest gradually e. for smaller, lighter and simpler regulated fund structures

Partner & Executive Director, Argus Group

Do you believe that Cyprus can compete with the more established funds jurisdictions such as Luxemburg and Malta? As a hub we have specific elements that already compare favourably with these jurisdictions, with Luxembourg in terms of overall set-up and running costs and with Malta on the wider offering of professional and experienced service providers with a customized service philosophy, a highly educated and talented workforce. Other elements include a better quality of life and better access to the Middle East, Asia and Eastern Europe. I also believe that

it is not always correct to define this as a competition as we can act as a complementary hub and cooperate with these and other jurisdictions to jointly mobilise networks and source business for the industry. Is the current legislation in Cyprus adequate for the development of the funds industry? We currently have a workable and functional legislation regime that is complete and fully harmonized with the EU legal framework. It is supported by improving efficiency on the part of the authorities and by a modern and transparent legal system based on common law and high quality service providers. New changes to the legislation are expected to further improve the existing regime, thus further refining our product offering. Do you have any specific proposals that could make Cyprus an even more attractive location for funds and their management? We need to further mobilise resources and networks in order to promote the industry. To this end, we need more investment. Funding from the authorities as well as tax and other incentives, would certainly assist CIFAâ&#x20AC;&#x2122;s efforts whilst private initiatives should be encouraged to grow further. Our efforts should also be encouraged with further improvements to operational efficiency in certain industry areas and with the prompt passing of new legislation to fully complete our offering.

General Manager, MAP S.Platis

Do you believe that Cyprus can compete with the more established funds jurisdictions such as Luxemburg and Malta? Instead of directly competing against more established fund centres in Europe or elsewhere, I prefer to follow a strategy of differentiation, targeting segments of the fund industry which are more specialised. It is important to understand our strengths and weaknesses in doing so and Cyprus has a number of competitive advantages on which it can leverage: a. The regulatory framework with respect to funds and fund managers is fully aligned with the European Union (EU) framework b. A high value-for-money proposition for professional services and infrastructure c. A favourable tax regime applying to both legal entities and individuals d. Common law regime e. EU membership â&#x20AC;&#x201C; Cyprus can serve as the gateway to the EU, providing an EU passport

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for funds f. Proximity to the Middle East and Africa Is the current legislation in Cyprus adequate for the development of the funds industry? The current legislation forms a sufficient basis to build on and this has been the strategy until today. We have come a long way since 2014 when the relevant regulatory framework was first introduced. The number of funds and fund managers has been growing ever since. In an attempt to realise Cyprusâ&#x20AC;&#x2122; full potential, it is imperative to introduce longpending reforms, which are the result of recommendations by an international London-based law firm which specialises

in the global fund industry. The world of funds is extremely dynamic and these reforms will allow Cyprus to move to the much-sought next level, in an attempt to attract more funds and fund managers in the years to come. Do you have any specific proposals that could make Cyprus an even more attractive location for funds and their management? The absence of global custodian banks offering depositary services is a drawback in our efforts to have a more significant footprint. Serious attempts to attract such a global custodian bank should continue in a coordinated manner, probably with the Government offering specific

incentives to this end to facilitate the decision. Gaining nvestment grade status with global credit rating agencies as soon as possible is also necessary, albeit not individually sufficient. We are now closer to achieving this objective, although the high level of non-performing exposures in the banking sector hinders efforts and will require a solution soon. Brexit can be seen as an opportunity, with Cyprus offering the option for regulated structures to use for EU passporting purposes. There are large numbers and types of such companies of varying sizes in the UK, to which Cyprus can be promoted as an alternative jurisdiction to allow them to operate from, perhaps alongside their current operations.

Cyprus still has the potential to be a credible and viable option for AIFMs and family offices

George Rologis Group Executive Board Member, Group Head EMEA & Group Head Corporate Development - Strategy & M&A, Alter Domus How do you view the prospects of the funds industry in Cyprus? Although it is fast becoming a bit late, Cyprus still has the potential to be a credible and viable option for AIFMs and family offices looking to set up or transfer their fund vehicles or manager operations to the EU. For this potential to materialise, however, there need to be two basic ingredients: the new funds legislation must be enacted as soon as possible and it requires a fully supportive Government and regulator. Do you believe that Cyprus can compete with the more

established funds jurisdictions such as Luxemburg and Malta? Cyprus should to look at the pockets where it can compete credibly and not attempt to counter the established jurisdictions like Luxembourg, the Channel Islands and the UK until it has a proven track record of some years in setting up and hosting such vehicles. In the meantime, and assuming Cyprus has the aforementioned ingredients, it can be an option for the new and smaller managers â&#x20AC;&#x201C; those using Malta or Cayman at the moment who are cost- conscious and those looking to patch to their

current vehicles with an EU vehicle that has a wide Double Tax Treaty network relevant to where they are investing. Is the current legislation in Cyprus adequate for the development of the funds industry? Cyprus needs the new updates to the legislation, referring to the introduction of the mini-manager, the Registered Alternative Investment Fund, the Limited Liability Partnership as well as the regulation of fund administrators to be able to compete at an equal level. New legislation, however, will not be enough. Continuous

innovation and updating to be up to date and, moreover, ahead of the curve, is needed. Do you have any specific proposals that could make Cyprus an even more attractive location for funds and their management? Real commitment and support from the Government and the regulator are needed. The private sector can then build a strong industry in Cyprus to replace the ailing traditional corporate services sector. There is little reason to look for more proposals for improvement when Cyprus has not even done the basics.

ACCOUNTANCY CYPRUS

COVER STORY

Marios Pilavakis

Marios Tannousis

Council Chairman, Cyprus Stock Exchange How do you view the prospects of the funds industry in Cyprus? The Funds industry is a new and promising industry in Cyprus and a great deal of effort is being made by the Authorities and market participants, in order to attract funds (local and international) and promote Cyprus as a fund jurisdiction. Taking into consideration the country’s attractive tax regime, a legal framework that is harmonised with EU Directives and the large number of skilled professionals, I believe that these will enable the growth of the funds industry in the near future. It has already started to grow as the Cyprus Securities and Exchange Commission has approved and already supervises a respectable number of funds. Do you believe that Cyprus can compete with the more established funds jurisdictions such as Luxemburg and Malta? Cyprus can compete with Luxemburg and Malta, given the similarities in their tax and regulatory frameworks but, most importantly, its competitive advantages. There is

significant interest from investors and fund service providers internationally, who are looking for new jurisdictions like Cyprus that are regulated in the EU. Regarding the facilities provided to list funds on the CSE, the option of listing Alternative Investment Funds with limited number of investors (AIFLNP) should be reconsidered by the Authorities, taking into consideration the need to satisfy such requirement by a significant number of registered AIFLNPs. Is the current legislation in Cyprus adequate for the development of the funds industry? The current legislation in Cyprus may be considered as adequate. However, there is always room for improvement and periodic adjustments and changes. Do you have any specific proposals that could make Cyprus an even more attractive location for funds and their management? An important component of the Cyprus economy is the Cyprus Stock Exchange (CSE) which offers the possibility, among others, of listing funds

via the options of with or without trading. The listing of funds on the CSE should be promoted in the overall package offered by Cyprus as a Fund jurisdiction, noting the following advantages that can be obtained through a listing: x Visibility and transparency are provided to investors, which gives Funds a higher public profile and prestige x A price mechanism is provided (either through NAV postings, or market prices if traded) for Fund managers that require a publicly quoted securities Exchange price for their investments x The competitive pricing policy of the CSE x Funds can be more effectively marketed to investors by being eligible investment propositions for particular investors, e.g. pension schemes, etc., thereby overcoming specific restrictions to investing in unlisted securities or in investments not listed on a recognised exchang x Simple, quick listing procedures, minimal bureaucracy, flexibility and effectiveness by the Cyprus Stock Exchange. x Listing on a Recognised and Regulated Stock Exchange.

Deputy Director General, Cyprus Investment Promotion Agency (CIPA), Board Secretary, CIFA How do you view the prospects of the funds industry in Cyprus? The Cyprus Fund Industry has great prospects. This is not new. It was first identified in 2010 by the experts commissioned by the Cyprus Investment Promotion Agency (CIPA) to analyze Cyprus’ economic model and identify new economic sectors for development with long-term prospects. Since then, the Advisory Committee on Investments Funds set up by CIPA’s Board of Directors has worked diligently and methodically and drafted a roadmap in collaboration with leading international law firms on funds such as Simmons & Simmons, KWM and international Banks such as SOCGEN. The support of the Ministry of Finance and CySEC has been instrumental in this direction. The roadmap and strategy are followed very closely and revised to reflect new trends, developments and regulations. Do you believe that Cyprus can compete with the more established funds jurisdictions such as Luxemburg and Malta? Cyprus can certainly compete with the more established jurisdictions in the long term. The main EU jurisdictions are Luxembourg, Ireland and Malta, all three of which started from a particular point and have built an ecosystem over the years that works, is sustainable and attracts business. Cyprus can do the same and has a role to play, especially in the Middle East and North Africa (MENA) as well as in Eastern Europe. The fact that Cyprus has adopted all the EU Directives related to Investment Funds and is positioned as a white, onshore, transparent, jurisdiction can attract business from

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COVER STORY

Investment Funds that are re-domiciling from offshore to onshore jurisdictions. Is the current legislation in Cyprus adequate for the development of the funds industry? It is adequate but this is not enough because the industry is dynamic and each jurisdiction frequently tries to introduce new incen-

tives and/or enhance existing ones. There should be continued benchmarking of Cyprus with other jurisdictions. Within this framework, CIFA is expecting the introduction of five new bills to Parliament that will further enhance the countryâ&#x20AC;&#x2122;s ability to attract Investment Funds as well as Fund and Asset Management Professionals to Cyprus.

Do you have any specific proposals that could make Cyprus an even more attractive location for funds and their management? Cyprus needs to: a. Be able to list its investment funds, UCITS and AIFs on international platforms such those of Thomson Reuters and Clearstream so that they are visible globally. b. Transpose into national

legislation the five new bills mentioned earlier. c. Attract a Global Custodian to operate in Cyprus d. Strengthen and intensify the promotion of the Cyprus Funds Industry in specific and targeted events and roadshows on Asset and Fund Management by the private sector as well as by institutions such as CIPA, CIFA, the CCCI and the CFA.

The real question is not if Cyprus can compete with other jurisdictions but whether it can build and elevate its own funds industry

Omiros Pissarides

COO & Group General Manager, AXIA Ventures Group How do you view the prospects of the funds industry in Cyprus? The prospects of the funds industry in Cyprus are promising for a number of reasons: (i) Over the last few years, the country has pursued a serious and coordinated effort to attract funds, which is beginning to bear fruit and will continue to pick up speed; (ii) Cyprus has shed much of the uncertainty surrounding its economy and financial system since 2013 and is largely considered a comeback success story; (iii) Cyprus possesses a number of undeniable advantages, ranging from high-calibre, educated professionals to a competitive tax rate, good infrastructure and advanced telecommunications, political stability and more; (iv) The country is also aided by a generic trend for funds under management to grow on a global scale. Do you believe that Cyprus can compete with the more established funds jurisdictions such as Luxemburg and Malta? Yes, although reaching the size of the funds industry in jurisdictions like Luxembourg

is not the required outcome. The real question is not if Cyprus can compete with other jurisdictions but whether it can build and elevate its own funds industry, partly through the efficient utilization of the experience and lessons of other countries. The ultimate outcome is to create a local funds industry on the foundations of best practice that is beneficial for the economy and all its agents â&#x20AC;&#x201C; the numbers will then take care of themselves. Is the current legislation in Cyprus adequate for the development of the funds industry? The current legislation is partly adequate. In realization of this, under a general but wide-reaching initiative of CIFA, significant efforts have been undertaken by all parties involved to update the relevant legislation and we are close to reaching this point. It must be noted that the increasing pace of evolving legislation, as well as the relative ease of international fund managers to assess the merits of individual countries, imply that Cyprus can only remain an

attractive long-term jurisdiction if it maintains an active and undiminished focus on continuously adopting best legal practices over time. Do you have any specific proposals that could make Cyprus an even more attractive location for funds and their management? At CIFA, we try to monitor developments closely, while receiving proposals from market participants. A number of overriding messages that come across are that legislation needs to be both up-to-date and efficient, time to market in terms of funds authorization should not be unduly long and supervisory powers should be robust enough to act conductively towards creating a renowned fund jurisdiction, while not being so excessive as to deter commercial activities. Overall, deploying an enduring strategy, which is monitored and re-evaluated, will deliver results and this strategy should also target a higher growth rate of local high-calibre professionals that will participate in the industry.

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Cyprus can certainly be a credible alternative to other European jurisdictions including Luxembourg, Ireland and Malta

Panikos G. Teklos Managing Director, Investment Management, Regulatory Risk and Wealth Advisory Leader, Deloitte Ltd How do you view the prospects of the funds industry in Cyprus? Overall, I am very, very positive. Cyprus has come a very long way in creating a footprint as a credible jurisdiction for the establishment and servicing of different types of funds over the last 6 years. The transposition and adoption of the European Regulatory framework for UCITS and AIFMs into national legislation in 2012 and 2014 respectively, the creation of a national framework for AIFs in 2013 and continuous efforts to update and enrich the regulatory and legislative framework has put Cyprus officially on the map of European fund jurisdictions. The Cyprus Fund ecosystem, comprising a prudent yet business-oriented regulator, international-calibre professional service providers and administrators, distinguished law firms and UCITSD/AIFMDcompliant Depositaries, makes for a solid foundation on which the industry can grow and create an attractive environment for the establishment of Funds, Fund Management Companies and Fund Servicing Companies. The inclusion of the use of an AIF in the Citizenship by Exception Programme has also created further prospects for the establishment of funds in Cyprus, while the existence of

investment opportunities in real estate, shipping, infrastructure, NPLs, Oil & Gas, Renewable Energy Sources, Start-ups and Private Equity projects creates a prosperous ground for the employment of EU-compliant fund vehicles in Cyprus to raise capital and finance such projects. These credentials coupled with the latest global and European fund statistics indicating global AUMs at €43 trillion and €15 trillion respectively, and the growth trend for emerging managers at 3% p.a. for the last 6 years strongly suggest that Cyprus has great prospects of increasing its market share and, all things being equal, grow its AUMs five-fold in the next 3-5 years.

of prolonged low yields, such as the last 8 years, cost optimisation is key for Fund Managers in order to deliver performance to their clients and continue raising AUMs. Furthermore, Cyprus’s geographic location places it at the crossroads of Europe, Africa and Asia with regular flight connections, supporting business infrastructure and a stable political regime. Last but not least, there is a continuous effort by the private sector, through its designated body CIFA, with support from the Government and the Regulator, to be at the forefront of fund-related developments and provide incentives for Fund Managers and international depositaries and administrators to establish presence in Cyprus.

Do you believe that Cyprus can compete with the more established funds jurisdictions such as Luxemburg and Malta? Cyprus can certainly be a credible alternative to other European jurisdictions including Luxembourg, Ireland and Malta. Some of the compelling features of Cyprus are its very competitive cost, its Common Law-based legal system (which can attract Funds and Managers from the UK due to Brexit) and its very efficient, transparent and effective tax system. In periods

Is the current legislation in Cyprus adequate for the development of the funds industry? The current legislation is about to be enriched and amended with a set of laws regarding the establishment of a Registered AIF (“RAIF”) and the “Mini” Manager regime, whilst a series of other reforms are under way. On a fast-changing and continuously evolving regulatory landscape, “static adequacy” is not sufficient. We need to be equipped with the flexibility and versatility to adapt and adopt new regulatory requirements as

well as new legal frameworks to maintain and increase the competitiveness of Cyprus as a European Fund jurisdiction. Do you have any specific proposals that could make Cyprus an even more attractive location for funds and their management? Although it may sound trivial, one way to make Cyprus more attractive as a fund jurisdiction is to increase its visibility in a more targeted and systematic way. This is as simple as “the more people see and learn about Cyprus as a fund jurisdiction, the more likely they are to ask about it”. Technological advances and social media can greatly assist in this effort. Speaking of technology, the digitisation of the investment management industry and the use of blockchain technology would further enhance the attraction of the jurisdiction. Increasing awareness domestically about the use of investment funds as alternative financing and investing vehicles to traditional bank lending and deposits should also be put to work, while introducing Fund Management courses at universities, in conjunction with specific seminars by Industry professionals, can also assist in the maturity of the jurisdiction and, consequently, its attractiveness.

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ACCOUNTING & AUDIT

THE PERFECT CLOUD COMPUTING AND THE ROLE OF INTERNAL AUDIT

By Theodoros Hadjistyllis, Assistant Manager, Risk Advisory, Deloitte Limited

rganizations today are increasingly embracing Cloud Computing in an attempt to leapfrog or keep pace with growing competition in the marketplace. The rise of Cloud adoption has been phenomenal in the past few years and there are no signs of it slowing down. A move to the Cloud can yield significant benefits for organizations but it also introduces new risks that require attention. As the importance of Cloud Computing increases, internal audit will be pivotal in guiding organizations through change, help prevent surprises and ward off regulatory and compliance fines that may have a damaging impact on brand and reputation. The rule rather than the exception There is widespread evidence that Cloud Computing is a fast-growing industry. According to the latest reports by Forbes, Global Cloud IT market revenue is predicted to increase from $180 billion in 2015 to $390 billion in 2020, attaining a Compound Annual Growth Rate (CAGR) of 17%. Slow-and-steady customers, who were initially hesitant to adopt Cloud Computing in a meaningful way, have gone from the smallest to the fastestgrowing segment. In 2011, these customers had only 1% of their applications, on average, in the Cloud. By 2015, they had

16% in the Cloud, and this is expected to grow to 30% by 2018. This phenomenal expansion has already been translated into an impressive increase in revenue on the books of the major Cloud providers. Amazon Web Servicesâ&#x20AC;&#x2122; (AWSâ&#x20AC;&#x2122;) third quarter revenue was $3.66 billion, compared to $2.56 billion during the same period last year, attaining 43% growth. AWS has announced that customers had migrated more than 23,000 databases using the AWS Database Migration Service since it became available in 2016.

whenever the network is available and can be accessed from a range of devices (PCs, laptops, mobile devices, tablets, etc.). 3.

Resource pooling and location independence: The provider pools its computing resources to serve multiple consumers using a multi-tenant model. The customer organization generally has no control over or knowledge of the exact location of these resources.

Self-service: Users can access the service directly, provisioning is ondemand, and services are delivered in near-real-time.

Elasticity of supply: Capabilities can be scaled up or down to meet resource demands, with seemingly limitless upper bounds. This allows the organization to rapidly increase or decrease its information technology (IT) infrastructure costs based on changing business needs.

WHY ALL THE FUSS? Companies are migrating to the Cloud in such numbers because it can yield significant benefits, from increasing speed to market and achieving better economies of scale to improving organizational flexibility and trimming spending on technology infrastructure and software licensing. These benefits are attributed primarily to the five key characteristics of Cloud Computing: 1. Predictable pricing: The organization incurs a charge only when it consumes resources. The price is based on a flat subscription fee or a pay-as-you-go usage model, not on perpetual licensing or a long-term contract. 2.

Ubiquitous network access: The service is available wherever and

NOT EVERY CLOUD HAS A SILVER LINING A move to the Cloud has essentially extended the boundaries of the traditional computer processing environment and, although it can yield significant benefits, it also introduces new risks that could be particularly detrimental to organizations

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A move to the Cloud can yield significant benefits for organizations but it also introduces new risks that require attention

and therefore should be considered by the internal audit function. Listed below are some concerns that should be addressed by organizations before moving to the cloud: Data breaches: Particularly in multi-tenant cloud service databases. A flaw in one client’s application could give an attacker entrance to other clients’ data as well. Breaches could expose e-mail databases, putting e-mail accounts of thousands of end customers at risk of increased spam and phishing scams. Worse yet, data breaches could also reveal customers’ passwords and even personal and financial information to hackers. Data loss: Malicious hackers, natural disasters or lapses in provider services could result in a loss of customer data. For example, bugs in web-based e-mail services could lead to the disappearance of users’ messages, folders, inboxes, or entire e-mail accounts. Downed reservation systems and websites: Whether due to denial of service attacks, severe storms or technical glitches, outages could result in thousands of inconvenienced customers and the disruption of traffic (and commerce) at client websites.

THE ROLE OF INTERNAL AUDIT Internal audit departments can add value by helping organizations avoid the pitfalls associated with Cloud adoption tin the following ways: Discovery of Cloud services in use: Usu-

ally companies have a surprising number of Cloud services in use which are well beyond what was initially listed. Internal audit functions can use third-party solutions to scan the network to identify previously unknown Cloud services. This will ensure that all Cloud providers are inventoried and that all related risks are discovered, categorized and taken into account. Assessment of policies and procedures: Internal audit functions can provide objective assessment and advice in the development of company policies and procedures for procuring, managing, monitoring, and operating Cloud services. Internal Audit should also test the operating effectiveness of these policies on an annual basis as part of the internal audit plan. Vendor evaluation: Internal auditors can perform a risk assessment on potential or existing Cloud providers and develop their risk profile. Issues to be taken into account when doing so include vendor controls, disaster recovery capabilities, the handling of multiple customers’ data, contingency plans in the event of a data breach or loss and roles and responsibilities. Monitoring vendor performance: Internal audit has a central role in assessing how well a Cloud provider performs according to its contractual obligations regarding security, resilience, and reliability. The function can also assist in developing Cloud provider con-

tracts and service-level agreements. Risk- evaluation and mitigation: Internal auditors can proactively evaluate the possible risks of moving applications to the Cloud and develop risk-mitigation strategies to help minimize the Cloud risks that have been identified during the process. Regulatory compliance: In light of the recent General Data Protection Regulation(GDPR), which takes effect in May 2018, internal auditors can ensure through app due diligence that apps state clearly in their terms that the customer owns the data and that they do not share the data with third parties. Moreover, they can discover the true location where Cloud apps are processing or storing data – as the app vendor’s headquarters are seldom where your data is being housed – and thus ensure compliance with GDPR, which prohibits the transfer of personal data beyond EU/EEA. Internal audit departments should keep up with the rapid pace of Cloud adoption and continue to add value to organizations during this important transitional period. Each Cloud Computing benefit comes with associated risks and internal audit functions are expected to guide organizations through this unmapped territory and help them safeguard their assets from security risks, privacy issues, and operating hazards. After all, the sun always shines above the clouds.

