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. Last Updated: 07/27/2016

Is Cyprus Revealing Ownership Secrets?

The Federal Securities Commission, the nation's stock market watchdog and lead advocate for sound corporate pratices, has found itself at the center of an international scandal thanks to recent remarks made by its chairman, Igor Kostikov.

Kostikov was quoted by Kommersant last week as telling a conference in Geneva that the central bank of Cyprus was fully disclosing to the FSC the beneficial owners of Russian companies registered in their favorite offshore tax haven.

The remarks raised eyebrows in financial and legal circles in both countries because Kostikov seemed to suggest that the Cypriot central bank was bending its own laws. The bank quickly issued an official denial that it was acting improperly and demanded clarification from Kostikov.

"The exchange of information is ... subject to the national laws of the two countries and is strictly restricted to only the information that is absolutely necessary to enable the two authorities to perform their supervisory/regulatory functions," the bank said in a statement published on its web site.

Kostikov declined to comment Monday, but a spokesman denied that the FSC chief had made the remarks, despite Kommersant's claim in a follow-up article published Monday that it had his comments on tape.

The Cypriot central bank and the FSC signed an agreement in March 2002 in which they agreed to exchange information about companies from either country that provide financial and investment services to the general public -- but only with the consent of the owners.

On its web site, the bank said the agreement does not apply to the majority of Russian offshore companies registered on the island.

According to Neophytos Neophytou, Cyprus-based partner with Ernst & Young, the central bank had not changed its practices with respect to beneficiary owners since that agreement was signed.

"Under Cypriot legislation, it would not disclose information about the beneficial owners of any company set up in Cyprus unless there is a court decision in cases of fraud, money laundering or criminal proceedings," he said by telephone from Nicosia.

Markets players polled Monday said there is rarely smoke without a fire, and several said they had heard unsubstantiated claims that Russian law-enforcement agencies are collecting dirt on influential people ahead of parliamentary elections in December.

"I don't exclude that a central bank provided information about a particular company that is suspected in illegal operations, but it does not mean that it takes place on a regular basis," said Eduard Niygibaeir, deputy head of Prospect brokerage.

He said the market had not heard of any similar cases and none of the local financial companies has been punished by the FSC, "so either the FSC does not have such information, or it is not using it."

"The FSC may have just wanted to show the market how powerful it is, but it failed to do so," said one trader who asked not to be identified.

Nicos Constantinou, head of Cyprus-based consulting company C&N Constantinou and Co., said reports that that Cyprus' central bank may be bridging its own secrecy laws has done little to slow Russia's appetite for banking there.

"Business is expanding even now, as we see more serious Russian companies that are interested in building long-term operations," he said.