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ACCOUNTING & AUDIT

CAN INTERNAL AUDITORS BECOME TRUSTED ADVISORS? By Michalis Mylonas, Head of Internal Audit, cdbbank

ey business stakeholders recognise the increasing importance of the role of the Internal Auditor as an advisor to the organisation in order to achieve its business. Internal Auditors are expected to play a key role through the provision of guidance in addressing strategic and emerging business risks. Even though assurance remains the primary function of internal audit, advisory services are required so that Internal Auditors can add value to the effective implementation and execution of business processes. Internal auditors should be proactive in providing strategic advice, in order to become trusted advisors and not just fault finders. To successfully meet stakeholders’ expectations, Internal Auditors should possess the following qualities:

1. COMMUNICATE EFFECTIVELY WITH STAKEHOLDERS AND ALIGN WITH THEIR EXPECTATIONS AND STRATEGIC GOALS Constructive communication with stakeholders is crucial in setting the tone and establishing strategic priorities and expectations. Effective relationship management, excellent communication and the development of trust between Internal Audit and the stakeholders enhance the efforts to achieve value added deliverables. Moreover, they create an open, constructive environment in which Internal Audit can seek feedback and continue to look for opportunities to improve and add greater value. An ef-

fective stakeholder management plan often enhances business alignment and elevates Internal Audit’s awareness and resulting focus on critical risks.

2. ADDRESS SIGNIFICANT RISKS Internal Auditors usually have extensive experience in addressing general risks. However, a lack of experience is often observed in addressing strategic risks, which are rated high in significance. Through a dynamic risk assessment of the organisation’s strategy, risk appetite and legal and regulatory requirements, Internal Auditors should be in position to identify the most critical risks and adapt their audit plans in order to effectively evaluate them and recommend value added solutions.

3. BUILD A TALENTED, HIGHLY PERFORMING TEAM Successful Internal Audit teams possess the appropriate mix of core internal audit skills, subject matter expertise and the agility to align with expectations in order to meet the strategic goals. Team members should undergo regular training and obtain performance feedback in order to facilitate growth and development of skills. Successful Internal Audit teams should able to reach a balance of technical and softer skills, such as intellectual curiosity, critical thinking, conflict management and leadership. Trusted advisors often drive accountability across their teams by (i) providing clear guidelines, in order to expand interaction

beyond the routine audit results, and (ii) evaluating the teams’ actions to improve performance. When the above are carried out correctly, they will result in achieving value added deliverables. Internal Audit may take the following actions in order to attract and retain the right capabilities: x Recruit personnel with advanced analytical as well as problem-solving skills. x Use third-party professional service teams, in case the Internal Audit teams do not have the appropriate expertise in certain areas. x Apply a rotation schedule, in order to develop the team’s skills and broaden their experience. x Apply a guest auditor programme with the aim of attracting highly performing employees from other business lines, who will provide Internal Audit teams with specialized skills.

4. INVEST IN TECHNOLOGY Internal audits utilise technology to improve productivity and the overall businesses risk management process. Technology can help automate activities, such as ongoing monitoring of certain internal controls and thereby enable Internal Audit professionals to allocate their time and expertise to other high impact areas. Moreover, through data analysis, entire populations of financial and operational transactions and other data can be comprehensively tested and, where appropriate, analysed close to real time on an automated basis. In order to effectively meet the above targets, the Internal Audit teams need to understand the complexities of their company’s systems architecture and subsequently achieve audit efficiency by means of technological innovation. Stakeholders’ expectations of Internal Audit are ever-increasing and Internal Audit needs to deliver added value results and proactive advice. Internal Auditors should take key steps towards establishing effective communication channels with stakeholders, understanding the business objectives, enhancing value to the business, and placing more emphasis on significant risks, hence developing a culture of trust.

Internal Audit needs to deliver added value results and proactive advice

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ACCOUNTING & AUDIT

FIGHTING CORRUPTION DEALING WITH CONFLICT OF INTEREST WILL REDUCE A COMPANY’S EXPOSURE TO SUCH A PROBLEM.

By Agis Taramides & Katerina Ioakim (Members, ICPAC Economic Crime and Forensic Accounting Committee)

orruption breeds corruption and it can start with as little as one small favour which turns into another and escalates from there. Corruption in organisations can appear in a variety of forms, the most common one being conflict of interest. Conflict of interest may take the form of a financial benefit or even the recruitment of a manager’s close relative. Detecting and addressing conflict of interest is essential to maintaining good governance and trust in any organisation. However, this may be difficult to accomplish in practice.

DEFINITIONS The Organisation for Economic Co-operation and Development states that: “Conflict of interest occurs when an individual or a corporation (either private or governmental) is in a position to exploit their own professional or official capacity in some way for personal or corporate benefit.”

According to the World Bank, corruption is defined as “the abuse of public office for private gain”. This definition can be equally applied to the public-sector and the private sector. Comparing the two definitions, Conflict of interest is when an individual could abuse his position and Corruption is when an individual does abuse his position for personal gain.

CONFLICT OF INTEREST Conflict of interest situations are sometimes inevitable as, at some point, work decisions and actions may conflict with personal interests. Some conflicts of interest are indisputable, for example, public officials awarding contracts to themselves, their friends, family members or political patrons; public officials who personally hold, or whose close relations hold, shares in companies with which they are contracting, etc. These conflicts present circumstances which pose a threat to the public interest. A conflict of interest may be

actual, potential or perceived: x An actual conflict is a situation where there is a conflict between an individual’s duties and its other roles outside the organisation or private interests; x A potential conflict is a situation where an individual has other duties or roles or private interests that could potentially conflict with his duties within the organisation (i.e. a conflict may arise in the future and measures should be taken to mitigate that future risk); x A perceived conflict can exist where one could form the view that an individual’s duties or roles or private interests outside the organisation could improperly influence the performance of their duties within the organisation, currently or in the future. Having a perceived conflict may be as severe as an actual conflict, due to the doubt arising about an employee’s or an organisation’s integrity. Avoiding conflict of interest is considered so fundamental

to good administration that most countries enact specific laws related to it. For example, the framers of Thailand’s 1997 Constitution viewed conflict of interest as a threat to democracy and such conflicts were addressed in the Constitution itself. It provides that government officials be politically impartial and prohibits Members of the House of Representatives, Thailand’s lower house of parliament, from placing themselves in a conflict of interest situation.

CORRUPTION Although conflict of interest can exist without corruption, corruption cannot exist without some kind of inherent conflict. Apart from the need to avoid being a victim of corruption, management needs to show its integrity at a time when regulation and compliance are more crucial than ever before.

Detecting and addressing conflict of interest is essential to maintaining good governance and trust in any organisation

EREST

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It is important to understand the correlation between corruption and conflict of interest in order to find ways of eliminating misconduct. Management, internal auditors and investigators share equal responsibility for detecting and preventing corruption. Failure to take responsibility increases the probability of a conflict of interest situation or a corrupt act escaping attention. Nevertheless, all employees should be held accountable for their own actions.

PREVENTION OF CONFLICT OF INTEREST Conflict of interest can exist in any environment but an organisation can more easily hold individuals accountable if it has first set out its rules and expectations, for example: • Ensuring that all employees fully understand: the concepts and interrelationship between conflict of interest and corruption, and how to manage situations if they find themselves involved in conflict of interest. • Alerting managers and auditors of conflict of interest situations arising and the potential consequences, especially when employees have not declared them; • Ensuring that management properly and regularly conducts due diligence. In addition, it should examine correspondence files, due

Avoiding conflict of interest is considered so fundamental to good administration that most countries enact specific laws related to it diligence and transaction reports to identify conflicts of interest; • Adding a conflict of interest component to internal auditors’ standard audit programmes; • Considering how to deal with conflicts of interest which develop over time and may not have been picked up during initial due diligence checks, such as conducting surprise or regular due diligence or implementing a rotation policy for staff in key positions. While it would be naive to think that one can eliminate misconduct, any organisation that properly manages conflict of interest can minimise its exposure to corruption. Also, managers and directors must establish an ethical tone at the top of the organisations they lead. Whatever tone management sets will have a trickle-down effect on employees of the organisation.

CONFLICT OF INTEREST POLICY Organisations should establish policies clearly defining what constitutes a conflict of interest and prohibiting any such entanglements by officers, directors, employees

or other agents of the organisation. An effective conflict of interest policy should, as a minimum, include: • Identification of relationships, services, activities or transactions in which a conflict of interest may arise; • Examples of conflict of interest; • Measures adopted to prevent and manage conflict of interest; • Requiring employees to complete an annual disclosure statement; • Maintain a register with all reported conflicts. Disclosure of corrupt conduct and administrative wrongdoing is a necessary instrument in combating corruption. If it is not identified, it is unlikely to be controlled. It is therefore crucial that disclosures of such nature are protected effectively. An effective conflict of interest policy should not restrain all private interests of officials (public or private). The objective of such policy should be to preserve the integrity of the policy and administrative decisions and at the same time recognising that unaddressed conflict of interest could result in misconduct. Therefore, the policy should establish a balance, by identifying relevant risks faced by organisations, forbidding unacceptable conflicts, making organisations and

employees aware of the frequency of such conflicts, ensuring effective procedures are in place for the detection, disclosure and management of the appropriate resolution of conflict of interest situations. The private sector has a long history of questionable integrity in business and, in particular, in the protection of shareholders’ interests and the public as a whole. Recent scandals have shown that conflict of interest situations can become an issue. For example, a public official leaves public office for employment in the private sector, or an accounting firm offers both auditing and consulting services to the same client, or a regulatory agency becomes too closely aligned to the business entities it is intended to supervise. Beyond the written conflict of interest policy itself, it is important to consider the management process after the policy’s creation. How does the organisation properly monitor and enforce compliance with the conflict of interest policy? Are annual reviews conducted? How easy is it for an individual to certify that they have no actual or possible conflicts of interest? The threat of corruption is real but any organisation that is able to efficiently and effectively manage conflict of interest will automatically be managing its exposure to corruption.

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ECONOMY

CYPRUS BANKING SYSTEM CHALLENGES COPING IN THE POST-CRISIS PERIOD AND IN A LOW INTEREST RATE ENVIRONMENT By Lenia Georgiadou, Economist, Independent Member of the Board, Alpha Bank Cyprus

he global financial crisis, which started in the USA in 2008 and spread subsequently to the UK, Europe and – with some time lag – to Cyprus, led Central Banks to respond by taking unconventional monetary measures, including negative interest rates and asset purchases. For most of the past 6-8 years, interest rates have been effectively near zero or even below in the largest world economies. The European Central Bank (ECB) reduced rates repeatedly and they have remained negative for a long period (-0.25%) for deposits placed by banks with the ECB. Besides the wider adverse economic consequences of the financial crisis – on income, employment, loss of wealth, etc.– the banking system is

suffering severe consequences. Non-performing loans (NPLs) in Cyprus remain at a very high level, (one of the highest in the eurozone) despite all efforts aimed at restructuring. The management of NPLs remains the top priority and the most important challenge for banks. At the same time, profitability, as measured by the return on assets, remains at a very low level. This is not seen in Cyprus only. In a low interest rate environment, there are a number of factors which have a negative influence on profitability. From the beginning of the financial crisis, Net Interest Margins (NIMs) have fallen sharply, because of the low interest rates. According to various studies, the profitability of banks is higher when interest rates are high, something which reflects the better macroeconomic and financial environment and higher NIMs. In a low interest

rate environment, banks have difficulties or are reluctant to lower interest rates on deposits, which in Cyprus are the main source of their liquidity. There are practically no other funding options (no wholesale market, no securitization). At the same time, banks, because of competition and in their effort to cherry-pick viable business, have to pass on lower interest rates to borrowers, especially in the cases of floating rate loans, where the interest rate is related to a reference rate, e.g. that of the Central Bank and there are clauses in loan agreements for repricing ,i.e. to reduce (or raise ) the interest rate, depending on how the reference rate moves . So lower NIMs reflect the usually greater passing on of low interest rates on loans (affecting their income) rather than on deposits (which has an impact on their expenses)

There are certain cases, where banks may benefit from low interest rates, for example, through valuation gains on securities they hold; the value/ price of securities moves in the opposite direction of interest rates. As interest rates fall, the prices of securities – and hence their values – go up .Lower interest rates may also have a positive impact on the ability of borrowers to repay their loans and hence on NPLs .However,

The management of NPLs remains the top priority and the most important challenge for banks

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these positive factors are not significant enough to outweigh the bigger losses from lower NIMs . To make things worse, demand for loans, which will contribute to future earnings (and also to a reduction of the ratio of NPLs) remains very limited, while income from sources other than interest, e.g. commissions, fees, charges on Forex transactions, etc., have fallen significantly . So in this low interest environment, the biggest challenge for banks, after the need to reduce NPLs, is to become more efficient through dealing with their cost structures. This may entail changes to their organization/ structure, asset disposal, shutting branches and cost-cutting programmes to offset the adverse effects on profitability and erosion of their capital base. But in order to improve cost structures, additional investment in technology are required, which carry

high costs. Moreover, such efforts for adjustment take time to show results. The immediate benefits are limited, especially when weak cyclical economic conditions prevail. Furthermore, banks are required to improve their balance sheet through work on their loan portfolio (need for deleveraging) to bring it in line with their capital. Efforts to restructure their loans require additional provisions and involve write offs of bad loans. These actions absorb profitability and even turn limited operational profits into losses. The period of “restructure and pretend” seems to be over. Both provisions and write offs have a negative impact on profitability and the capital base of banks. At the same time, there are continuous pressures from supervisors to increase the coverage ratio of provisions, while capital regulatory requirements have

been tightened considerably. This is another big challenge for the banking sector. An additional challenge is the fact that lower profitability reduces the banks’ ability to attract investors. As Investors chase yields, they can only be attracted to banks if banks achieve higher levels of profitability that will reward investors holding their shares or their securities. It should be added that, in the present circumstances, it is very difficult, if not impossible, for the Government of Cyprus (and for other EU governments ) to recapitalize the banks .So the vicious circle goes on, with a negative impact on the ability of banks to lend to the real economy . One more big challenge in the post-crisis period has been the loss of trust in banks, which is an open sore. Following the crisis, the banking sector continues to be the object of negative

Lower profitability reduces the banks’ ability to attract investors media reports and scrutiny and faces a hostile attitude from politicians and parliamentarians. Efforts are needed to shake off the unhappy events of the past few years. The increase in deposits in the recent past is a positive sign of regaining trust but there is still a long road ahead. There are many lessons to be learned from the crisis and although we are in the midst of a period of change, there is still a lot to be done, including work on our culture, which may be a big hurdle and one that takes a long time to change. .

ACCOUNTANCY CYPRUS

ECONOMY

CONSUMPTION AS AN ECONOMIC INDICATOR By George Andreou, Board Member, KPMG Limited

he way consumption unfolds Is an important indication of an economy’s health level and, at the same time, it reveals consumer spending trends. However, it should be noted that published data also takes ‘imported consumption’ (generated by foreign visitors) into account and therefore further analysis is required as to whether and to what extent the state of the domestic market is reflected in such data. For example, while consumption indicators are improving, the Economic Sentiment Indicator, according to the latest update, is following a negative trend. Of course, the indicator does not only demonstrate current market conditions but also business estimates of the state of the economy. In addition to being affected by the mood of consumers, consumption is also affected by liquidity and disposable household income. In Cyprus, following the events of 2013, indicators relating to the volume and value of retail trade turnover decreased sig-

Since 2013, people’s consumption habits have changed, mainly due to the reduction in their disposable income

nificantly, along with imports, as expected. On the one hand, the withdrawal of large amounts of deposits/liquidity from the system and, on the other hand, the forced change of consumer habits, eventually led to a reduction in demand. This has resulted in a decreased turnover in many businesses, while at the same time their borrowing was, and may still be, at very high levels. As a result, there has been an increase in unemployment and overall business management, with the so-called ‘real economy’ being severely damaged. Fiscal measures, such as tax increases and government spending cuts, contributed to this outcome as well. There have been improvements to consumption indicators in 2017, driven by the favourable economic climate, the abolition of measures imposed on households and the gradual increase of liquidity through increased foreign investments and the strengthening of the interest rate with regard to new loans granted by the banks. As mentioned above, consumption also relates to visitors to the country. According to the latest data on credit card use, in the first six months of 2017, foreign tourists spent almost €400 million in Cyprus, amount accounting to 24% of total purchases. The growth of tourism strengthens consumption, although the impact of this boost may be disproportionate since, according to tourism-related entrepreneurs, tourists coming to Cyprus today belong to

a lower salary-base compared to those who came in the past. At the same time, government expenditure is higher, which also boosts consumption. This is mainly due to new recruitment wages. The country’s annual budget is considered a major fiscal tool for stimulating the economy, although in recent years due to restrictions, it has not played an important role in encouraging economic growth; therefore, the burden has shifted to the private sector. An increase in consumption is usually accompanied by rising prices. According to the latest data from the Statistical Service for the period January-August 2017, the Consumer Price Index recorded an increase of 0.9% compared to the corresponding period last year, despite the fact that in August there was 0.2% deflation. Further statistics reinforce the trend towards improving consumption indicators, such as the increase in vehicle registrations and revenue enhancement from indirect taxes such as VAT. It is important to note that, since 2013, people’s consumption habits have changed, mainly due to the reduction in their disposable income. Consumers shop far more carefully, while many now conduct market research before any actual shopping takes place. The gradual recovery of the economy and the strengthening of household income may lead once again to changes in their habits, reinforcing consumption indicators even further.

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ECONOMY

Private Sector Debt POLICY SHOULD FOCUS ON THE NEED TO OVERCOME IT

By Savvakis C. Savvides, Economist, former Senior Manager, Cyprus Development Bank, Visiting Lecturer, Harvard University (USA) & Queen’s University, (Canada).

am often asked to give my opinion on what I consider to be the right policy for solving the problem of non-performing loans (NPLs). My response is that NPLs are the symptom, not the cause, of the predicament that the Cyprus economy finds itself in. The real problem is private sector debt. The focus should not be on how to compensate depositors or bondholders or even shareholders of the affected banks. It should be on how over-indebted businesses and households can lighten their debt burden and be in a position to engage in normal economic activity in a stable and sustainable manner. Cyprus is prone to suffering, as several other countries have (Ireland, Iceland and most notably Japan), from what Richard Koo

calls a ‘balance sheet recession’. This happens when a country’s economic agents (businesses and households) have taken up so much debt that they are not able or even willing to undertake new debt. In such cases, of which Japan is the most stark example in terms of magnitude and length, austerity measures usually prescribed by the IMF and traditional economic thinking not only do not help but they have the opposite effect of further depressing the economy and causing a downward spiral where savings do not go back into the economy as new loans, thereby aggravating and elongating the recession. Koo’s general advice

is that a more expansionary fiscal policy is required to offset the fall in domestic demand arising from efforts of private sector entities to reduce their indebtedness via increased savings in order to prevent the economy from shrinking. I believe that correct strategies do exist for reducing the high level of indebtedness in Cyprus. One is to find ways for borrowers to benefit from the substantial provisions made by the banks (which will continue in 2018). The only reason banks prefer to sell their loans (even at huge discounts) is because they consider it to be the only way for them to write back accounting profits

and thus help them with their recapitalisation needs. Following five years of inaction, during which NPLs have remained stubbornly high, the Government is now considering the creation of a “bad bank”. But once again, the politicians do not seem to understand the real issues and the consequences of what they propose. One should perhaps remind many of those who are now pushing for this that they are the same people who killed a similar idea in 2013 when it was proposed by the then Governor of the Central Bank. Be that as it may, the proposal raises more questions than answers. At what price would the fund/bad bank buy the loans? What would it do with them? Where would the funding come

NPLs are the symptom, not the cause, of the predicament that the Cyprus economy finds itself in

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from? What would the consequences be for the real estate market? Even more importantly, how is this going to help private debt and the real economy? These are the real questions that no-one is asking! A good policy would be one that provides the benefits that banks would derive from selling the loans (even at huge discounts) but which utilises the provisions to make possible viable restructurings and, more importantly, extend new loans to new entities. For this to happen, one needs to settle an existing loan and to refinance viable businesses using the assets that are thus released by creating new SPVs (special purpose vehicles or, more simply, new companies) funded by new loans and by new equity. This is why I have been arguing since 2013 that we need a Reconstruction and Development Bank or a Development Finance Agency and not a bad bank, whose main objective at best, is to manage break-down assets rather than create new competitive enterprises. For households and small businesses, there are other such policies which can be pursued. The starting point is to identify what is impeding a settlement within the margins afforded by the provisions and holding the economy to

ransom, with unpaid debts on the one hand and â&#x20AC;&#x153;counterpartâ&#x20AC;? depleted equity on the other keeping idle potentially productive assets. For example, there should be a limit to the exposure of people to guarantees. There must be a way for borrowers (as there is in some other countries, notably the United States) to hand over the mortgaged asset and walk away debt-free. The aim of policy should be to enable economic agents to start again. Unfortunately, in Cyprus, bank lawyers and poorly informed borrowers have created this mess. Loan contracts asked for the kitchen sink while ignorant borrowers and even innocent bystanders (friends and relatives) were willing to sign anything that was put in front of them. There is also the moral responsibility of banks, which should perhaps be made legally binding, in a similar fashion as the Law of Fraudulent Conveyance of New York. Under this law, it is considered illegal if a lender has given a loan without first assessing the ability of the borrower to repay. In such cases, the borrower can walk away debt-free (even without losing the asset that was put up as collateral). This may be a rather extreme measure for Cyprus and one which, in any case, is unlikely to have ret-

rospective effect, but a law or, better still, a central bank regulation in this respect, would surely apply pressure on banks to cooperate and even compromise in reaching settlements with borrowers. That should indeed be the ultimate aim. To help the economic agents of the country overcome their indebtedness and re-enable them to undertake new viable capital investments (and take up new loans) in conditions of strong domestic (and foreign) demand. Without such policies we will be trapped in a stalemate for too long and this helps no-one, not even the banks themselves.

Many of the politicians who are now pushing for a bad bank are the same people who killed a similar idea in 2013

re to an i ch

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ECONOMY

EXPENDITURE RULES: IMPORTANCE AND LIMITATIONS By Demetris Georgiades, Chairman, Cyprus Fiscal Council.

he last fiscal and financial crisis led to several EU reforms. The objective was to create and enforce rules, procedures and mechanisms that effectively limit to the minimum free-riding and contagion between the two hard-hit sectors (banks and governments) and also between EU nations. The EU is far from being a full union/federation. The lack of trust between member states is obvious. The valid argument that we, as Europeans, should try and preserve national sovereignty and democratic accountability has no exact definition and so compromises need to be made by all. Transfers from member states that are doing well to those facing crisis understandably come with terms that, unavoidably, limit national sovereignty. Furthermore, fiscal rules, even though a necessity, have limitations. One of the first

criticisms of the EU’s Fiscal Framework, as prescribed by the Maastricht Treaty rules on debt and deficit, was that it had not addressed adequately the cyclicality of the economy. Thus it was decided to introduce the rule on structural balance/ Medium Term Objective. Member states producing less than their potential output are allowed to reduce their fiscal effort and vice versa. But the potential output which is needed to calculate the position on the economic cycle, the output gap and the structural balance, is, unlike other macroeconomic indicators, an unobserved variable, subject to revisions and errors. Even though the concept is of paramount importance (and it would be a great mistake to abandon it), in practice it has proved difficult to devise a relevant numerical procedure that will enforce member states to take measures, even on ex-post breaking of such a rule. It is for this reason that new

GDP does not fluctuate only because of increases in productivity/ profitability reforms are being discussed. The EU is most likely moving towards enforcing an improved expenditure rule. This, because of what was mentioned above and also because governments have more control over expenditure. Most gross policy mistakes that lead to fiscal derailment tend to be associated with the creation of permanent expenditure during good times. This is what an expenditure rule intends to address. An attempt to introduce such a rule was made in Cyprus. Although the relevant legislation has not been passed, it has been used during negotiations. The parties involved in the recent discussions on the level of pay increases

in the general public sector made several references to this “rule”. This rule/ agreement provides that government payroll increases should not exceed the nominal GDP growth rate. Two important points need to be made about this. First, these rules are not meant to be used as a factor in deciding the level or allocation of expenditure. They are intended to be the last test/a safety net/a cap, which will ensure that the total level of increase does not exceed a politically set or fiscal framework set target. Other, more rational mechanisms/ procedures/rules should be used to decide on the level of specific expenditure. For instance, in the case of payroll, several factors should be taken into account, amongst them, productivity, the level of responsibility of each position, the corresponding salaries in the private sector and in other eurozone countries, sectoral performance, etc. Once all types of expenditure

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are summed up, then the total should be put to the final test, that of passing the Expenditure Rule. Secondly, one of the arguments heard is that, since the level of nominal GDP has increased by over 3%, then payroll benefits should increase by a similar rate so that employees maintain their “fair share” of economic growth. One should, however, take into consideration the fact that GDP does not fluctuate only because of increases in productivity/ profitability. It can increase or decrease because employees enter or leave the labour market. This phenomenon explains almost wholly the post-crisis years’ fluctuations in Cyprus. Also, during the Figure 1

Figure 2

pre-crisis years, a big part of the GDP increase was caused by additional labour force. As shown in Figure 1 below (taken from the last Autumn Report issued by the Fiscal Council), with the exception of the crisis year (2013), the nominal rate of GDP has been constantly well above the “Per capita GDP” rate of increase. During the postcrisis years, “Per capita GDP” remained stable. “ “P While, comparingg “Per capita ge pay p per GDP” and “Average grow employee” rates of growth, (F g it for the same period (Fig.2) bee is clear that they have been a e closely following the same pattern. 2 7 In total, for the 2003-2017 i period, nominal GDP inle per creased by 46.3%, while

capita GDP increased by 25.7%. For the same period, average wages increased by 29.6%. It is more reasonable to associate the latter two indicators, “Per capita GDP” and “Average pay per employee”, and historical data confirms this association. Taking into account the earnings gap between private and government sector employees (over 60% in favour of the latter group), one can easily appreciate that any indexation of public sector pay with nominal GDP Growth in a period of increases in the labour market will widen this gap even more. Additional factors should also be taken into account. Growth in different sectors of the economy and professions is not uniform. One sector might be booming and need to offer higher salaries to attract/keep employees while others might be contracting and thus need to contain costs so as to preserve their competiveness. Flat and universal pay increase will clearly affect the competiveness of the economy negatively and even threaten the viability of individual organisations that face market competition. Even if a sector is booming, it does not imply that all participants in the sector follow the same pattern. One can see the fallacy and risks of granting pay rises in an organisation that is losing market share and profitability because and while its competitors are gaining market share and increasing profitability. One final point is to recog-

We should not look at expenditure rules as mechanisms for deciding the exact level of expenditure nise the importance of taking “political decisions”. During policy planning, the executive does not and should not take into account only the results of econometric models and economic theory. That is why almost all EU rules are subject to Council approval. Irrespective of past bad experiences that include gross policy mistakes, one cannot and should not expect, at least for the foreseeable future, that government budgets will be the result of pure technocratic procedures and strict rules based on econometric models. It is for these reasons we should not look at expenditure rules as mechanisms for deciding the exact level of expenditure. They are just a safety net with the aim of containing public expenditure below a certain level over the short to medium term. This level can be set in order to ensure fiscal sustainability and/or to preserve the structure and competiveness of the economy by limiting the government’s share in the economy. The views expressed here are personal and do not represent those of the Fiscal Council.

ACCOUNTANCY CYPRUS

ECONOMY

NON-PERFORMING LOANS:

SOLUTIONS AND COMMON PRACTICES Βy Constantinos Kypriotis, Senior Manager, KPMG Limited.

he current status in the European Banking System is characterized by an alarming heterogeneity with regard to the category of NonPerforming Loans (NPLs). It is evident that high NPL stocks are reducing the resources that could be allocated to new financing by shrinking lending and, consequently, draining the economy of necessary liquidity and working capital. According to the European Banking Authority (EBA), in the second half of 2016 and in a total of 131 banks, NPLs already account for 5.4% of total lending. However, in one third of all banking institutions NPLs appear to exceed 10% of total lending, while Cyprus and Greece, in the first places and far from the average, have NPLS of around 46% of their total lending, followed by Portugal and Slovenia close to 20%. Italy is at16%, and Ireland close to the limits of 14%. According to the EBA, in Cyprus, 6 out of 10 loans (60%) in small and mediumsized enterprises (SMEs), as well as in large enterprises are deemed non-performing, while more than half of household loans (55%) are also deemed non-performing. Similarly,

in Greece, NPLs in SMEs account for more than 65%, followed by households around 46%, while large businesses are around 38%. The above figures reveal a need to reduce NPLs in order to lower capital deficits and stabilize the domestic economic environment. To this end, the following practices are followed: 1. Securitization of NPLs and their transfer to a special purpose vehicle which will be created for the purpose and, consequently, may utilize as collateral those securitized loans for any subsequent issue of a bond. In Greece in 2016, Alpha Bank proceeded with the securitization of loans amounting to €320 million, while Attica Bank has securitized €1.331 million. It must be noted that the aim of similar actions is to restore capital adequacy ratios to normal levels, ensuring, above all, the smoothness of the banking system. 2. Assignment to a third party portfolio manager specialized in NPL management, the controlling and administration of NPLs, while at the same time the bank is able to maintain ownership of those portfolios in its books. This will enable banks’ management and investment committees to focus only

on actions that bring growth to their institutions and relieve them of activities that are usually far removed from traditional banking purposes. 3.Direct sale of the NPL portfolio to third parties. However, this option may encounter obstacles, as the buyer will seek to put market prices lower than the fair value while the bank may not want to record higher losses than existing ones. 4. Establishment of a securitization market regulatory framework, thus contributing to the implementation of a legislative environment, while favouring additional funding conditions. 5. Provision of significant incentives in order to achieve greater responsiveness on behalf of borrowers. Such incentives could include the write-off of a significant portion of the loan, reduced bank charges, discounts, etc. 6.Upgrading monitoring procedures and requirements from the stage of the initial credit risk assessment, as well as of the role of Internal Audit and Credit Risk Officer. The emerging implementation of International Financial Reporting Standard 9 (IFRS 9) will

support this early tracking but it should be done by reviewing existing credit risk models and credit monitoring tools. Existing databases should be integrated with the new tracking tools, providing clear visibility about the borrower’s status. Finally, it is also worth mentioning that the development of such practices should be closely monitored by a supervisory authority and should be part of specific implementation and legal protection frameworks, in order to avoid any negative impacts on wider society. More efficient management will release larger resources to the productive sectors of the economy, resulting in increased productivity and growth. In addition, it will separate the real “bad payers”, who may benefit from ineffective and immediate sanctions, from those creditors who may have difficulties but demonstrate a real intention of repayment. The ultimate challenge is not to replace NPLs with new loans which, in turn, will revert to NPLs, thus creating a vicious circle by transferring the problem to the next balance sheets. The core aim should be to secure a healthier financial environment capable of producing growth and stability for the economy and society.

ACCOUNTANCY CYPRUS

ECONOMY

LABOUR PRIORITIES By Lena Panayiotou, Director, Industrial Relations & Social Policy, Cyprus Employers & Industrialists Federation (OEB)

n 2017, the Cypriot economy managed to rise above its biggest post-independence peacetime crisis and recession, an achievement hailed internationally as a success story. Through disciplined fiscal policy, reforms and sacrifice, we have managed to return to growth and earned the right to look to the future with more optimism and confidence. Compared to previous years, the economy is now growing, unemployment has fallen and our credit ratings have considerably improved. For our good performance we have received much praise. We ought to be proud of what we â&#x20AC;&#x201C; government, employers and workers â&#x20AC;&#x201C; have achieved in such a short time. However, pride in our achievements does not justify any celebrations. At least, not yet. A sober assessment of our cur-

rent situation points in one direction: we must not rest on our laurels as the economic recovery is still frail and the reform process far from complete. Non-Performing Loans remain sizeable, limiting liquidity and restraining economic activity. Most businesses are still struggling with indebtedness and reduced turnover. Our civil service remains one of the most expensive in Europe. New taxation is planned for the sake of our much-anticipated National Health Insurance System, while the operation of the countryâ&#x20AC;&#x2122;s essential services is not safeguarded against trade union abuse. Inevitably, before we can claim victory and a return to sustainable growth, we have to ensure that we have done all that needs to be done to reform our state and stabilise the economy. With 2018 almost here, we have to prioritise our needs.

Our civil service remains one of the most expensive in Europe

The civil service must be reformed substantially and effectively. Our economy cannot afford to continue supporting a gargantuan state payroll. Attempts to bind state payroll growth to economic growth by law have failed. Regrettably, our parliament has missed a golden opportunity to correct, once and for all, a distortion that has been tormenting the economy since independence. The Cyprus Employers & Industrialists Federation (OEB) implores the executive and legislative branches of government to revisit the issue and put a restrain on the state payroll. The economy, distressed businesses, the unemployed and other disadvantaged groups need all the support they can get. It thus follows that any fiscal surplus should be directed at measures that will aim to resolve the issues faced by those affected. During the crisis years, trade

unions and workers acted responsibly, helping to contain labour costs and safeguard job positions, often by accepting reduced wages and benefits. This constructive approach was part of a collective effort to avoid the collapse of the economy, help businesses survive and restrain unemployment. As the economy improves it is understandable that the trade unions will start issuing demands. Bearing in mind that the economy is still licking its wounds, OEB does not object to a gradual and reasonable restitution of wages and benefits in the private sector, where such restitution is possible. The economy is not recovering at the same rate across the spectrum, as some sectors have been more affected than others. Caution is needed to avoid overburdening businesses or the economy. Unfortunately, the unions do not share this view when it

ACCOUNTANCY CYPRUS

FOR

2018

comes to public sector employees. Their demands consist of pay rises over and above the Cost of Living Adjustment (COLA) and pay scale increments (both to be reinstated in 2018) which do not seem sufficient to satiate their appetite. Instead, they are coveting part of the fiscal surplus for additional rises for employees who never had to lose sleep from fear of losing their jobs, employees who enjoy rich benefits relative to their counterparts in the private sector. And when do the trade unions demand these raises or threaten with strikes if their demands are not met? Weeks before the country’s next presidential election, when all political actors are vulnerable to pressure from organised groups. We have to end such extortionate practices that usually lead to granting excessive pay rises and reaching non-viable agreements. OEB

proposes a simple solution to this problem; to put collective bargaining in the public sector on hold for the nine-month period prior to presidential and parliamentary elections. Another threat to the stability of the economy is the lack of regulation regarding the right to strike in essential services. So far, the right to strike in essential services is governed by a voluntary agreement (Agreement on the Procedure for Labour Disputes in Essential Services) concluded in 2004. Although the unions profess their dedication to the agreement, they have never respected it. Certain organised groups operating in essential services resort to strikes on a whim, most often in the total absence of an actual labour dispute and with the tolerance (if not encouragement) of the unions. These abuses to the system must finally come to an end.

We cannot allow our airports, seaports, hospitals, telecommunications, electricity or water supply be held hostage to the impulses or the goodwill of certain groups of employees, trade unions or anyone else for that matter. Like every other developed country, we need to regulate the right to strike in essential services. Our detractors claim that OEB wants to forbid strikes and curtail labour rights, which couldn’t be further from the truth. What OEB wants is to create a legally binding mechanism that will exhaust all options of dialogue, negotiation and mediation before any party can resort to strikes that can paralyse the economy or put lives in danger. Make no mistake – refusing to regulate the right to strike in essential services is equivalent to granting permission to act with impunity. The adherence to the voluntary agreement that the

Refusing to regulate the right to strike in essential services is equivalent to granting permission to act with impunity trade unions proclaim is clearly insufficient. What OEB is essentially asking for is to make the voluntary agreement mandatory. It’s as simple as that. The past few years have been traumatic for everyone and the economy is still limping. As we put this wretched period behind us, we must reflect on past mistakes and how to avoid repeating them. We can choose to correct the individual distortions afflicting our economy and proceed with much-needed reforms, or we can choose to learn nothing from our ordeal and keep repeating the same mistakes and omissions that pushed us closer to our current adversity. We can either be prudent and take a longer view of the future, or we can pretend that nothing has happened and jeopardise our hard-earned successes. As far as employers are concerned, we have made our choice.

ACCOUNTANCY CYPRUS

ECONOMY

Unemployment t n e m y o l empInflexible Unthe and e l b i x e l f n I e h t d n a Labour Marketket r a M r u Labo By Tassos Anastasiades, Economist & Editor, Accountancy Cyprus

nemployment can destroy lives, lead to fiscal deficits and rising public debt and even topple governments. Generally speaking, unemployment is the result of one of two causes: demand deficiency or structural reasons. When the economy enters a recession, unemployment rises because there is inadequate demand in the economy. Inadequate demand may be due to reduced investment, reduced exports in relation to imports, or reduced private and/or government consumption. What is needed to combat demand-deficient unemployment is a rise in demand, through fiscal and monetary measures undertaken by the public sector. Through fiscal measures, the government expands public expenditure and reduces taxes, thus leading to higher disposable income and greater demand, which leads to higher employment (and thus a reduction in unemployment). But when the country has high public debt, fiscal expansion may create problems because expansionary fiscal policies will increase the public debt even more and the rating agencies will downgrade the country’s borrowing ability, resulting in a higher borrowing rate,

which will adversely affect the country’s investment and consumption expenditure. With regard to monetary policy, the Central Bank can reduce interest rates and may also engage in quantitative easing, i.e. purchasing bonds both from the government and the private sector, again helping to increase demand since, with plentiful liquidly and lower interest rates, investment and consumption will rise. But when the recession is very serious and unemployment is high, monetary policy cannot help because, even with zero interest rates, businesses do not want to borrow if they expect demand to be anaemic. In this case, i.e. when we are facing the ‘liquidity trap’ phenomenon, the economy must be given stimulus through fiscal measures. Unemployment due to inadequate demand is considered to be `involuntary’. However, as noted above, it is dangerous for a country to engage in fiscal stimulus when it is burdened with high debt.

Structural unemployment cannot be reduced by expanding demand

Countries with low public debt and large current account surpluses like Germany are advised by the IMF to expand public expenditure and reduce taxes, a policy that is expected to help correct the imbalances in these countries as well as raising welfare and helping other countries, like the southern countries of the EU (Greece, Spain, Portugal). On the other hand, structural unemployment has various causes and is considered by some economists as `voluntary’ when, for example, there is demand for labour but the unemployed, for various reasons, refuse to accept these jobs. For example, it may be that the demand for labour requires specific skills, which the unemployed do not have. Additional factors resulting in unemployment during periods of high demand are high unemployment benefits, especially if they extend for a lengthy period of time, as well as high minimum wages and benefits, often demanded by the trade unions. High wages and benefits often lead to a reduced demand for labour by businesses, either because they prefer to introduce more automated production methods or because of reduced demand for the goods and services which the companies offer, as a result of the increase in costs and thus in

ACCOUNTANCY CYPRUS

prices in a globalized economy. Those who remain unemployed due to structural reasons either have to accept a job which is unrelated to their specialization or a lower wage than what they were being paid in their previous job. But the best alternative is to accept retraining in jobs for which there is demand. Structural unemployment cannot be reduced by expanding demand but by taking the necessary measures to reduce the structural problems, thus rendering the labour market more flexible. It is relevant to refer to the measures taken in 2004, by the then Chancellor of Germany, Gerhard Schroder, to render the labour market more flexible, when at that time Germany was seen as the ‘sick man of Europe’. He reduced unemployment benefits as well the period over which they were given, and increased labour market flexibility by reducing the barriers to temporary employment. These measures led to the German labour market ‘miracle’ as unemployment fell from 10% in 2004 to 5.8% in 2007 and to 3.8% now, in relation to the eurozone average of 9.1%. In France, which has an inflexible labour market and strong trade unions, which submit expensive and unjustified claims, unemployment is 10%. President Em-

manuel Macron is now taking measures with the objective of introducing a flexible labour market so as to render France a more attractive destination for investment and also to give incentives to French companies to hire more workers. Among the measures introduced by President Macron is the fixing of a maximum figure for compensation in cases where employers proceed with the unlawful dismissals of workers. Also, companies that employ fewer 50 workers will be allowed to negotiate directly with their staff on wages, hours of work and overtime. With regard to Cyprus, the trade unions are just as strong as those in France, especially in state-owned organisations and, of course, the civil service. It should be noted that before the 2013 crisis, annual increases in wages and salaries were much higher that the rise in productivity for most years. As a result of the crisis, unemployment increased to 16% in 2013, falling to 10.6% in 2017 in relation to 12.2% in 2016. During this period, 48,000 workers from the EU and 28,000 from third countries were employed in Cyprus. Since a large number of workers from the EU and third countries are employed in Cyprus, this is an indication that a certain amount of unemployment is due to structural reasons.

Before the 2013 crisis, annual increases in wages and salaries were much higher that the rise in productivity for most years Consequently what is needed is the submission of justified claims by the trade unions and avoidance on the part of the Government of raising the minimum wage and unemployment benefits to such a level that there is no incentive by the unemployed to accept work. In the meantime, after taking in consideration the changes and developments that have been taking place in the world economy, mainly due to globalization but also to the expansion of automated production, we should proceed to promote those sectors of the economy that require the qualifications and experience of the unemployed. In this, the Cyprus Human Resource Development Agency has a substantial role to play.

re to an i ch

ACCOUNTANCY CYPRUS

ECONOMY

The significant role of the EIB in Cyprus By Savia Orphanidou, Economist

he European Investment Bank (EIB) is the Bank of the European Union, owned by the 28 member states. Established in 1958, it will soon count 60 years of experience in financing some 450 projects per year in over 160 countries within and outside Europe. Today, the EIB is the largest multilateral lender and borrower in the world, raising funds from the international capital markets and passing on favourable borrowing conditions to beneficiaries through the provision of low interest rates and longer maturities. The EIB’s main priority is promoting sustainable and inclusive growth in Europe by enhancing employment and improving infrastructure, by promoting environmentally friendly and climate-resilient projects and by focusing on building innovation. The numbers for 2016 alone

demonstrate the EIB’s significant contribution to growth: the EIB Group (both the EIB and the European Investment Fund) has provided finance of around €84 billion in order to promote around €280 billion total investments worldwide. In order to further boost growth and investment in Europe, especially in the aftermath of the severe financial crisis, in 2014 the EIB proceeded with the establishment of the European Fund for Strategic Investments (EFSI), the so-called “Juncker Plan”, with total available EIB financing of €60 billion, accompanied by €21billion in guarantees from the EIB (€5 billion) and the European Commission (€16 billion). The aim of the Fund was to “unlock” public and private investments in the real economy for high-risk and mature projects of a total cost at least €315 billion, over a

three-year period (2015 – 2017). By November 2017, an amount of €49.6 billion had been approved under the Juncker Plan for the generation of €251.6 billion total investments in Europe (80% of the target). In the above context, the EIB’s presence in Cyprus represents more than 35 years of support to the economy, through the promotion of more than 50 investments in the public sector and more than 300 in the private sector. The EIB’s current support to Cyprus is estimated around 14% of the island’s GDP, with a total current exposure of €2.4 billion. The EIB’s role in Cyprus was significantly enhanced during the difficult years of the crisis, making the EIB’s main priority of investing in Europe’s growth

a reality. During those challenging times for Cyprus, the EIB operated counter-cyclically, helping the economy by promoting key investments that could bring back growth and development. Taking into account only the last 5 years (2012-2016), the EIB’s support in Cyprus amounted to €1.4 billion, whereas the target for signatures in 2017 is expected to exceed €250 million. In 2016 alone, €240 million was provided by the EIB, which correspond to 1.4% of GDP and constitutes the highest percentage among all EU Member States. The EIB has been and still remains a strategic lender

Cyprus’ involvement in the Juncker Plan has been limited and there is room for further participation

ACCOUNTANCY CYPRUS

The EIB’s current support to Cyprus is estimated around

14% of the island’s GDP

to Cyprus, promoting social cohesion and investing in infrastructure across all sectors. It has supported the construction of many motorways, public schools and hospitals, high priority infrastructure, such as the EAC’s Vasilikos Power Station, Sewerage Boards and the regeneration plans of the Nicosia and Paphos Municipalities. In 2016, the EIB provided finance of €40 million for the Vasilikos-West Nicosia Water Conveyor and €15 million for two anti-flooding additional rain water pumping stations. Of major importance is the EU co-financing framework loan of €200 million, through which Cyprus can further finance projects and programmes co-financed by EU Cohesion Policy Funds for the period 2014-2020. In addition to the above, one should not overlook the EIB’s funding of up to €162 million to the University of

Cyprus, in particular for research infrastructure (including its state-of-the-art School of Engineering), the €26 million funding for research and infrastructure of the Cyprus Institute of Neurology and Genetics (CING), and the recent approval of €35 million to COSMOS to build its own facilities for oil reserves at the Vasilikos Energy Centre. One of EIB’s main priorities in Cyprus is to closely follow developments in natural gas exploration and support energy infrastructure investments in the future. Though the EIB’s main support has been in the public sector, its financing of the private sector has proved a “blessing”, especially during difficult periods when access to lending by small and medium-sized enterprises was almost impossible. Since 2014, the EIB has provided loans with favourable conditions (low-interest and long-

term) due to the provision of state guarantees (€1 billion) to ten banks, which lend to the private sector on equally favourable terms. Until now, €615 million has been allocated and with about half of the money already given as loans to over 200 businesses, around 300 investments have been promoted, many of which would not have existed without low-level EIB lending, and which have significantly boosted the growth of the Cyprus economy. Additionally, in 2013 with EIB financing, Cyprus established the Entrepreneurship Fund, which is based on a risk-sharing mechanism and which, in cooperation with two banks, finances smaller firms. The EIB’s InnovFin SME Guarantee Facility is also being promoted as a risk-sharing mechanism, which finances innovative higher risk investments and derives funds from EFSI. At the same time, the EIB is al-

ready working on supporting energy efficiency in private households in Cyprus. Due to the success of the EIB Scheme, as well as the lack of sizable mature high-risk projects on the island, Cyprus’ involvement in the Juncker Plan has been limited and there is room for further participation. Examples of EFSI operations are the above mentioned InnovFin SME Guarantee Facility with the two Banks and the COSMOS loan, which constitutes the first EFSI infrastructure operation on the island. The EIB’s contribution to the Cyprus economy has been proven extremely valuable, especially during the difficult years of the financial crisis. Our efforts should be aimed at further expanding Cyprus’ cooperation with the EIB, in order to further support worth-while investments that enhance competitiveness, development and sustainable growth.

ACCOUNTANCY CYPRUS

TAXATION

VAT

IS IN THE AIR By Panayiotis Panayi, Senior VAT Consultant, Chelco VAT Ltd

ollowing in the footsteps of the VAT Yacht Leasing Scheme (VYLS), in 2015 the Tax Department introduced a similar scheme for private aircraft, the VAT Aircraft Leasing Scheme (VALS). With plans to establish Cyprus as an aviation hub by utilising the old Lar-

naca airport and improving existing airport facilities, the VALS seemed ideal and although it did not materialise to the intended level, the VALS was introduced via Circular 190 on 24 March 2015 and is available to High Net Worth Individuals who would like to acquire a private aircraft for private or executive use at a reduced VAT rate. The scheme follows the same principles as the VYLS and is based on the

place of supply rules as per article 56 of the EU VAT Directive and the use and enjoyment provisions of article 59a(a) as applied through the Cyprus VAT Laws. Similar to the VYLS, the Tax Department introduced the following fixed rates based on the maximum takeoff weight and the type of engine that powers the private aircraft in order to avoid the arduous task of presenting travel logs as proof of usage.

TABLE A: PISTON ENGINES Takeoff weight

Deemed % use within EU

Applicable VAT rate on the lease payment

Light: 1kg – 3,000kg

100%

19%

Small: 3,001kg - 5.700kg

80%

15.2% (80% x 19%)

Medium: 5,7001kg – 15,000kg

60%

11.4% (60% x 19%)

Large: Over 15,001kg

40%

7.6% (40% x 19%)

Deemed % use within EU

Applicable VAT rate on the lease payment

Light: 1kg – 3,000kg

55%

10.45% (55% x 19%)

Small: 3,001kg – 5,700kg

45%

8.55% (45% x 19%)

Medium: 5,7001kg – 15,000kg

35%

6.65% (35% x 19%)

Large: Over 15,001kg

25%

4.75% (25% x 19%)

TABLE B: TURBO ENGINES Takeoff weight

TABLE C: JET ENGINES Takeoff weight

Deemed % use within EU

Applicable VAT rate on the lease payment

Light: 1kg – 3,000kg

50%

9.5% (50% x 19%)

Small: 3,001kg – 5,700kg

40%

7.6% (40% x 19%)

Medium: 5,7001kg – 15,000kg

30%

5.7% (30% x 19%)

Large: Over 15,001kg

20%

3.8% (20% x 19%)

So, what are the conditions of the VALS and how does it work?

ACCOUNTANCY CYPRUS

CONDITIONS: a. The lessor must be a Cyprus resident and VAT registered company. The lessee may be any legal or physical person established or having their permanent address in Cyprus and not engaged in any economic activity. b. The aircraft is required to fly to Cyprus within two months from the time the lease agreement is put in effect. c. The value of the aircraft will need to be ascertained either via the purchase documentation (usually applicable for new aircraft) or an independent valuation (usually applicable for the purchase of used aircraft) as may be required by the VAT Department. d. The maximum takeoff weight and engine type are determined as per the constructor’s certificate. e. The lessee needs to contribute a minimum initial contribution of 40% of the aircraft value. This is subject to VAT at the reduced effective rate based on the aircraft specifications. f. Lease payments will be monthly and the agreement can neither be shorter than 3 months (91 days, to meet the long term

leasing definition) nor longer than 60 months. g. Over the length of the leasing agreement the lessor must have a profit of no less than 5% of the aircraft value. This means that the total value of the lease agreement should represent the purchase value of the aircraft plus an additional minimum 5% margin. Half of that margin, that is 2.5% of the aircraft value, is applied over the lease payments and the other half over the last payment. h. The final payment under the option to purchase the aircraft by the lessee, cannot be less than 2.5% of the aircraft value. This final payment is always subject to the standard VAT rate (i.e. 19% as of 13/01/2014). i. To apply the VALS, prior application and written approval from the Commissioner of Taxation is required. Together with the application, the following certificates must also be submitted:

a. Noise certificate b. Type certificate c. Certificate of airworthiness d. Airworthiness review certificate The aircraft is not required to be registered in Cyprus. In fact, it may be registered on the register of any national aviation authority anywhere in the world. Upon completion of the VALS, a VAT paid certificate will be issued to the lessee if they have exercised the option to purchase. Also, the Cyprus Customs Department will issue a T2L certificate upon settlement of the 40% initial contribution required under the VALS scheme. Taking advantage of the favourable VAT regime under VALS in Cyprus means that the effective VAT rate on the purchase of a private aircraft could be reduced to as low as 4.4% based on the characteristics of the aircraft.

EXAMPLE Dassault Falcon X jet with takeoff weight of 30,000kg and a value of €20,000,000. Using the VALS leads to VAT savings of €2,926,000! Net Amounts Involved: Calculations

€

Aircraft value [(A)]

20,000,000

2,5% required profit [(B)=(A) x 2,5%]

500,000

Total value incl. 2,5% expected profit [(C)=(A)+(B)]

25,000,000

Initial contribution by lessee 40% [(D)=(A)*40%]

8,000,000

Total lease instalments [(E)=(C)-(D)]

12,500,000

Monthly lease payments [(F)=(E)/48]

1,416,667 per month

Final payment [(G)=(A) x 2,5%]

500,000

Tax amounts involved over the lease period: VAT amounts

Effective VAT Rate

VAT Amount (€)

Initial contribution (8,000,000)

3.8%

304,000

12 Lease payments (12 x (F)=12.500.000)

3.8%

475,000

Final payment ((G) 500,000)

19%

Total VAT paid under VALS Effective VAT rate (874,000/20,000.,00)

95,000 874,000

4,4%

ACCOUNTANCY CYPRUS

BUSINESS IN CYPRUS

YEAR-ROUND TOURISM IS KEY

IF CYPRUS IS TO MAINTAIN AND INCREASE THE RECORD NUMBERS OF TOURIST ARRIVALS OF THE PAST TWO YEARS, MEASURES MUST BE TAKEN TO SOLVE THE SEASONALITY PROBLEM, SAYS CHRYSO TSOKKOU, DIRECTOR, A.TSOKKOS HOTELS PUBLIC LTD.

he tourism sector has enjoyed a second record year as far as arrivals are concerned. How has this impacted Tsokkos Hotels? It was a record year for Tsokkos Hotels & Resorts. Cyprus has smashed its previous record for annual tourist arrivals, with the total reaching 3.4 million at the end of October. Arrivals in the first 10 months alone comfortably exceeded the record 3.18 million registered in 2016. We have to acknowledge that the incentives for extra rooms given by the government were vital for the excellent boost to the tourism industry, which has had a positive ‘domino effect’ and boosted the economy as a whole. Were you confident that 2017 would be at least as successful as 2016? Yes, the indications for a successful year were obvious early enough, mainly due to the geopolitical situation of our competitors. This, of course, will change and, as tourism is very sensitive to unexpected exogenous factors, we have to

be proactive and careful to protect the island’s vital industry. This year we have had a record year and it is our responsibility to ensure that our guests have enjoyed their holiday in Cyprus in order to transform them into loyal repeat guests. Our aim should be to establish Cyprus as an excellent, all-year-round sustainable destination with highquality services and facilities and a variety of exciting experiences. Do you think this year’s figures disprove the view that more tourists came to Cyprus simply because there were problems in our traditional competitors? No. There are many reasons for the record numbers but, in my opinion, the geopolitical situation of our competitors was one of the main ones. Therefore, we have to maintain our com-

We have to be proactive and careful to protect the island’s vital industry

petitiveness by taking various measures that they will help the industry in the future. For example, the Government has to find attractive and sustainable financing to minimize dependency on the Tour Operators. It should introduce incentives and subsidies for adding extra quality accommodation to existing hotels and for product upgrading. Moreover, government and public organisations dealing deal with issues that affects tourism (directly or indirectly) should appoint professionals and technical experts in all tourism-related fields. I also think that it is essential to upgrade the hotel and tourism schools and the Higher Hotel Institute Cyprus (HHIC) or branches of it should be created in the purely touristic districts (i.e. Famagusta) where a University branch or a renowned hotel university should be established. Other suggestions are that the Government needs to authorise and employ personnel from universities of third countries, especially Russia, to solve the vital issue of language and communication with our Russian guests. Personnel recruitment is one of the most important issues the industry is

facing today and for premium tourism, a premium service and experience is expected from personnel. Year-round employment will attract talent to the hotel industry. As I have already said, we have a great opportunity and a responsibility to transform this year’s guests into repeat business. Where do you stand on the “All-Inclusive” debate? Is it a good thing or not? All-inclusive is a worldwide trend which is becoming stronger every year, mainly due to the fact that the holiday budget can be controlled, especially for families. We cannot bridle or control this trend: it is a reality we have to face. I would underline that, as per the new Tourism Strategy, the target is for Cyprus to become a premium, all year round destination by 2030, with arrivals reaching 5 million, 40% of whom will visit the island during NovemberApril period, and to attract guests with higher spending power. When we manage to reach this target, we will be in a better position to determine how to handle “all-inclusive” or any other trend.

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The vast majority of your hotels are in Protaras/Ayia Napa area. How has it changed in recent years? Are you excited by the creation of the Ayia Napa Marina? Traditionally Protaras and Ayia Napa are the two most popular tourist destinations on the island. The two together attract the majority of tourist arrivals and 48% of accommodation nights. In the last few years, the hotels have invested a great deal so as to offer renovated and upgraded products, high-quality services and facilities. Cyprus is also a very popular destination for real estate and second home owners. Our biggest challenge is to overcome the seasonality problem and transform our area and Cyprus in general into an all-year-round destination. Ayia Napa Marina will, of course, be a new cosmopolitan attraction in the area and we strongly believe that it will upgrade the whole area of Protaras and Ayia Napa. How significant for the industry is the decision to create a Deputy Ministry of Tourism? What do you expect from it? I absolutely believe that the Ministry of Tourism is of the utmost importance for our country. It is a necessity, if we take into account that tourism is one of the most vital industries to the Cyprus economy. Tourism has to be seen as a national issue of major importance and the Deputy Minister must report directly to the President. We expect the Deputy Ministry of Tourism to establish Cyprus as an all-yearround destination, to ensure the smooth cooperation between

the public and private sectors, to monitor things closely, help overcome obstacles and, mainly, to be productive and effective. The Deputy Ministry should help reduce bureaucracy, formulate a long-term strategic and infrastructure plan to assist with providing high quality services to the growing number of guests, improve the system of governance and the regulatory framework, improve flight connectivity, offer subsidies and incentives for the hotel upgrades and renovations and to provide solutions to the crucial issue of a lack of professional employees. Do you believe that Cyprus is doing enough to remain competitive as a tourist destination? Are there specific things you would recommend for this purpose? Cyprus is a very attractive tourist destination, and the numbers speaks for themselves. Regardless of that, we have to invigorate our tourist product if we want to remain on the map and improve further. To this end, in addition to steps that I have already mentioned, I would propose the following: x The same investment incentives should be offered to both

Cypriot and Foreign investors. x We should try to attract internationally renowned investors or companies, which will themselves attract further business interest. x A one-stop-shop should be set up to provide services to investors in an efficient way with a rational waiting time. x The Government must invest further in public infrastructure. x Cyprus must develop a unified tourism brand and apply modern marketing techniques It needs to create exciting experiences with local characteristics and reduce visual pollution. x Efforts must be made to attract tourism from countries such as China (as part of their EU trip), Central Europe (Germany, Austria, Holland), Scandinavia and the Russian federation. x Sustainable tourism (the core message of WTTC 2017) is very important and everything starts with education and training at all levels. We have to be proactive and efficient so to achieve the highest-quality service. x Technocrats and professionals need to be appointed to Public sector organisations and committees,

The Min ist of Tour ry ism is of th e utmost importa nc for our e countr y

who will bring their expertise to deal with all the issues and challenges that arise. Are you confident that 2018 will be as successful as 2017? The prospects and figures are very promising and auspicious, with hotel occupancy expected to be high but, as already noted, the tourism industry is very sensitive to and easily affected by exogenous factors so we have to intensify our efforts to make Cyprus a year-round destination. This will be the key for the health of the industry and of the economy in general.

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BUSINESS IN CYPRUS

HEADHUNTING SECRETS

FOR PROFESSIONALS By Demetris Stylianides, DipLC, CT, CTM, FAIA, FCCA, CPA Internationally Certified NLP Trainer

he key to unlocking an organisation’s potential to achieve maximum performance is undoubtedly its people. Effective headhunting is the first step in building a winning team and if you want to save time and money, then mastering these skills will give you more than that! The greatest asset of any business is its human capital, its employees. Employees are central to the smooth running of a business and to the

provision of a quality service. The value and importance of employees is often underestimated and, unfortunately, management sometimes fails to see employees as the valuable assets they are. All too often, employees are instead treated as liabilities. However, it happens to the best of us. We employ a new person who we think will be a star, only to realize we’ve hired the wrong employee. So what does an employer do in such a scenario? The answer depends on the situation. Knowing more about recruitment will enable you to cut through the clever answers and polished performances of potential candidates to the real person underneath. The knowledge you will gain will massively reduce the total cost of recruitment and the time taken to decide about the right candidate for

There is a fairly high percentage of false information presented in CVs and job applications

any job in mind

THE NEED FOR PROPER INDUCTION Many organizations throw people into their jobs with little thought as to how they will perform. They expect new employees to show up and become a productive part of the team with little direction. Take a closer look at your induction process. Have you provided the newcomer with an employee orientation programme in order to be successful in his/her new role? If not, step back and offer more guidance. You may be able to turn this situation around. If you feel you have properly trained a new employee and things are still not working out, then you must move him/her out of the organization as soon as possible. In NLP (Neuro-Linguistic Programming), Meta-programs are a set of advanced questions designed to help you understand easily and effortlessly whether the applicant is suitable for the job in mind. Using the special

set of questions, you can identify the profile of the candidate in less than 15 minutes. You can do this for as many applicants as you like and, you will be glad to know, there is no per usage fee!

WHEN ‘FIT’ DOESN’T NECESSARILY MEAN ‘RIGHT’ Perhaps it’s a matter of fit. The employee may have the skills to do the job, but appears to be the wrong fit for the organization. This is likely due to a mismatch with the corporate culture. You could invest in a coach for this employee and hope things will get better but changing behaviour is not an easy thing to do. In many cases, it’s next to impossible. Investing resources in a newly-hired employee who has yet to prove their worth may simply not be a sensible thing to do.

DEAL IMMEDIATELY WITH PERFORMANCE ISSUES Too often, employers are

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Effective headhunting is the first step in building a winning team afraid to confront employees regarding performance issues. Instead, they pray this person will resign, which is rarely how things end. It is better to have an open and honest discussion with a new employee who appears to be the wrong choice than to be obliged to show him/her the door after a few months. Whatever you decide to do next, you should keep minutes of the conversation in writing in case the matter comes up again in the future.

make corrections where necessary to avoid making the same mistake twice

LEARN FROM YOUR MISTAKES

MODELLING SUCCESSFUL PEOPLE

Hiring mistakes are costly and divert attention that is better spent on moving the business forward. Examine your hiring process and

It would seem common sense to try to duplicate success. The problem is that the reasons people succeed are not clear from just observ-

RELYING ON AN INTERVIEW TO EVALUATE A POTENTIAL EMPLOYEE The usefulness of the interview in accurately predicting later success on the job was analyzed by a research study group and the surprising finding was that the interview is considered as a very poor tool, even though it is still the most commonly used selection technique.

ing the characteristics of top performers. The critical information to know is how top performers are different from poor performers. You must “verify” the critical skills for success by comparing the differences between a large enough sample of top performers against weak performers to find the factors that consistently distinguish the winners from the “losers”, otherwise, you may select energetic candidates who fail quickly but with style.

EVALUATING PERSONALITY INSTEAD OF SKILLS Many consultants have offered psychological theories to support their belief that certain personality factors are critical to success in management, sales or other

types of jobs. Reputable “personality” type test producers like the Myers Briggs readily admit their tools are useful for self-awareness and training but are not suited to hiring candidates. Only “skills-based tests” or job knowledge tests have consistently been proven to predict success on the job. So while it might be nice to know that a sales candidate has self-confidence and high energy, it is far more critical to know whether he or she can retain existing customers or develop new ones.

NOT USING STATISTICALLY VALIDATED TESTING Skills are the critical elements that consistently predict job success. Incentives can motivate a skilled per-

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son but all the motivation and good intentions won’t improve an unskilled candidate. Experts suggest that we should rely on “reasoning” or “common sense” because it is easier to determine an individual’s attitude or personality than to measure their skills. Skills can often only be measured by carefully developed tests or real on-the-job trials.

NOT EXAMINING CAREFULLY WHY PEOPLE HAVE FAILED IN A PREVIOUS JOB Research consistently shows that people fail in a job due to factors different from the criteria used to select them. Most managers can list the two, three or four most common reasons people have failed. Surprisingly, however, this exercise is rarely part of the process used to choose the criteria when selecting new candidates. Identifying these “failure points” and building it into the selection process can reduce hiring mistakes.

RELYING ON GENERAL “PEOPLE SKILLS” While everybody wants to hire “good people”, just being a good person (i.e. having good presentation

skills, being enthusiastic and hard working, having a sense of humour, etc.) is not a predictor of success on the job. The primary reason is that skills have become so specialized that there is little advantage or application for very general skills unless we’re selecting for the most administrative type of entry level jobs.

NOT CONDUCTING A CAREFUL BACKGROUND REFERENCE CHECK For whatever reason, various recruiting and placement agencies report that there is a fairly high percentage of false information presented in CVs and job applications (15%-20% of job applicants try to hide some dark chapter of their lives. For some positions it can be as high as one out of every three CVs). While it takes extra effort, not doing thorough homework to verify critical information almost always results in problems later. An individual who will twist the facts to get a job will probably twist the rules on the job. It is much better to be carefully safe than carelessly sorry.

PRACTICAL SOLUTIONS TO MINIMISE RECRUITMENT

SURPRISES 1. Evaluate a candidate only on the skills critical for success in your job. Use questions that predict on-the-job skills and performance (not just personality) Prioritize to select the skills that are most critical for your job 2. Get the best and most reliable feedback. Delegate the task to an expert consultant in your firm or outsource the service. Provide multiple options to fit your needs (have a back up plan). Assist your staff as much as possible in the entire selection process, including interviewing and other screening steps 3. If you have a Human Resources department, ensure that the person in charge relies mostly on logic and not on feelings. This will save you the trouble of keeping the wrong employees for emotional reasons rather than showing them the exit and getting fresh blood as soon as possible. A company’s primary assets are its employees. The employee is the secret in the sauce and the glue that holds the corporation together. Without employees, other assets are valueless. They are

expense items on the income statement. But, the real measure of the employee expense can be measured by the loyalty, commitment and love that employees have for the company and their work. If management shifts its focus to the careful selection of these intangibles, the profits will take care of themselves. An organization that has a mission beyond mere moneymaking considers its employees its greatest investment. If it secures its reputation by doing what is right for its people, then it will definitely meet with success.

An organization that has a mission beyond mere moneymaking considers its employees its greatest investment

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Authorised Partner for Cyprus

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Combating Unethical Conduct

COMPANIES NEED TO BOTH MOTIVATE THEIR WORKFORCE TO DO THE RIGHT THING IN THE FIGHT AGAINST FRAUD AND CORRUPTION

By Aristodemos Yiannakas, Senior Manager, EY Cyprus Fraud Investigation & Dispute Services (FIDS)

he results of a survey carried out on behalf of EY suggest that although progress is being made in the fight against bribery and corruption, an average of 51% of employees interviewed in EMEIA ((Europe Middle East, India and Africa) assume that business transactions in their country involve bribery and corruption. An issue of major concern is that 82% of the survey participants from Cyprus believe that bribery/corrupt practices are widespread in business locally. In fact Cyprus, along with Ukraine and Greece, occupy the top three positions of the resulting list, with the Scandinavian countries having the best results. Across EMEIA, our survey has found that 77% of Board members and senior managers could justify unethical behaviour to help a business survive, while 1 in 5 would deliberately misstate a company’s financial performance. These respondents were also more prepared than their colleagues to act unethically to improve their remuneration. When it comes to ethical choices, the results are somewhat mixed for Cyprus. Participants from Cyprus indicated that they were prepared to resort to unfair means for the supposed well-being of their respective companies but not to benefit their own career. Specifically, compared to the average of 17%, 37% of Cypriot participants indicated that a decision to offer cash payments to win or retain business could be justified in order to help their business survive. Also, 10% of the survey respondents from Cy-

prus would intentionally misstate the financial figures of their organisation in order to achieve financial targets, a figure which is equal to the EMEIA average. On the other hand, only 10% of those interviewed said that they would act unethically to support their own professional progression and to receive a higher salary compared to the average of 21%. Only 1% of all survey respondents can imagine providing incorrect information to the company management team in order to improve their career or pay; in EMEIA the corresponding figure was 5%. What is also worth noting is that in the last two years, over half of the participants (56%) in Cyprus have heard senior management frequently communicate the importance of maintaining high ethical standards and behaviour. Efforts by regulatory authorities are also hitting home, with half of participants indicating that regulatory activity has had a positive impact on ethical standards within their companies. Some 82% of those interviewed agreed that prosecuting individuals would help deter fraud, bribery and corruption by executives. According to Stavros Pantzaris, EY Cyprus Country Managing Partner, “The harsh

Anyone who is contemplating engaging in unethical practices should think twice

measures imposed by the courts on those convicted in relation to the recent highlypublicised scandals, offer a very clear message to the business community that unethical behaviours will no longer be tolerated and anyone who is contemplating engaging in unethical practices should think twice”. The results of our EMEIA survey indicate that relaxed attitudes toward unethical behaviour and high levels of mistrust among colleagues are common characteristics of today’s workforce of young professionals. In particular, respondents from Generation Y (25-34 year olds) are more likely than any other age group to justify unethical behaviour to help a business survive, to meet financial targets and for their own career progression. Young professionals prefer collaborative working, do not get tied up in the details, value a work-life balance and evidently often display unethical behaviour: Among 25-34 year-olds, a higher proportion of individuals compared with all other age groups are prepared to justify unethical behaviour in order to save the company or to boost their own career. One in four of the young survey respondents justified offering bribes in order to win a new order or continue with existing orders. From the 45+ age group, only one in ten would act in such a way. Besides a greater willingness to offer bribes, the young generation is also less trusting of colleagues. More than all the other age groups, they believe more strongly that they would act unethically in order to climb up the career ladder more quickly or to earn more money. And more than two-thirds of

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young employees believe that their management would behave unethically if it meant saving the company. My own view is that the survey results are indeed worrying. This generation of young professionals constitutes the future of our businesses. If companies do not take action now to combat unethical conduct across all levels of their organizations, such behaviours may increase in the future. Companies need to introduce programmes so as to educate and motivate all their employees to act in an ethical way. An organisation’s critical digital and physical assets are at greater risk of theft, damage and manipulation by insiders than ever before. Threats posed by insiders are difficult to detect without gathering and analysing data from a variety of sources. Despite the need to collect such data, our survey identified a tension between opinions about what data companies should monitor and the types of surveillance that their employees consider a violation of privacy. Some 67% of respondents in Cyprus said that their companies should monitor data sources such as emails, telephone calls, social media profiles or messaging services, and yet, 86% of respondents would consider monitoring these data sources as a violation of their privacy. Our survey has also identified some important findings relating to whistleblowing. Specifically, only 10% of Cypriot respondents actually had information or concerns about misconduct and went ahead and reported it. The majority (66%) of those surveyed said they had never had such in-

82%

of those interviewed in Cyprus agree that prosecuting individuals would help deter fraud, bribery and corruption by executives formation. The three main factors likely to prevent employees from reporting an incident of fraud, bribery or corruption within their business are: (1) Concern about their future career progression within the firm, (2) Fear for their personal safety, and (3) Loyalty to their colleagues. The significant majority of those who would report information or concerns about misconduct to a third party said they would go directly to a law enforcement agency or regulator. Finally, it is also notable that 74% of those that took part in the survey said that they would not consider resigning due to concerns over unethical conduct. Companies continue to face the threat of cyber-attacks by various actors, as we have all witnessed in recent weeks. When they occur, such breaches can have a highly

disruptive impact on a company’s operations, potentially resulting in higher operating costs, the loss of intellectual property and the leak of confidential information. To tackle this threat, 79% of respondents from Cyprus indicated that their company should have a robust cyber breach response plan in place. Positively enough, 57% indicated that, in fact, their company does have a robust cyber breach response plan compared to 37% at EMEIA level. To address these issues, Jim McCurry, EMEIA Leader, Fraud Investigation & Dispute Services, says, “Companies need to both motivate their workforce to do the right thing and embrace technological advances in order to bolster their defences against fraud and corruption.” Leaders who adopt this parallel approach will best position their businesses against fraud and corruption. The Survey: Between November 2016 and January 2017, 4,100 interviews were conducted in 41 countries across EMEIA (Europe Middle East, India and Africa) by Ipsos MORI on behalf of EY. Cyprus was included in the survey for the very first time. Α total of 100 respondents from different sectors of the economy participated in the survey: 25 from Financial Services, 32 from the Government and the Public Sector, 18 from Technology, Communications and Entertainment, 11 from Consumer Products, Retail and Wholesale, and 14 from other sectors. Apart from Board members, employees from top management, middle management and other employees were surveyed

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BUSINESS IN CYPRUS

Using European Funding Programmes to Develop Tourism By Panagiotis Moiras, Manager, PwC Cyprus. Member of the Hospitality & Leisure Team.

or Cyprus, the tourism industry is one of the main drivers of GDP growth. It does, however, face a significant number of key challenges, both in the short and long term. Several of these challenges can be addressed through various European funding programmes, as tourism is also the third largest economic sector in the EU. Stakeholders in the tourism industry fall into two main categories: businesses (e.g. hotels, tour organisers) and

organisations (e.g. local and national authorities, tourism councils), both often facing common needs and priorities such as the following:

STAFF TRAINING Staff training can be achieved through the Erasmus Plus programme, one of the par excellence competitive programmes of the EU on education, training, youth and sport, that aims to improve skills and employment. Proposals can be submitted under Priority Axis 2 of the programme and, more specifically, under the actions entitled Strategic Partnerships, Knowledge Alliances and Sector Skills Alliances. In the context of a project

under Erasmus Plus it is possible to develop various products such as: x training seminars for employees in the tourism industry x creation of educational manuals x certification programmes x summer camps for education in leadership and management in the tourism industry x creation of online educational material

DEVELOPMENT OF CORPORATE SOCIAL RESPONSIBILITY (CSR) It is well known that tourists are becoming increasingly sensitive to social responsibility issues and want the destinations they visit to demonstrate their responsibility in practice by protecting the environment and

supporting local society and employees. Tourism organisations with a coordinating role (e.g. local tourism councils) can also satisfy this need

through the Erasmus Plus programme. In cooperation with other organisations, they can design and implement CSR awareness campaigns and publish educational material with the aim of reinforcing the competitiveness of the destination.

NETWORKING AND PROMOTION OF TOURIST ACTIVITIES The promotion of

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ound s a e o havogrammes t y r a ecess of the pr dapt and n s i t I ledge bility to a need into w o n k he a idea or osal t d n a ess anding prop r g o r p a fun various tourist activities and networking between different tourism organisations and businesses can be achieved either through the Creative Europe programme or the Life pro-

gramme or territorial cooperation programmes, such as Interreg Med. Through the territorial cooperation programme Interreg Europe in particular, organisations

can help promote policies that enhance the competitiveness of businesses and organisations in the tourism industry.

REDUCTION OF SEASONALITY Reducing seasonality is a key challenge for the tourism industry, especially in Cyprus. Amongst the most effective ways of reducing seasonality is the creation of new tourist products that will serve as a driving force for attracting tourists. One of the programmes that supports the development of tourist products is Creative Europe and more specifically the action entitled “Transnational Cooperation Projects”. The aim of this action is to develop, create, produce, disseminate and preserve products

and services that are inextricably linked to culture and artistic creation. Under this programme it is possible to fund actions such as the creation of specialised tourist products, thematic exhibitions and relevant promotional material.

DEVELOPMENT AND MODERNISATION OF INFRASTRUCTURE ENI CBC MED is yet another attractive programme, which is addressed to Mediterranean countries and encourages the cooperation and transfer of know-how between Mediterranean countries of the EU and North Africa. It has no particular restrictions on the legal persons that can benefit and is aimed at developing tourist products as well as developing and mod-

ernising organisational infrastructure. The tourism industry enjoys a substantial number of funding opportunities as tourism is a “horizontal” priority for the EU. This means that there are no specialised programmes designed exclusively for tourism, but rather tourism-related actions, allowing organisations and businesses to be eligible and obtain funding under the general funding priorities of the various EU programmes (such as employment, environment, energy, innovation, education). Of course, in order for all this to happen, it is necessary to have a sound knowledge of the programmes and the ability to adapt and progress an idea or need into a funding proposal.

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BUSINESS IN CYPRUS

VALUING SMES DRIVERS OF BUSINESS VALUE AND THE CHALLENGES FACED DURING VALUATIONS By Tasos Aristidou Manager, Horwath DSP & Member, ICPAC Advisory Committee

here is an endless list of hundreds of factors that can affect the value of a business but a company’s core value lies in the following: 1) You buy the future; not the past! Many business owners have the impression that a few good years in the past may guarantee them a high business value! However, more often than not, the value of the business is dependent on its future performance. The historic performance of a company is only relevant if it allows you to extrapolate its future from it. 2) The higher the borrowing, the better! As debt is a much a cheaper way to finance a business, the higher the financial leverage, the lower the average cost of capital will be. Borrowing levels and the ability to obtain third party lending depends on, among others, the type of assets held by the firm, the prevailing market conditions and the firm’s creditworthiness. 3) Expectations, expectations! The buyers’ expected return is another important determinant of a business’ value, which is also often correlated with the perceived level of risk associated with the investment. A higher perceived risk and, consequently, a higher return (i.e. Return on Investment – ROI) expected by the potential buyer of a firm will cause the cost of equity to rise, which, in turn, will drive the business value lower. 4) The gist is in the cash! The actual worth of a business, its real gist is dependent on the cash it generates, not on its profit levels. For example, a high profit

generating company might initially appear more lucrative but its refinancing needs may lower its real value. After all, no one would disagree that a company that makes sales but does not collect its receivables can ever survive in the market in the long run. The amount of cash that the business generates at the end of the day is what is really important!

CHALLENGES Of course, there are always challenges in valuations and they will force valuers to apply their judgement to resolving them. The most important are the following: 1) Risk free rate choice We usually use a triple AAA government bond as the risk free rate. However, what if the government bond of the business’ resident country is not AAA? Should you use a country premium? And if so, why? One can claim that we live in a globalized economy and so a risk-free investment is not the resident country’s bond but that of Germany. What stops you from investing in that bond and, therefore, what stops you from considering it as the risk-free rate for your cost of equity calculation?

More often than not, the value of the business is dependent on its future performance

2) Trace of comparable companies and industry information A very common challenge faced during valuations, especially of small or medium sized companies, is to find comparable companies and industry information that allows you to understand matters such as the industry’s leverage ratio or beta factor. With regard to the latter, the reliability of the beta factor used plays a significant role in the calculation of the average cost of capital and thus in the value of the business. In most cases, valuers of small or medium sized businesses end up using listed companies’ betas and, via the method of deleveraging, try to estimate a reliable beta for the business they are valuing. 3) Existence of cash flow projections It is very common to discover, when valuing small or medium sized companies, that the management has not prepared any cash flow projections. They often consider that this is the responsibility of the valuer (expectation gap!). A common way of tackling this issue is to use the historical results of the company and extrapolate them in the future, based on management’s representations. However, in such cases, the valuer must be able to assess properly the validity of the management’s representations and not blindly follow them! Valuations will always be challenging and valuers will always need to apply good judgment, especially to the calculation of average cost of capital. That is the reason they get paid, after all. However, when it comes down to what is really important to a business’ value, three words should always come to mind: future, cash and cost (of capital)!

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Email: info@elyabeachsuites.com I Tel: 99584210

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: 70 2

THE E

HOW TO DOUBLE WORKPLACE LEARNING OPPORTUNITIES

apability development remains a high strategic priority of business organisations nowadays. The most basic reason for providing a range of opportunities for learning and development is to ensure that employees are able to carry out their current roles. According to a 2016 McKinsey & Company survey, it is evident that organisations that are committed to providing training and educational opportunities for staff plan to increase their learning and development spending in formal learning hours per employee. It is also

reported that organisations are keen to use a narrow range of learning methods, including traditional forms of classroom-based training, experiential learning and on-the-job application of skills, ignoring peer and self-directed learning, sharing of knowledge, digital learning and initiatives that take individuals outside their comfort zones. However, employees may still feel short-changed by formal learning opportunities since the process of transferring skills and behaviours to the workplace after the instruction is only partially effective (Chiaburu and Lindsay, 2008). To avoid creating the ‘sea of sameness’ that overlooks the implementation of effective continuous

improvement strategy, managers who are keen to improve their efficiency and profitability should look at more diverse learning and development activities, which enable and encourage employees to reach their full potential and maximise their performance. This suggests that, if managers would like to develop a true picture of successful learning outputs, they may wish to deploy less formal learning methods. A training programme should not be organised for its own sake since a ‘one-size-fitsall’ programme for everyone is unlikely to result in significantly enhanced performance results. Instead, a corporate culture that enables individuals to learn from new experiences with no fear of

failure, to reflect on their development and to receive continuous feedback from peers and managers should support revolutionised corporate learning practices. To address the above concern, the 70:20:10 Model for learning and development allows managers to determine the learning paths of employees and provide access to resources, which are relevant to specific jobs. At its core, the 70:20:10 Model is considered to be of great value for managers who attempt to maximise the effectiveness of learning and development initiatives in the workplace. Developed by Morgan McCall and the Centre for Creative Leadership in the 1980s, this Model continues to be widely

employed by organisations throughout the world. The 70:20:10 Model explains how to develop skills and knowledge by paying attention to the optimal mixture of formal and informal learning (2 parts of informal and 1 part of formal learning). In other words, this Model puts formal instruction back where it belongs, by providing targeted learning intervention that only deals with 10% of learning (via official training, courses, workshops and seminars). In this way, formal learning methods are applied to develop a basic level of knowledge and skills. However, to capitalize on employees’ strengths, we should take a closer look at the learning activities that make up

Managers who are keen to improve their efficiency and profitability should look at more diverse learning and development activities

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MODEL : 0 10

By Irene Lokhtina-Antoniou, PhD, MA, MSc, University Lecturer of Human Resource Management and Leadership, HRDA Certified Trainer

the remaining 90%, including experiential and social learning: x 70% experiential learning from job-related experiences (e.g. challenging assignments as providing an opportunity to record and assess the process of learning and development, problem-solving tasks and deliberate reflection). x 20% social learning through interaction and collaboration with others (e.g. close collaboration between colleagues and knowledge sharing between them, peer coaching, mentoring, giving and receiving feedback). Even though the 70:20:10 Model can be considered as a strategic enabler of capability develop-

ment, it is also fair to say that, if someone is looking for a perfect blend of learning methods as presented in the Model, there is going to be disappointment. Charles Jennings (co-founder of the 70:20:10 Institute) explained in an interview in February 2014 that “The model is not set in stone and should actually be used as a reference model... It should act as a reminder that a greater percentage of learning and development comes from experiential and social learning than classroom based alternatives”. He added that, “With the rise of social media, it’s almost inevitable that the ‘20’ will become more important as a channel for learning”. What is evident from different sources is

that the implementation of the 70:20:10 Model brings not just a learning change; it has much broader implications for building high performance. Thus, while the 70:20:10 Model has its critics, it can be very effective when properly integrated into a business. For example, according to a report by the learning and development consultancy Towards Maturity (and Charles Jennings (2016), “Businesses that use 70:20:10 are four times more likely to report that their staff are able to respond faster to business change, and three times more likely to report improvements in staff motivation”. In addition to this, the 70:20:10 Model of learning is “more than

just a training fad, it can help predict better organisational success” (Crush, 2016; CIPD) since individuals and groups are enabled to use the tools to acquire skills in the way which suites them. As a result, the hallmark of a successful implementation of the 70:20:10 is the minimisation of negative outcomes from workplace learning practices such as a mismatch between employees’ needs and demands that may cause employee dissatisfaction. Moreover, the 70:20:10 can enable managers to scale up workplace learning provision at a fraction of the cost they usually spend on traditional educational formal training. However, it goes without saying that a key aim

to achieve high performance along with the provision of the 70:20:10 Model is to establish “a deeperlevel workplace culture that’s powered by social and informal learning” (Claudio Erba, CEO and Founder, Docebo). All in all, if employers are keen to promote learning in the workplace, it is important to go beyond a narrow skills agenda and promote a broader development of expertise by providing multiple opportunities. With this in mind, the remaining practical challenge that managers face is not ‘if’ the Model is applied, but rather ‘when and how’. This is because the optimal balance of the ingredients at the beginning is likely to contribute to a good result!

Implementation of the 70:20:10 Model brings not just a learning change; it has much broader implications for building high performance

ACCOUNTANCY CYPRUS

BUSINESS IN CYPRUS

BIG DATA: IMPLICATIONS FOR

COMPETITION LAW By Athina Patera, LLB Law (University of Cyprus) and MCL Candidate, Master of Corporate Law, University of Cambridge

ig Data is a concept that has emerged as a result of the evolvement of the digital market, causing implications for competition law enforcement. These implications arise from the use of Big Data by firms aiming to restrict competition, either by exploiting their dominant position in the market or by enhancing the stability of cartels. Big Data is characterized by four elements commonly known as the “4V’s of Big Data”: Volume, Velocity, Variety and Value. The Volume of data is increasing day-byday due to the continuing growth of the digital market, e-commerce, the development of smartphones and social networks (e.g., Facebook, Twitter, and LinkedIn). The Velocity of data refers to the speed with which data is produced, analysed and expanded. The Variety of data is used to describe the various types of information that data can contain. Big Data may contain information about the demographics of a person, their interests and the history of their purchases, which can lead to targeted advertisements. The Value of data is a result of the combination of the Volume, Velocity and Variety of the data. Big Data can have severe implications in competition law. Firstly, the collection of Big Data by firms which already have many customers, may lead to the creation of barriers to other competitors entering the mar-

ket. In particular, large firms may develop a dominant position in the market by attracting more and more customers. As a result, small and medium enterprises are prevented from entering the market because they are incapable of competing with firms that have a stronger customer database. Furthermore, collecting and using Big Data may result in the creation of a dominant position in the market. Although this is not illegal, a dominant firm may not take advantage of that position to distort competition to the detriment of consumers. In the case of Big Data, their analysis’ high costs may also contribute to the concentration of Big Data in the hands of large firms. This enables firms to take advantage of their dominant position by easily accessing data of value with the effect of distorting competition. An example of such a case is when the use of Big Data by large companies leads to the lack of incentives for new firms to enter the market. In addition to these, using Big Data could give rise to discrimination against consumers on the basis of price and quality. For example, large firms that take advantage of

Collecting and using Big Data may result in the creation of a dominant position in the market

their dominant position in the market may violate the principle of non-discrimination by applying different prices on samevolume transactions. Moreover, the terms and conditions regarding the use of Big Data may be vague and/or opaque, thereby causing confusion regarding the way the data will be used. Online companies present their products as free in exchange for consideration in the form of data, which may also lead to further implications when it comes to consumer protection. Using Big Data can also contribute to the improvement of cartel stability, as the advanced methods of analysis, along with programming tools and the ability to compare prices online, may facilitate coordination between companies. For example, by analysing data, companies are able to ensure their compliance with collusion practices. At the same time, firms may use similar algorithms in order to set prices for their products, allowing for a simultaneous adjustment of prices to market’s terms. Big Data can also lead to the creation of cartels by contributing to the improvement of market transparency and being used in programmes, which may promote the instant adaptation to any decrease in the pricing of the products of competing companies. Big Data constitutes an important parameter that should be taken into consideration when it comes to competition. Hence, national competition authorities are advised to carefully assess any challenges that may result from its burgeoning use..

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BUSINESS IN CYPRUS

Financial Fair Play

THE WORLD’S BIGGEST TRANSFER DEAL: THE DEBATE AND THE INVESTIGATION By Christos Antoniou, FCA, BA, Chairman, ICPAC Larnaca-Famagusta Coordinating Committee; Member, ICPAC Educational Committee

peculation surrounding the world’s biggest transfer deal and the future of football clubs’ financial obligations, as well as the provision of relevant evidence from interested parties, dominated the front pages of the national and international financial and sports media throughout the summer. The reason was the new world record transfer fee paid for a Brazilian football player, which shone the spotlight on the business of transfers in general, and more specifically on the role of Financial Fair Play (FFP) on the part of UEFA to ensure that such transfers are fair and feasible. In other words, everyone interested in football has read the story involving the transfer of Neymar Jr. to Paris Saint Germain FC from FC Barcelona at the beginning of August when, to quote an official announcement, “Neymar Junior’s legal representatives visited the Club’s offices in person and made the payment of €222 million in

the player’s name with regard to the unilateral termination of the contract that united both parties.” The record transfer fee has since focused attention on the legitimacy of other football. Moreover, a number of recently introduced regulations regarding balanced competition among clubs through existing control over transactions, transparent financial statements linked to transfers and “buy-out-clause” regulations have been questioned.

WHAT IS FINANCIAL FAIR PLAY? UEFA considers its FFP regulations to be a key governance mechanism, which aims to ensure that the financial stability of European football clubs is always kept in mind by maintaining their sustainability and cost recovery. More specifically, FFP is the continuous monitoring of clubs against break-even requirements over a three-year period in order to ensure that they do not repeatedly spend more than their generated revenues. There is only one exception to this rule, which permits clubs

to spend up to €5m more than they earn in each “assessment period” (every three years) and to record losses up to €30m. However, this practice is accepted only if such losses are covered in their entirety through a direct payment by the club’s owner(s) or a related party. Besides, under the FFP regulations, wages may not account for more than 70% of a club’s income. When looking at PSG’s finances, it all looks rosy – but only at first glance. In 2016, 54% of PSG’s revenue was spent on players’ salaries and even with Neymar’s colossal gross wage, PSG’s salary spending still only constitutes 68.5% of their income, mean-

Regardless of their profit in 2016 (€10m), PSG’s annual expenses have risen by approximately

€124m

ing they are not contravening FFP requirements.

FINANCIAL DETAILS OF THE TRANFER A more detailed analysis of the Neymar case demonstrates that PSG had not only met Neymar’s €222m ‘buy-out clause’. In addition, both parties had signed a five-year contract with an annual net wage of €30m and paid a further €40m in commission bonuses to the Brazilian’s father and agent, Neymar Santos Sr. As a result, regardless of their profit in 2016 (€10m), PSG’s annual expenses have risen by approximately €124m (including Neymar’s gross wages and the €44.4m amortization of his transfer fee). Thus, having the Selecao star on their books may not be to their sustainable financial advantage. However, what PSG believe is that this record spending will be offset by the boost in sales that they have triggered by buying one of the world’s most marketable footballers. Moreover, it has been agreed that although PSG should pay Neymar’s ‘buy-out clause’ in a

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single payment, the club could spread the above amount for accounting purposes over the length of his contract, namely for five consecutive years. As a result, the transfer fee could be shown as a €44.4m cost in the annual accounts for the next five years. If this is the case, PSG would be attempting to raise sufficient revenue in order to reduce the financial impact of the Neymar transfer and thus, to minimise financial risk and maintain compliance with the policies and regulations of FFP.

REACTIONS Unsurprisingly, critics and financial experts questioned the initial application of FFP regulations to the transfer of Neymar. Arsenal manager Arsène Wenger described the fee paid by PSG for Neymar as “beyond calculation and beyond rationality” and added that, “Once a country owns a club, everything is possible. It becomes very difficult to respect Financial Fair Play because you can have different ways or different interests for a country to have such a big player to represent [that] country”. PSG Chairman Nasser AlKhelaifi, in his answer to the aforementioned and similar critical remarks addressed to the club, replied, “For people worrying about FFP – go and have a coffee! We’re fine. There are no problems. What we’ve done is completely transparent and legal. As for what the media says, we honestly don’t care”. In support of PSG, French Football Federation President Noel Le Graet commented that only Europe’s elite clubs are complaining about PSG’s

Arsène Wenger described the fee paid by PSG for Neymar as “beyond calculation and beyond rationality” record spending: “There is a bit of jealousy …] In the big boys’ playground, it’s a bit difficult for them to accept a little newcomer”. It came as no surprise that UEFA said that it would conduct “formal and systematic investigations”, aiming at assessing broader sustainability issues, including whether PSG had breached any of the established FFP regulations and principles. UEFA itself could not block the deal since it is not in a position to stop clubs from buying players but clubs failing to abide by Financial Fair Play rules may face sanctions. It is worth noting that there is a precedent for measures against the Qatari-funded club: PSG was punished by

UEFA in May 2014 over its sponsorship agreement with the Qatar Tourism Authority, which was considered e as having unfair value by an independent investigation panel. However, if UEFA does not have the power to influence a situation like that of Neymar’s move to PSG, this will be seen as proof that its FFP initiative has failed and it will be unable to continue enhancing the transparency of the financial position of football clubs and to control spending so as to improve the overall governance of European club football.

CONCLUSION It is not surprising that FFP regulations and policies have led to repeated debates and produced conflicting answers. Commentators have started questioning the power of the basic FFP policies and associated guidelines formulated by UEFA’s Executive Committee in September 2009. These enforced principles of introducing

more discipline and rationality in club football finances; reducing pressure on salaries and transfer fees, limiting inflationary effects, encouraging clubs to compete with(in) their revenues, protecting the longterm viability of European club football; and ensuring clubs settle their liabilities on a timely basis, were again questioned in August this year. The Neymar transfer has raised questions about the future of FFP, since much attention will be focused on the current UEFA investigation concerning further actions toward transparency and credibility of club finances. Moreover, the relevant stakeholders will take a closer look at PSG and their commercial activities over the coming years. Even though UEFA was confident that European football clubs would follow the rules and principles of FFP (back to 2013/14 season), in reality things are not so straightforward. There are more questions than answers. For example, will PSG be financially stable without ‘Qatari money’? Are they planning to ignore the common sense practice described by former UEFA President Michel Platini as ”If you earn €1,000 you can’t spend €1,200”? After paying Neymar’s €222m buyout fee and his €30m annual net salary, will PSG still lose no more than €30m over three years in order to comply with FFP rules? Finally, can we expect to see more such transfers by top European clubs? Will spending continue to rise? These questions will have to be definitively answered in the near future.

ACCOUNTANCY CYPRUS

BUSINESS IN CYPRUS

IS BRAND FEASIBLE IN TODAY’S By Andrie Penta, Senior Manager, KPMG Limited

eing creatures of habit, one would assume that customers prefer to remain loyal to the brands they have been using, instead of switching to competitive brands. And yet, according to Nielsen, 78% of consumers are not loyal to any particular brand. Considering that customer loyalty has long been recognised as the magic ingredient in the recipe for business

success, this figure leads us to question whether loyalty really exists in the digital era. Price, quality and service are traditionally considered the main pillars on which consumer loyalty was built. These days, the tendency of consumers to switch between brands is driven by the fact that many transactions are now web-based. An inclination towards experiential loyalty seems to be aiming at engaging consumers with brands while establishing long-term relationships. We have learned over time that it costs less

to pursue further sales from existing customers than to seek new ones. Therefore, maintaining existing customers in the longer term is what every business should be aiming for. Those customers, who in essence are “satisfied customers”, spend more, buy more often and regularly recommend their brand(s) of preference to friends and family. When we add the digital world to the equation, things get tougher. Building and maintaining brand loyalty in the digital world is not easy, especially when prices and product com-

parisons are no further than a click away. The surprising thing is that, although 80% of businesses claim that they are providing exceptional customer service, only 8% of customers feel that they are receiving such a level of service. In the digital era, satisfaction is about more than joining the dots between product quality, price and delivery speed. It is a combination of touchpoints

For organisations that get it right, customer loyalty can be very strong (such as the speed of responding to customer feedback), each of which is an opportunity to drive loyalty. What makes things even more complicated is the fact that earning loyalty online is an ongoing process. Being great once or twice and then fail-

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LOYALTY DIGITAL WORLD? ing to fix a mistake will drive customers away. Bearing that in mind, one might assume that customer loyalty is short-lived but, in fact, that is not the case at all. For organisations that get it right, customer loyalty – and the bonds that tie consumer and business together – can be very strong. In order for that to happen, businesses need to change their definition of what loyalty truly is. Loyalty is a very powerful thing but it is not about selling more goods more often. It is a result of continuous excellence, the cultivation of relationships and

the creation of an environment that makes individuals want to buy more things more often. Taking all the above into consideration, here are three steps that any business can adopt in order to create more engaged customers.

1. UTILISE SOCIAL MEDIA EFFECTIVELY As a first step, it is essential for brands to develop a strategy for effectively engaging customers, leads and opinion leaders on social media. Considering that social channels influence shopping behaviour

and enhance brand loyalty, the effective management of customer comments and complaints will play a vital role in the development of long-term loyal followers.

2. LET CUSTOMERS DO THE SELLING FOR YOU Customers trust other customers much more than they trust brands, so why not leverage that dynamic and let your customers do some selling for you? This kind of experience can be a make-or-break factor when consumers are deciding to give their business to one

brand over another. Thank and reward your customers when they leave reviews for your brand, emphasize and project the best things that they say about your business and foster your presence on review sites.

3. GET PERSONAL Being personal and getting into your customers’ shoes lies at the heart of any business success. To do that, you need to deeply understand the people that you are communicating with. This means making sense of the information you

have and gaining insights about those people who could end up being your future loyal clients. Building brand loyalty in the digital age certainly presents new challenges to business owners but it is by no means impossible to achieve. Although today’s consumers are much more likely to switch from one provider to another than they were ten years ago, they will not do so as long as the brand continues to offer impeccable quality and makes an effort to identify to whom it is really selling.

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BUSINESS IN CYPRUS

The Mounting Challenges of Provident Funds THE RECENT PAST HAS TAUGHT US THAT PLACING ALL YOUR EGGS IN ONE BASKET CAN CREATE ONE HUGE OMELETTE By Christis Michaelides, BA, MSBA, MCIM, Ancoria Insurance Public Ltd

n the years preceding the bail-in of deposits of the islandâ&#x20AC;&#x2122;s main banks, depositors basked in an abnormally high interest-rate environment. With deposits yielding rates up to 7% and the capital perceived as guaranteed, most Provident Funds placed their assets in a single asset class (cash) and, in many cases, with a single financial institution. With the ensuing haircut, Provident Fund assets vanished overnight and the sanctity of bank deposits became a thing of the past. It can be very rightly argued that what took place on March 2013 was unprecedented and nearly impossible to predict. The unthinkable became a reality. While this may be the case, the fact of the matter remains that some very elementary principles of investing were ignored.

DIVERSIFICATION OF ASSETS Arguably, one of the most important principles of investing is diversification, whether in geographical areas or asset classes. The Cyprus economy, in GDP terms, It is probably time accounts for around for the Provident 0.02% of Fund community the world to rethink its economy and operational although it may be normal model for any investment portfolio to have some kind

of local bias, it is extremely risky to have a 100% exposure to a single country risk (not mentioning a 100% exposure to a single asset class in that country) as is currently the case with many Provident Fund assets.

LOW INTEREST RATE ENVIRONMENT In the past few years, the euro has been going through a zero/negative interest rate era (although Cyprus banks still offer some small interest on deposits) and this is not expected to change soon. With low returns and low expectations for a better yield soon, Provident Funds are not only having a hard time covering the rate of inflation for their members but even covering the running expenses of the Fund. In order to mitigate this effect, Provident Fund Committees need to consider placing assets in other asset classes such as fixed income and equities in an attempt to increase their Fundâ&#x20AC;&#x2122;s performance for the benefit of their members.

ASSET MANAGEMENT EXPERTISE Provident Fund Committee members carry the burden of making investment decisions without, in many cases, having the investment knowledge or expertise. This may lead Provident Funds either taking investment decisions that may not compatible with the risk tolerance of their members or simply taking no action (i.e leaving all assets in cash) in the fear of taking a wrong decision. Taking into account that the management of a Provident Fund is a long term exercise that influences the retirement benefits of its members it is vital that the basic acceptable

investment principles and methodologies are adopted throughout.

INCREASED REGULATORY REQUIREMENTS LEAD TO HIGHER COSTS The set-up and maintenance of a Provident Fund entails significant fixed costs and the smaller the Provident Fund is, the higher the cost attributed to each member. Of course, additional to the fixed costs is the responsibility of Provident Fund Committees which, at times, may be too distracting and time-consuming. In the next few months, Provident Funds are expected to face increased regulatory requirements which will further increase costs (and hence negatively impact the performance of the Fund), responsibilities and administration.

THE WAY FORWARD In order to address many of the challenges mentioned above, a number of Provident Funds have already chosen to either outsource the administration of their Fund or the investment management of the Fund or both to professionals, by enrolling in turnkey occupational pension solutions such as the ones offered by the Insurance industry under Class VII of the insurance law (Management of Group Pension Funds). These solutions undertake the entire administration of the Provident Fund and offer various investment options so that all members can select their own strategy according to their individual investment profile. It is probably time for the Provident Fund community to rethink its operational model.

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BUSINESS IN CYPRUS

Getting Closer HOW AND WHY INDUSTRY AND ACADEMIA SHOULD COLLABORATE MORE

By Dr Sotiroula Liasidou, Lecturer, Cyprus University of Technology Faculty of Management and Economics – Department of Hotel and Tourism Management

n issue that needs to be thoroughly discussed is the relationship between academic institutions and industry in Cyprus. In other words, it is imperative to understand the benefits that students can gain from the interaction between academic and industrial institutions. Moving from theory into practice is imperative if any attempt is made to dynamically establish the industry environment and create the right candidates for it. Especially since the financial crisis that caused high unemployment rates and changed the business environment, companies have implemented stricter employment policies. The key to success is

the preparation of employees with knowledge and skills who can really overcome difficult situations. This preparation should begin in the universities, in close cooperation with industry practitioners. To facilitate interaction with industry, academics should create a conceptual framework that includes all possible methods of getting closer to industry. In other words, educators should apply educational theories in actual practice, with the aim of being adaptive to industrial needs and demands. At the same time, students should become adept at learning with a view to becoming lifelong learners, and be responsive to the ever-changing nature of knowledge and skills. Industry managers should be open to academia in order to forge links of collaboration and create synergies of practical learning. The real

working environment is ideal in the learning processes and provides the actual essence of applying theory into practice. Students are eager to interact with real industry protagonists, whom they view as role models in terms of their own personal career in the industry. Thus, it is imperative for academics to incorporate various teaching and learning methods that are dedicated to industry

Academic institutions in Cyprus need to develop stronger synergies with industry

in order to understand its vibes, issues and challenges. Educators should invite and encourage managers to get into university lecture theatres and disseminate their knowledge and experience to the students through lectures and seminars. Additionally, encouraging students to participate actively in industrial placements will provide them with a realistic view of the particular industry. This will enable them to enhance their knowledge and to interact more with the real protagonists of the industry throughout their studies. Additionally, occasional visits to various organisations and tours as field trips should be included as part of the learning process. Having closer links among educational institutions and industry related companies will provide a better understanding on the needs of the industry

and this will impact the curriculum in the form of updated content. Admittedly, academic institutions in Cyprus need to develop stronger synergies with industry in an ‘academic–industry–student’ alignment. This will bridge the gap and bring academia and industry closer with great benefits for the students. Getting closer to industry provides an updated learning process and prepares students better for the industry environment. It is thus imperative for academics to get out of the university lecture theatres and start giving lectures on the organisations’ premises. At the same time, Human Resource managers should be in constant communication with academic institutions and cooperate on the preparation of their prospective human capital while the are still students.

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For further information and registration contact: IMH, 5 Aigaleo Str., 2057 Strovolos, P.O.Box 21185, 1503, Nicosia, Cyprus Tel.: +357 22505555 | Fax: + 357 22679820 | E-mail: events@imhbusiness.com | Website: www.imhbusiness.com

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MEET THE CFO

Anthoulis Papachristoforou

ALTHOUGH THE CHIEF EXECUTIVE OFFICER (CEO) OF A COMPANY OR ORGANIZATION IS THE PERSON WITH ULTIMATE RESPONSIBILITY FOR ENSURING THAT IT FUNCTIONS PROPERLY AND IMPLEMENTS THE STRATEGY SET OUT BY THE BOARD, THE CHIEF FINANCIAL OFFICER (CFO) IS BECOMING INCREASINGLY IMPORTANT AND POWERFUL. WE SPOKE TO ANTHOULIS PAPACHRISTOFOROU, GROUP CFO, LOGICOM PUBLIC LTD.

n recent years, it would appear that the role of a company’s Chief Financial Officer (CFO) has changed considerably. Is this your experience? The role of the CFO has indeed changed considerably. It has evolved from that of a data provision officer for the Board of Directors or the Executive Committee or the CEO, to that of a participating Executive Director in the decision-making process of the organization. The business environment is constantly changing and, as a result, the role of the CFO is following at the same pace. In order for a CFO to ensure that his/her organization’s operations continue to run smoothly, he/she must remain ahead of these changes and be ready to overcome any challenges that come his/her way. These could be political instability, a financial crisis, new legislation/regulations or the Information Technology evolution, which has created the digital world that everyone is now talking about, just to name a few. This has certainly been

my experience, as the way that I managed my daily job and the challenges that go with it is now completely different from what it was 15, or 10, or even 5 years ago, and it will be even more different in years to come.

The CFO has become the internal legal compliance officer in most organizations It has been suggested that the CFO is perhaps the one person in an organization who sees the ‘big picture’. This suggests that the roles of CEO and CFO are growing closer. Would you agree? I fully agree that the roles of the CEO and CFO are growing closer. To put it differently, I would say that the CEO cannot function without the CFO and the CFO cannot perform without the support of the

CEO. Today, the first person who sees the “big picture” in any organization is the CFO, who then passes this knowledge on to the CEO. Therefore, the CEO heavily depends on the CFO to make correct business decisions and, as we all know, we cannot go wrong twice or, sometimes, not even once, because a wrong decision can be detrimental. Both roles are of critical importance, as the CEO and the CFO must have in-depth knowledge of the business environment in which the organization operates and be able to identify the business and financial risk areas and find ways to mitigate them. They complement each other, without crossing the barriers. I see these two roles simulating the Principal – Agent Relationship, where the CEO is the Principal and the CFO is the Agent. The Principal relies or depends on the Agent and the Agent supports or endorses the Principal, and the success of their relationship depends on their performance. Have you had to develop certain new skills for your

position in today’s changing corporate world? This was inevitable, as new skills are developed through the experience we gain over the years, often without us even noticing. For example, our skills in dealing with people, both internal or external to the organization, problem solving, negotiating, presenting, analyzing, handling pressure and stress are all developed or improved through our daily work engagement. I cannot see myself acting the way I used to in the past. I have grown over the years and my skills have also grown in parallel, and this has had an impact on the way I think or work or perceive things. Of course, the changing corporate world requires additional skills beyond the inherent ones, such as specific knowledge in certain areas. This can be acquired or attained, either through specific trainings or attending specialized seminars. It is important to acknowledge that we do not have the capacity to know everything, therefore, every CFO must be willing and be able to take advice and help from expert sources, otherwise, we will be prone to provide wrong

ACCOUNTANCY CYPRUS

advice or judgements that may lead to wrong decisions. How much pressure is placed on the CFO these days due to stricter regulation and compliance requirements? The pressure is enormous and is continuously growing, and this is because of local (in-country) or global (intra-country/worldwide) efforts to place stricter controls on transaction dealings and the motive(s) behind them. The CFO has become

the internal legal compliance officer in most organizations, simply because he/she must have knowledge of the tax, legal and regulatory framework in which the organization is operating and, at the same time, ensure that the organization strictly follows or adopts all this regulation or legislation. Usually, noncompliance means huge penalties or, in certain cases, closure of business segments or even the entire business operations. For this reason, the CFO carries this burden of regulation & legislation compliance, which proves how significant this matter is for the organization. Compliance with Export Regulations and related sanctions (US, UN

tor or is a CFO doing pretty much the same thing in any company or organization? There are some aspects of my work that are specific to the business sector in which the company is operating, but, at the same time, there are aspects that are similar to those of any organization or company. For example, Logicom is an authorized distributor of US origin products, manufactured by many US- based technology companies, thus, we must follow the US Export Regulations, which prohibit dealings with embargoed/sanctioned countries or entities. This is a specific compliance aspect of our business sector, which we must incorporate into our business processes and ensure strict adherence, otherwise we might face huge penalties or even lose the distribution contract(s). The major aspects of a CFO’s work are similar in any organization and entail functionalities such as Treasury, Credit, Purchasing, Accounting, Financial & Management Reporting, or, to put it in just two words: “Financial Management”. The CFO has to deal with all the financial matters of the organization and, in general, all matters that have a financial impact since everything is measured in monetary terms. To be more specific, the CFO has to deal with all the problems that the rest of his/ her Team cannot resolve on their own, and this can range widely. The CFO provides assistance to his/her colleagues to

The changing corporate world requires additional skills beyond the inherent ones, such as specific knowledge in certain areas & EU), EU Directives, different tax regimes, local country regulations, the Stock Exchange and Securities & Exchange Commission regulations create challenges that need proper attention and prompt action on a daily basis. This entails special knowledge and expertise in these matters. In your personal role at Logicom, are there aspects of the work that are very specific to the company and the sec-

run their daily tasks smoothly. These major tasks include, among others, promptly securing sufficient funding to run the operations, efficient working capital management, and effective foreign exchange risk hedging, safeguarding the organization’s assets and providing accurate management information for decision making purposes. The CFO is in constant communication with all Heads of Departments and provides support on any critical or non-critical matter, and usually acts as the liaison between the various departments of the organization. You were recently named CFO of the Year at the inaugural CFO Awards. How did this make you feel? It is always fulfilling to receive an award in recognition of your work and your contribution to your organization or society in general. It is like winning a trophy that you worked very hard for. My philosophy, however, is that no-one wins anything without the help and support of the people around him/her. Receiving the inaugural CFO of the year Award makes it even more special, and, for me, this is a recognition of the achievements of my organization, the Logicom Group in general, and, more specifically, the hard work and efforts of my team, since each and every one of them has contributed and has a fair share in this achievement. Of course, this sets the bar at an even higher level and creates a new mission for accomplishment, because there is always room for improvement. CFOs should not only lead people but also inspire them.

ACCOUNTANCY CYPRUS

FINANCIAL SERVICES

BUILDING A BETTER

WORKING WORLD AS EY CELEBRATES ITS 80TH ANNIVERSARY IN CYPRUS, COUNTRY MANAGING PARTNER STAVROS PANTZARIS LOOKS TO THE FUTURE, WHILE REFLECTING ON THE PRESENT STATE OF THE ECONOMY AND HIS FIRM AS 2017 COMES TO A CLOSE.

ow would you describe the present state of the Cyprus Economy and what are your predictions regarding GDP growth in 2018? What are the main economic challenges that lie ahead? Cyprus has proven itself as a

resilient and pro-business economy. Consecutive upgrades by international credit rating agencies and numerous large-scale projects have all contributed to the resurgence of Cyprus as an enticing Foreign Direct Investment location in Europe. The resilience of our economy is reflected in the healthy capital and liquidity levels held by local banks today and the continued registration of new companies, funds and investment vehicles. In fact, every quarter in 2017 has proven strong and recently Moody’s released a report raising its real 2017 GDP growth forecast for Cyprus from 2.7% to 3.5%. GDP growth in 2018 is expected to continue to be around 3%. These numbers are solid and the European Commission has not only confirmed them but stated that Cyprus is exceeding expectations. This year we have seen unemployment continue to fall, while the labour pool continues to expand

and grow in skillset. Our outlook for 2018 is positive. However, there will be inevitable challenges such as the high rate of non-performing loans. It is imperative that we continue to examine our vulnerabilities as a country and explore solutions alongside the government. How much does the broader professional services sector contribute to the economy of Cyprus and to society as a whole? The professional services sector contributes significantly to our GDP but the exact figure depends on what kind of activities fall under the definition of “professional services”. Despite the various challenges faced, the sector proved to be resilient during the crisis of 2013 and managed to maintain most of its business. It is imperative, however, that we continue capitalising on our strengths (such as the solid legal framework, the attractive tax legislation and the high quality

ACCOUNTANCY CYPRUS

of services provided) and work around our weaknesses, mainly reducing bureaucracy and improving the efficiency of the public administration. We should also continue to enhance our country profile in an effort to attract real business that will create substance in Cyprus and which will lead to the creation of new jobs and foster economic growth. In the wake of the publication of the socalled “Panama Papers” and “Paradise Papers” and growing global objections to tax avoidance schemes, how important is it for Cyprus to insist on issues of transparency and compliance so that it maintains its good reputation and the trust of clients? It is true that the world is demanding greater corporate transparency and it is of the utmost importance to provide transparency and compliance with regulation and standards. Investors want access to more accurate and relevant information about companies, transactions, markets and risks. In Cyprus, we continue to adopt the policies aligned with the EU and are adopting International Financial Reporting Standards to harmonize accounting internationally. We are also seeing a strong push by the Government for companies to adopt processes and practices that adhere to EU legislation or be subject to high penalties. It is imperative that we insist on issues of transparency and compliance in order to further enhance our country’s overall image and reputation. With regulators exerting more control and legislative and regulatory change, I believe that global coordination is a necessity. Regulators and standard-setters need to continue to work together, to promote global consistency. Do you predict an increase in Mergers & Acquisitions in 2018, as the strong firms in all sectors consolidate and the weaker ones are forced to seek a bigger partner? According to recent reports issued by EY, such as the 2017 M&A Barometer which focused on the first half of 2017, there is visibly greater M&A activity globally in the real estate sector with manufacturing and IT following behind. While the

overall number of transactions decreased by 27.8% in comparison with the same period in 2016, these deals closed with greater transaction values than previous years. In fact, the average value of deals below US$100 million increased to US$19.1 million in the first six months of 2017 from US$13.6 million in the same period in 2016, while the average value of deals above US$100 million increased by 84% compared to the same period in the previous year, reaching US$402 million. As far as our region in Central & Southeast Europe is concerned, in terms of transaction value, the market was 42.4% higher than 2016 (US$19.9 billion). We continue to see strong numbers in M&A and I do foresee an acceleration in M&A activity during 2018, both in the number of deals and size of the transactions. EY recently celebrated its 80th anniversary in Cyprus. How great an achievement do you consider this to be? This year marks EY Cyprus’ 80th birthday. We are proud of our 80-year history, which is also closely related to the history of Cyprus. As a firm, we have been here, through the good times and the bad, and we have managed to overcome obstacles and challenges, growing and developing in the process. Our organisation has grown from a handful of professionals back in 1937, when the Russell & Co. partnership was formed, to a leading professional services organization in Cyprus with now more than 300 exceptional colleagues. Throughout our history, we have been at the forefront in assurance, tax, transaction and advisory, providing services to a broad range of clients from private individuals and entrepreneurial businesses to major public companies and large multinationals. We look forward to continuing the support of our people, our clients and the local community in the years to come. In doing so, we will continue to help all our stakeholders seize opportunities in the evolving economy in order to realize sustainable economic growth. You said during the celebrations that you are looking forward to the next 80

years but let’s look at the immediate future! What are your expectations for EY Cyprus in 2018-19? The financial year 2017 was another strong year for EY Cyprus despite the challenging and increasingly complex and disruptive business environment. We have reported double digit growth in Cyprus during the last year and we are optimistic that we will continue this growth in 2018/19. Our relentless focus on providing high quality services has enabled us to win many new projects this year. We have also invested substantially in people and new technologies, so as to be able to respond to the dynamic environment and we are seeing solid and sustainable growth in all our service lines. As innovation and technology are rapidly disrupting businesses and entire industries, we will stand by our clients to help them solve their most pressing challenges and take advantage of emerging opportunities in order to evolve. We intend to continue to team up with local businesses, entrepreneurs and the Government to support the local economy. We will also continue to invest in our human capital as it is critical to the success of our firm. At EY, our people are our most valuable asset; they are at the centre of our business and they are committed to delivering high quality services. They deliver the best results for our clients and help us realize our purpose of building a better working world every day.

AT EY, OUR PEOPLE ARE OUR MOST VALUABLE ASSET; THEY ARE AT THE CENTRE OF OUR BUSINESS AND THEY ARE COMMITTED TO DELIVERING HIGH QUALITY SERVICES

ACCOUNTANCY CYPRUS

Note: In this simple example, a company will decide to choose between two new products, taking into consideration how the economy will move. MANAGEMENT Prosperous economy

RESULT

Economic recession

RESULT

Prosperous economy

RESULT

PRODUCT Α

THE TREE:

NEW PRODUCT

PRODUCT Β Economic recession

RESULT

DECISION TREES

“Long-range planning does not deal with future decisions. It deals with the futurity of present decisions.” Peter F. Drucker

By Demetris Ergatoudes, Retired (2006) Senior Manager, Cyprus Popular Bank Ltd, and Fellow of the Chartered Institute of Bankers, London

oday’s decisions should be made in light of the anticipated effect and the outcome that uncertain events will have on future values and decisions. Since today’s decision sets the stage for tomorrow’s decision, today’s decision must balance economy with flexibility; it must balance the need to capitalize on profit opportunities that may exist with the capacity to react to future circumstances and needs.

DECISION TREES A decision tree is an aid to decision making in conditions of uncertainty. Faced with a number of possible actions, the decision maker: x sets out alternative courses of action in the form of a tree diagram x estimates the possible outcomes of the various actions x determines the (subjective) probability for each outcome x uses the latter to moderate each outcome and, in so doing, calculates the expected value of each outcome x selects the course of action with the highest expected value. The decision is based not on outcome alone but on outcome moderated by the likelihood of achieving that outcome. The advantage of using the decision tree technique is that it clarifies the decisionmaking process, thus leading to more

rational decision making.

USE The types of decision that lend themselves to the decision tree technique include: x whether or not to introduce a new product or continue with existing products x whether or not to launch a new advertising campaign or continue with the existing campaign x whether or not to sell off assets for a known price or continue to use them in conditions of uncertainty x whether or not to expand in one location or another.

x They lead to more rational decision making x New ideas are thrown up

LIMITATIONS x The construction of decision trees is timeconsuming x Information is not always available or is incomplete x Decision trees can lead to a neglect of non-quantifiable factors. x The estimate of probability is subjective, yet it encourages the belief that it is based on hard data.

CONCLUSION In all such cases, there is a sequence of interrelated questions to be answered and different estimates of outcomes (and the likelihood of achieving those outcomes) to be made.

THE TREE The diagram – in its simplest form – is as follows and it includes the object for which a decision should be taken and the various alternatives under different economic conditions.

ADVANTAGES x They show clearly and logically the alternative courses of action x They encourage managers to quantify alternative outcomes x They encourage logical thinking and planning

The unique feature of the decision tree is that it allows management to combine analytical techniques, such as discounted cash flow and present value methods, with a clear portrayal of the impact of future decision alternatives and events. Using the decision tree, management can consider various courses of action with greater ease and clarity. The interactions between present decision alternatives, uncertain events, and future choices and their results become more visible.The decision-tree concept does not offer final answers to management making investment decisions in the face of uncertainty. We have not reached that stage and perhaps we never will. Nevertheless, the concept is valuable for illustrating the structure of investment decisions and it can likewise provide excellent help in the evaluation of capital investment opportunities.

ACCOUNTANCY CYPRUS

SAVE

THE DATE #datacyconference

Thursday, 22 February 2018 Hilton Park Hotel | Nicosia

Audience Data Management • Data management best practices • Data quality • Data governance and compliance issues • Database creation process & maintenance • Data analytics & methods of data analysis • New legislation and regulations • Emerging technologies & impact on business • Entity data & client on-boarding • Chief Data Officer (CDO) – what does this role entail? • Using data for Marketing Data Protection • Reform of EU Data Protection Laws • Processing of personal data • Data collection • Anonymisation • Data transfer • Personal data protection & confidentiality • Radio-frequency identification (RFID) technology • Cyber-security • Identity & Access Management

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The Data Management and Protection Forum is addressed to Chief Data Officers (CDOs), Chief Executive Officers (CEOs), Chief Financial Officers (CFOs), Chief Operating Officers (COOs), Managing Directors, Finance Directors, Marketing Directors, HR Directors and other senior executives from the following: • Banks and other financial institutions • Insurance companies • Accounting, audit and tax firms • Law firms • Investment firms • Fiduciary Service firms • Advisory / consultancy firms • Wealth Management firms • Trust service providers • Company formation and administration firms • Hospitals, clinics and private physicians • Universities and higher education institutions • Schools and private tuition centres • Retailers • Logistics companies • Relevant governmental bodies and regulatory authorities

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www.imhbusiness.com

ACCOUNTANCY CYPRUS

REAL ESTATE

CONFIDENCE RETURNS TO THE MARKET

Interview with Constantinos Savvides, Senior Manager, Real Estate Advisory, PwC Confidence seems to be returning to the Cyprus real estate market. What is your take on the current state of the market? The real estate market and, in particular, the residential property sector, is directly affected by the overall economic performance of the country. The level of confidence that is currently exhibited across the Cyprus real estate market largely reflects the positive developments in the economy of the country, as well as the improvement of economic performance indicators, such as a growth in real GDP of 2.8% in 2016, the International Monetary Fund’s projections for further growth (year-on-year increase of 2,5% in 2017) and various upgrades to Cyprus’ credit ratings. Based on the number of contracts of sale submitted to the Department of Lands and Surveys, there was an annual increase of 43% in real estate transactions in 2016. The Department’s latest statistical data sends encouraging messages of further improvement in the transaction activity levels of the

THE PRIVATE REAL ESTATE DEVELOPMENT SECTOR HAS RESPONDED TO INCREASING LEVELS OF DEMAND WITH THE INTRODUCTION OF SEVERAL NEW DEVELOPMENT PROJECTS

market. It is worth noting that, during the first half of 2017, contracts of sale increased annually by around 20% compared to the corresponding period in 2016. Tax relief, such as the permanent reduction in transfer fees and the exemption of buyers from future capital gains tax for immovable property acquired between 16 July 2015 and 31 December 2016, also contributed to those increased transaction activity levels. Moreover, real estate transactions from banks in the context of the restructuring of Non-Performing Loans and the increased availability of financing at relatively low cost have also contributed to the increased levels of activity. According to a PwC publication, foreigners have contributed significantly to the real estate market. How do you explain this? Cyprus’ favourable tax, legal and institutional framework, coupled with the schemes for granting permanent residence and Cypriot citizenship to foreigners through foreign direct investments, have contributed significantly to the effort to attract foreign buyers in recent years. Such buyers originate primarily from outside the EU (China, Russia and the Arab countries) and their contribution is of great importance to the overall

economy of Cyprus, as well as to specific sub-sectors of the real estate market. During the period 2010-2013, the number of properties for which contracts of sale were submitted to the Department of Land and Surveys by foreign buyers almost halved but, from 2014 onwards, sales of properties to foreign buyers have demonstrated an increasing trend. More specifically, during 20132016, the number of transactions increased by around 80%. Nonetheless, it is worth noting that the total number of sales per annum to foreigners remains significantly lower than the levels recorded up until 2010 although, on a positive note, the average transaction value appears to have considerably increased. The private real estate development sector has responded to increasing levels of demand with the introduction of several new development projects, particularly along the coastal areas of the island. In the medium term, it will be extremely important to maintain and even further enhance the demand levels from foreign investors in order to avoid the adverse financial implications of a potential imbalance in supply and demand in the particular segment of the market.

ACCOUNTANCY CYPRUS

There appears to be a trend amongst foreigner buyers towards luxury residential property, particularly in Limassol. How did this come about? The first publication by PwC Cyprus on the Cyprus real estate market provides useful information and data on the luxury residential property segment (indicatively, our publication includes research into luxury property transactions exceeding €1.5 million). According to our analysis, it appears that, until 2013, transactions of luxury residential property worth over €1.5 million across Cyprus were traditionally in the range of 30-40 per annum. From 2014 onwards, primarily as a result of the revised investment criteria for the Naturalization by Investment scheme, demand increased rapidly and, by 2016, the number of transactions relating to luxury residential property had almost quadrupled compared to 2013. The majority of such transactions in 2014-2016 relate to properties within a price range of €2 to €3 million. At the same time, the total number of transactions for residential properties priced in excess of €3 million has grown substantially in recent years, largely due to the introduction of high-quality projects which have consequently increased the availability of products appealing to the high-end target market. The private real estate development sector in Limassol has actively responded to the growing levels of demand for such products and a large number of innovative projects and high-rise buildings are already under construction along the city’s seafront areas. It is worth noting that the introduction of planning incentives, which provide the potential to utilise high building

PRICES OF REAL ESTATE ACROSS CYPRUS ARE DEMONSTRATING SIGNS OF STABILISATION AND EVEN APPEAR TO BE INCREASING

coefficients along coastal land parcels, has been critical to the increased levels of development activity observed in Limassol. The availability of residential units of this scale and magnitude is one of the key reasons that makes Limassol the district with the highest level of transactions in luxury apartments and residences. The statistics show that, in 2016, Limassol accounted for more than two thirds of contracts of sale relating to the luxury residential property segment (i.e. units over €1.5 million). What is your take on the behaviour of property prices? Is the market demonstrating signs of price stability? The latest property price indices published by the Royal Institution of Chartered Surveyors (RICS) in Cyprus and the Central Bank of Cyprus (CBC) indicate that, in general, prices of real estate across Cyprus are demonstrating signs of stabilisation and even appear to be increasing. In the residential property sector across Cyprus, price indices demonstrated a negative trajectory from 2010. This reflected declining levels of demand from the domestic market but also the shrinkage in foreign transaction activity for the holiday-home segment, which had been largely affected by the economic recession across Europe during this period. The declining trend in prices continued until the end of 2015, with the overall drop in prices of for the 5-year period estimated to be in the region of 30%. In the second half of 2016, the CBC property price index recorded a marginal increase, although on an annual basis a small drop in prices was recorded (around 1%). On the contrary, the RICS property price index for residential properties demonstrated increases both on a quarterly as well as on an annual basis. With regard to the behaviour of commercial property prices, according to RICS Cyprus, positive signs were recorded in 2016 across all commercial property types (retail, offices and industrial premises), with the most significant increases being recorded in the office property sector – an estimated annual increase of 5%, largely driven by the growing levels of demand for Grade A office space.

ACCOUNTANCY CYPRUS

REAL ESTATE

CONDITIONS ARE RIGHT FOR FURTHER GROWTH IN THE LAND DEVELOPMENT SECTOR

DYNAMIC REVITALISATION

OF REAL ESTATE By Pantelis Leptos, President, Cyprus Land and Building Developers Association

espite the serious effects of the recent economic crisis on land development, the longstanding contribution of the real estate sector to the countryâ&#x20AC;&#x2122;s economic and social growth and its resilience under difficult conditions have yet again been affirmed. Following the events of March 2013, a time when a climate of insecurity, uncertainty, lack of trust and pessimism prevailed in Cypriot society, the real estate sector, with the creativity that has always characterised it, stood on its own two feet, found solutions, and proved its potential and vast capabilities, refuting those who had rushed to undermine it. Today, more than four years later, the industry has not only managed to stabilise but is also showing significant signs of recovery. These are clearly reflected in all the major indicators that monitor the progress of the land development and construction industry. The number of sales, building permits issued and jobs created, all indicate that we have embarked on a positive course.

The real estate industry has proved to be one of the most important contributors to the Cyprus economy

According to the official data of the Department of Lands and Surveys, property sales in July 2017 recorded an increase of 18% compared to July of 2016. At the same time, sales in the first seven months of the year show an increase of 20% when compared with the same period of last year. The dynamic revitalization of the sector is also confirmed by the data provided by the Statistical Service for the first two months of 2017 regarding building permits and the index of production in construction, which provide a significant indication of future activity in the construction sector. According to the data, between January and May 2017, some 2,368 building permits were issued across Cyprus compared with 2,156 in the corresponding period of the previous year, representing an increase of almost 10%. Additionally, the number of residential units also increased by 41%, while the index of production in construction increased in the first quarter of 2017 by 36.5% compared to the first quarter of 2016. In addition, the performance of the sector at employment level is also very impressive, since the industry employs more than 30,000 workers, whilst thousands of other professionals depend on it â&#x20AC;&#x201C; architects, civil engineers, contractors, real estate agents, industrialists, importers of building materials, tourist shops, restaurant owners and personnel, services, but also banking organizations,

cooperative institutions, law firms and auditing firms. It is also worth noting that, while the total number of employees in Cyprus in the fourth quarter of 2016 was 374,651 (compared to 361,433 in the corresponding quarter of 2015, an increase of 3.5%), in the construction sector during the same period, the number of employees increased from 26,580 to 31,751: a 20% increase. The real estate industry has proved to be one of the most important contributors to the Cyprus economy by attracting foreign investments, mobilising funds, making new projects and creating jobs. The above data confirms the comeback of the sector but should in no case lead to complacency. We are still going through a critical transition period in which we are called upon to remain serious and focused and to work tirelessly in a collective and flexible way in order to meet the challenges and take advantage of the opportunities that lie ahead. We need to proceed urgently with completing the necessary reforms in order to modernize our structures and practices; to reduce bureaucracy and implement quick and effective procedures. We all need to work with courage and determination in order to keep moving ahead. With the effort and great sacrifices made in previous years, we have laid the foundations for a new course. It will be inconceivable if we now let go of what we have achieved.

ACCOUNTANCY CYPRUS

REAL ESTATE

FREEHOLD OR LONG LEASEHOLD?

FOR

RENT

By Antonis Loizou, FRICS, Antonis Loizou & Associates Ltd, Real Estate Valuers & Estate Agents

was surprised by the response to a recent article of mine about quality retirement homes with full facilities, based on the American model. I mentioned that this type of housing may take 10-15 years to come about in Cyprus, since family ties are not what they used to be and parents and children may not have time for each other to the extent that they once had. However, families seem to be disintegrating to a much greater extent than I thought and my estimate of 10-15 years was way out: immediately or 2-5 years hence are more realistic. There are certain parameters that are essential for the success of such projects and they are listed below. • Compact and fully furnished units of high quality, in complexes of not less than 30 units facilities should include gardens, a heated pool (one level, maximum 1.30 m. depth), common room(s), a bar/takeaway snack bar, snooker room, etc. • Units should have a large door opening for wheelchairs where required, ground floor preferably, but provision for lifts could be

an option. Units should be of one or two bedroom (2 bathrooms) and large enough to accommodate the tenant’s live-in service personnel where required. • Doctors, taxis, grocery facilities to be offered (online) for payment and use of private cars allowed. • Fully gated and managed, including lets during vacant periods (if the tenant so wishes) with restrictions. • The units are not to be sold freehold (not necessary) but leasehold and the lease period must relate to the life expectancy that the tenant estimates (on average for men 79 years and women 83 years – plus 5 years to be on the safe side). If the tenant wishes to terminate the lease (or dies), he can sell the remainder of the lease to someone else, who will use the remaining period and/or extend it. • Considering that a furnished 2-bedroom unit in a well-run complex has a sale price of approximately €150.000 + furniture, etc., say €160.000), a lease for say 20 years with an upfront rent of €100.000 is the equivalent of €8.000 p.a. for 20 years, plus running costs of approximately €500 p.m. plus common expenses. This makes good financial sense. No transfer fees, no VAT, no property taxes, etc.

Families seem to be disintegrating to a much greater extent than I thought

• This is not an old people’s home, with the prevailing establishments being of a very low quality and with no/limited facilities, but suitable even for much younger people who are either on their own and others who seek companionship and new friendships when nearing the end of their life. This approach is not directly related to time-sharing, since we are talking of single ownership and at a cost of less than one third of the freehold alternative. My original article created a lot of interest in the older generation, mainly from people around 60-70 years of age with whole families wishing to participate (e.g. four brothers over 65 and their wives thought it was a good idea. This family, mind you, said, “We can sell our homes for at least €300,000 each and out of this we will buy a 30-year lease for €180,000 and we will be left with spare cash to do what we like.”) Obviously it needs a lot of detailed financial work but, at this point in time, when many people are short of cash, it could appeal to investors/ hotel operators for touristic villages/ hotel apartments (we have looked at two tourist villages on the beach in Paphos with a view to putting the idea into practice). As we say in Cyprus, “A Cypriot eats too much as if it is his last time alive and builds a home as if he will live forever.” This is an alternative.

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ACCOUNTANCY CYPRUS

REAL ESTATE

INVEST IN REAL ESTATE FOR YOUR RETIREMENT By George Mouskides, General Manager, FOX Property Services, Chairman, Cyprus Association of Property Owners (ΚSΙΑ)

re you determined to maintain your standard of living when you retire or will you enter the poverty zone, like many senior citizens in Cyprus? Life expectancy has, fortunately, increased but our working years are fewer (percentage-wise) than before. As a result, many retirement plans have changed drastically for the worse. The Social Security Fund is already facing many problems and does not offer a respectable income to pensioners. The insufficiency of retirement funds is an issue which surfaced as a result of the 2010-2015 economic crisis.

state must act before it is too late. Social Security funds must be boosted, the retirement age needs to be raised and ways must be found to inject more money into the Fund. All employees and self-employed persons without a solid retirement fund must do their homework to provide for the future. If nothing is done, poverty in retirement, which some are experiencing today, will be the rule for many tomorrow. I would like to suggest real estate investment as an alternative to other pension schemes. Real estate investment can constitute either a comfortable addition to a social security pension or be a solid pension in itself.

WORKFORCE

RENT TO PENSION

It is a fact that employees in Cyprus, especially those not working in the public, semi-government and banking sectors, do not usually plan ahead for their income during the retirement years. It is not for the present to point out the inequality of the system regarding the public and private sectors but there is a good chance that we will need to deal with it soon. It is unfair for someone who has contributed to the state coffers for 30 years to be living on ‘peanuts’ in his/her later years.

Let us think about the case of a 40-year-old private sector employee who buys a property on a loan and rents it out. Repayment of the loan will be over 25 years. In the early stages, rental income will just be enough for the loan repayments. But rents increase by about

MEASURES What are the measures we need to take? The

If nothing is done, poverty in retirement ,which some are experiencing today, will be the rule for many tomorrow

10% every two years or so, while the loan payments are fixed. This means that the investor will start saving after about 2 years. By the age of 65, the loan will have been repaid and the rent will be pension money. I believe that real estate provides a solid and stable income, which increases with time. Alternatively, upon retirement, the investor can sell the property and enjoy the sale proceeds. History tells us that rental properties (flats, houses, offices, shops) have an annual value increase of 5%-10%, depending on the state of the property, etc. The 2009-2015 period was the exception to the rule and prices nosedived following a sharp increase. For the past year, however, we have seen both rents and sale prices climbing. I expect this trend to continue, albeit at a slow pace.

FUNDS A new type of investment gaining momentum concerns investment funds. Such funds play a vital role in developed market economies abroad. Small-scale investors favour funds as this saves them the trouble of having to deal with sales and rental procedures. Whatever sector we are employed in, we all need to plan for our retirement by making the right investments for a comfortable living. The real estate sector is undoubtedly a correct and fruitful investment.

ACCOUNTANCY CYPRUS

101

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ACCOUNTANCY CYPRUS

ICT

RECOGNIZING THE NEED FOR DIGITAL TRANSFORMATION MORE AND MORE COMPANIES AND ORGANIZATIONS IN CYPRUS ARE BECOMING AWARE OF THE NECESSITY TO TRANSFORM THEIR OPERATIONS IN TODAY’S DIGITAL ERA, WITH CLOUD TECHNOLOGY AT THE HEART OF THIS CHANGE. ANTONIS SKOULLOS, COUNTRY MANAGER AT ORACLE, CYPRUS, EXPLAINS HOW THE GLOBAL LEADER IS ASSISTING LOCAL BUSINESSES ON THEIR JOURNEY.

n such a competitive sector, what is the secret of Oracle Cyprus’ success? Oracle Cyprus was founded in 2003 to cover the growing needs of local organizations and businesses. Fifteen years later, we remain by our customers’ side, listening to them, understanding their needs and providing them with innovative, reliable and secure IT solutions and services. This is the only way for any business to be successful: to know and understand their customers and be willing to stand by them under any market conditions, on a joint journey to growth. What are the barriers for local firms entering into the digital era and how can Oracle Cyprus help businesses overcome these?

I strongly believe that for any change to happen, a change of mindset and change of culture are required. Therefore, for any enterprise or organization – regardless of size and the sector it operates in – to enter the digital era it must first realize two basic things: why it needs to become more digital and how to change its culture and processes to accommodate this digital transformation. Oracle provides its customers with services and solutions that help them plan their journey of digital transformation at the pace and budget they want. Oracle’s Cloud solutions play a leading role in this transformational process and give customers access to leading solutions, with a pay-as-you-use financial model, with high-end security and reliability.

How important is it for businesses to make the necessary digital transformation and invest in modern technology solutions? Any business that wants to be competitive and expand its activities in this global market needs to seriously consider investing in IT and the overall transformation of its operations internally and externally. At this point in time, we can

DIGITAL TRANSFORMATION IS NOT AN OPTION ANYMORE BUT COMPULSORY, WITH NO RETURN POSSIBLE

safely say that digital transformation is not an option anymore but compulsory, with no return possible. Any organization with no plans for a digital presence and the capability of digital interaction with its customers, partners, suppliers and employees should immediately reconsider its business continuity. How significant is Cloud Computing to today’s businesses? Are Cypriot firms taking advantage of the Cloud to the extent that you would expect? Cloud computing is the most important IT advancement since the Internet and its impact on the way businesses work is already visible. We have customers that are experiencing significant cost savings, a more secure and stable

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IT infrastructure and improvements in their Marketing, Sales, HR, Supply Chain and Financial operations. It’s like a new world being revealed in front of them. Cypriot firms are showing increasing interest in Cloud solutions and we already have the first projects being implemented. Awareness and interest on the part of Cypriot enterprises are increasing exponentially and in certain Cloud offering areas, such as Software as a Service (SaaS), they are exceeding expectations. How do you ensure that your customers trust you with their data? Oracle has always provided extremely secure solutions, certified by various organizations and protocols so customers that have been using our on-premises solutions already know and have experienced our high security features. It is worth mentioning that the most vital public services in Cyprus, including ministries, telecommunications, utilities, universities and national security organisations, as well as financial services and other private organizations, run on Oracle Database technologies. Now that we have customers moving to the Cloud, one thing they realized early in the process is that the level of security that Oracle can provide through its data centres and the infrastructure hosting their data will always be the highest possible, as it is constantly being updated and upgraded. It is no exaggeration to say that our customers’ data may be more secure in the Oracle data centres than in their own.

CLOUD COMPUTING IS THE MOST IMPORTANT IT ADVANCEMENT SINCE THE INTERNET AND ITS IMPACT ON THE WAY BUSINESSES WORK IS ALREADY VISIBLE Are Cypriot firms taking issues like cybersecurity seriously enough? The recent discussion about the new EU regulation and protection of data (GDPR) shows that local firms and organizations still have a long way to go but they are very concerned. They need to understand how critical security is for their operations and their integrity in the eyes of their internal and external stakeholders. Analysts predict that a high percentage of organizations will miss the GDPR compliance May deadline, unfortunately, without even realizing what that means in practical terms. Meanwhile, we are witnessing an extensive awareness campaign by all the parties involved, including the Government and consulting firms, trying to promote the need for immediate action. We at Oracle already offer to our customers a complete and integrated data security solution to comply with the international standards such as the EU GDPR. How has the business evolved over the years since Oracle Cyprus was established? Oracle Cyprus has been steadily growing since its foundation in Cyprus and has evolved into a

regional hub for the wider geographical area as our local staff’s expertise and experience is being daily recognized by customers and partners. We have also seen our partners grow and expand internationally, through the business opportunities offered by the Oracle Partner Network. And of course, we see our customers in the public, telco, banking, retail, hospitality, energy and construction sectors transform their business and remain competitive and up to date. Today, as already

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mentioned, Oracle serves the most vital sectors and industries in the country. What are your plans for Oracle Cyprus over the next 3-5 years? Our plans always remain focused on our customers’ satisfaction and loyalty, helping them respond to their digital transformation challenges and assisting them in their Cloud journey. We are committed to providing them with ‘best of breed’ products and services and meeting their current and foreseeable requirements. Oracle Cyprus will continue to invest in developing its local human capital and further establish its local presence as an Oracle hub, thereby adding value to Cyprus’ strategic geopolitical position.

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PROFESSIONAL NEWS

NEXT GENERATION OF FAMILY BUSINESS LEADERS EMBRACES DIGITAL CHANGE AMONG THE NEXT GENERATION OF FAMILY BUSINESS LEADERS, THREE IN FOUR HAVE BIG PLANS TO TAKE THEIR BUSINESS FORWARD. HOWEVER, GENERATIONAL CHALLENGES PERSIST, LARGELY IN THE AREAS OF DIGITAL AND INNOVATION. PwC conducted in-depth conversations with 35 next generation leaders from 21 countries and polled more than 100 additional next gens for its new report, Same passion, different paths: How the next generation of family business leaders are making their mark. The results showed an incoming generation of family business leaders confronting generational gaps and culture change. Philippos Soseilos, Partner, Consulting at PwC Cyprus commented: “Our survey confirms the important role of digital technology in today’s world. The next generation enthusiastically adopts the changes brought about by the digital age. Despite the fact that some of

today’s leaders appear more hesitant, at PwC we invest in our people and our services in order to offer our clients the solutions and the confidence they are looking for in order to address these new challenges”. In today’s business landscape, all firms – family businesses or otherwise – need to address the digital challenge and next gens seem to grasp this. Three quarters of those polled believe it’s very important or essential to have a strategy fit for a digital age. As digital natives, they feel much more comfortable with digital technology and see its potential for change. That said, only 7% of respondents believe their firm is currently doing

DIFFERENT APPROACHES In the study, PwC identified four main approaches next gens are taking to build their own paths to success: stewards, transformers, intrapreneurs and entrepreneurs. Some next gens straddle more than one of these continually evolving paths, but they can provide a helpful way to separate the different challenges, risks and opportunities that the next generation faces, and how success can look and feel different depending on the route they choose to take.

this well. Partly due to a greater degree of transformation and investment needed to effect digital change, many current generation leaders may be cautious about committing to it. About a third of next gens polled (36%) expressed frustration that the current generation does not fully understand the potential for digital and the risks it could pose. Likewise, the vast majority of next gens see innovation as a core component, with 82% responding that innovation is very important or essential to business success. However, a mere 15% of those polled see innovation being implemented well at their firms.

ACHIEVING SUCCESS THROUGH THE ‘FIVE CS’ While next gens will take their family firms down different paths, a set of common success factors emerged from the research. Regardless of the chosen path, these “five Cs” comprise guiding principles for all family businesses.

• Culture – The family firm should foster a “safe place” for the next gen to explore and grow. • Communication – Genuine two-way engagement between the current and next generation, based on mutual respect and trust, en• Stewards – Individuals focused on ensuring the long-term sures that experience is properly valued and new ideas are appreciated. sustainability of the family firm and continuing its profitabil- • Clarity – It is vital to have a clear strategy and agreed demarcation ity by staying true to the established core business of roles and responsibilities—particularly where colleagues are also • Transformers – Next gens who take on the task of driving relations and emotions are always in play. significant change in the family firm, with the scope and sup- • Credibility – As the “boss’s child” a next gen needs to earn the port to do so respect of co-workers, possibly gaining experience outside the family • Intrapreneurs – Those whose families carve out a specific firm first. venture for them within the family firm, effectively the oppor- • Commitment – The business needs to make a long-term committunity to be an entrepreneur within the firm itself ment to the development of the next generation, but the next gen • Entrepreneurs – Those who pursue their own ventures should also reciprocate with a willingness to invest time in the busioutside the family firm, often in completely unrelated sectors ness and give it a chance to work.

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GOVERNMENTS IGNORING FISCAL POLICY EFFECT ON THE YOUNG, SAY EUROPEANS

uropeans believe their governments do not understand the harm their policies will do to young people, according to ICAEW. In its recent report Intergenerational Fairness: A survey of citizens in 10 European Countries, the accountancy and finance body warns that only one in four Europeans feel that their own generation is treated fairly. European citizens of all ages also agree that governments are not considering the financial implications of policy decisions on future generations. With concern over intergenerational fairness increasing across the world, the report aims to add to the growing political focus by providing a unique picture of the views of 10,000 Europeans on different aspects of the debate. Carried out in mid-2017, the 10 countries surveyed (Bulgaria, the Czech Republic, France, Germany, Greece, Italy, Poland, Sweden, Switzerland and the UK) reflect

a broad diversity of size, geography and economy across the continent. The data is further broken down by age group and gender.The report analyses responses across different countries and age groups to national policies on poverty and unemployment, pensions and social care, education and infrastructure, tax, sustainability and debt. Figures show each generation has differing priorities, and levels of concern vary from country to country. However, the broad outcome is overall doubt governments are aware of the impact their fiscal policies will have on the next generation. Michael Izza, ICAEW Chief Executive, said: “The intergenerational contract in Europe is under severe, increasing strain. Our survey shows over a quarter of Europeans feel their own generation is not treated fairly by their government. But it is very worrying that Europeans of all ages fear young people will pay the price for mistakes made today. “We need a step-change in the way we

tackle intergenerational fairness. This means an approach everyone can understand, contribute to, and scrutinise.” However, Izza cautioned that greater understanding of public finances was needed in order to tackle the general sense of distrust and dissatisfaction. He said: “National budgets are overstretched – but they are also very complex. If we are going to meet the commitments enshrined in the European Pillar of Social Rights then some difficult trade-offs will have to be made. Martin Manuzi, Regional Director, ICAEW Europe, said: “As chartered accountants we believe any policymaking strategy must start from a place of clarity, rigour and integrity. We are therefore proposing a framework based on five core considerations to encourage transparent, informed and accountable decision-making on what is generationally fair. We hope this will trigger further ideas and suggestions on how to refine and apply such a framework.”

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OUT OF OFFICE

TABLE TALK All ICPAC members naturally have a life beyond accountancy and, in each issue of the magazine, we take a look at how one of them spends his/her free time. Savvas Savvides is CFO of Akiva Asset Management Ltd but he is also the National President of Round Table Cyprus for 2017-2018.

What exactly is Round Table Cyprus? Round Table Cyprus is a registered club/association and a member of Round Table International. It was established in 1978, so in 2018 it will celebrate its 40th anniversary. Round Table originated in England, where the first club was established in Norwich in 1927, with the vision of helping young people develop their abilities, potential and skills. Today it consists of clubs of young professionals and entrepreneurs from 18-45 years of age whose objectives include helping society and promoting the brightest professional ideals. The basic values of Round Table are equality, friendship, solidarity and professionalism and the aims of all clubs globally focus on professional and social networking and cooperation, the fostering of ethics and ideals, the personal development of members, service to the community and to charity. The culture of Round Table can be summed up in its slogan “Adopt–Adapt–Improve”. It has been described as a true social network with no need to log on! How many members are there in Cyprus? Currently there are around 100 members in six clubs in Nicosia, Limassol and Paphos. We are in the process of reactivating the Larnaca club. Is Round Table Cyprus a ‘men only’ organisation? If so, why? Indeed it is. But this does not have to do with our perception or feelings about women! The founder, Louis Marchesi, believed that a gender and age limit for members would lead to greater cohesion

and educate ourselves. In 2003 and 2012, Round Table Cyprus was named the Best Association in Europe-Mediterranean-America and members from Cyprus have served in various positions of the international Board, including President of Round Table International by the late George Psaras. How long have you been a member and what made you join in the first place? I have been a member since 2004. As a second generation tabler, I was brought up in the Round Table Family. Having experienced its activities and charitable work, I was keen to leave my mark on Round Table so becoming a member was just a matter of time.

Savvas Savvides

among members. Ladies Circle is the corresponding independent international organisation whose members are all women. We share common values and aims and we work hand in hand on many projects both locally and internationally. Ladies Circle Cyprus was established in 1984. What are the organisation’s main activities? Our main activities are related to offering service to the community and to charity. Movember Cyprus, Life Education Units, the George Psaras/Round Table Association for Children with Liver Diseases, Access City – Paphos and the Children’s Love Day Fund are only few of the projects that we have initiated and developed over the years all over Cyprus. We organize events on both a local and islandwide level in support of our charitable projects but also to have fun, bring our families closer

As President, what are your particular responsibilities? As President I have a number of roles. Among others, I am the coordinator among all the clubs in Cyprus, I am the representative of Round Table Cyprus at all meetings and events in Cyprus and internationally. I also lead the Life Education Centres board. How much of your time is spent on Round Table business? Round Table and its activities take up considerable amount of time, especially since we have to “Adopt– Adapt–Improve” continuously. As President I have to be present at all our clubs’ main events as well as attend their meetings. How do you manage to balance professional life with your duties as President on Round Table Cyprus? As I am passionate about what I am doing, I always manage my time appropriately to fit in family and Round Table obligations. Of course I have a good boss (who was himself a tabler) and my wife is a saint!

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