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Cyprus

Auditor-general says Opap owes state over €50m

To date, the state’s financial claims against Opap Cyprus Ltd, a subsidiary of the Greek gambling giant, amount to ‘well over’ €50 million, the auditor-general has said.

In its 2016 report on the ministry of finance, the audit office again highlights what it calls a ‘lopsided’ agreement with Opap, the only company allowed to run lottery games on the island.

The deal was signed at a time when Opap belonged to the Greek state – which is no longer the case.

In 2016, the state’s revenues from taxing Opap came to €12.8m, down from €13.3m the previous year.

Data shows that from 2003 – when the interstate agreement was concluded – up to 2014, the Republic collected on average 7.6 per cent of the company’s turnover.

Alternatively, the revenues to the state amounted to 20 per cent of Opap’s gross profit on average.

Over the last few years, this has declined to 16 per cent of gross profit, even though the lottery outfit’s turnover spiked after it introduced the Kino game.

The problem, according to the audit office, is the method of calculating the tax levied on Opap’s operations.

The current agreement – which the auditor-general wants scrapped – stipulates that the ‘theoretical’, as opposed to real, winnings paid out to winners, are deducted from Opap’s annual revenues before the dues to the state are calculated.

As a result, the state is losing millions per year in potential additional earnings from the deal.

“It has been observed that the theoretical winnings paid out are higher than the company’s actual expenses, and it is these actual expenses which should have been taken into account,” the report states.

The audit office points out that, following consultations, the finance ministry agreed to raise the tax on Opap from 24 per cent to 26.5 per cent.

“In our view, this percentage would make sense only if the payout to winners is no less than 65 per cent,” it notes.

On the auditor-general’s recommendation, parliament has been drafting legislation to govern the new agreement between Opap and the state.

The draft legislation contains a clause that could be problematic, according to the audit office. It provides for a no-bid contract for the lottery games concession, which potentially contravenes EU law.

Cyprus needs to submit the legislation to the EU prior to bringing it to parliament for a vote.

The auditor-general also highlights Opap’s refusal to be audited by the Treasury. Eventually the company agreed to grant government officials limited access to documents.

From a cursory investigation of these documents, “there appeared to be indications of serious matters relating, among others, to the correctness of the payments made to the Republic of Cyprus.”

In February 2017, the attorney-general instructed police to open a criminal probe into Opap. The Nicosia district court granted police a search warrant, but the company managed to have the warrant voided on technical grounds after appealing to the supreme court.

In December 2017 the Nicosia district court issued a new search warrant, which Opap is also challenging before the supreme court.

Elsewhere in the Audit Office report, it emerges that in 2016 banks and investment firms paid nothing into the national bank resolution fund, with the designated €50m in contributions coming from the taxpayer instead.

In July 2014, the European Commission issued the Single Resolution Mechanism Regulation, according to which the proceeds from national bank resolution funds would henceforth be transferred into a single EU pot, the Single Resolution Fund (SRF).

The directive was not transposed into Cypriot national law until March 2016, and then only partially, as a result of which the Republic did not collect any contributions from banks or investment firms for the years 2015 and 2016.

Despite this, an audit found that during 2016 two payments worth a combined €50m were made from the government’s Consolidated Fund, covering the contributions of the banks for the years 2015 and 2016.

“Given the above, our agency is of the opinion that the legal basis by which these payments were made into the National Resolution Fund, may be problematic,” the report notes.

A bill tabled to parliament last year aimed to deduct lenders’ contributions to the SRF from their contributions to the national fund.

Up until then, Cypriot banks – on paper at least – paid into both funds, the national resolution fund and the SRF.

Launched in 2016, the SRF is financed from annual contributions from banks, but it will only reach its target size of €55bn by the end of 2023.

The 19 countries sharing the euro agreed on a single bank supervisor and a Single Resolution Mechanism (SRM) for winding up failed banks, with the costs to be covered from a dedicated fund, filled by the banks themselves.

The auditor-general also zeroes in on the benefits regime within public-law entities (such as semi-governmental organisations), which he finds has remained unchanged despite the difficult economic times.

Staff still receive much the same benefits, including medical coverage, to which they contribute nothing while there is no cap on the employer’s contribution.

Employees continue to enjoy other perks, like special low-interest rate loans.

On the economy in general, the Audit Office notes that the general government debt in 2016 came to €19.298bn, compared to €18.960bn the previous year, an increase of 1.8 per cent. The debt to GDP ratio in 2016 was 107.8 per cent, up from 107.5 per cent in 2015.

The largest share of the general government debt in 2016 related to the state’s borrowing. Around 59 per cent of the debt related to loans received from the European Stability Mechanism and the International Monetary Fund during 2013-2016.

The remaining 41 per cent related to other loans, granted to Cyprus mostly by the Russian Federation, the European Investment Bank and the Council of Europe Development Bank.

More broadly in its report, the Audit Office finds fault with the manner in which it is granted access to finance ministry documents.

It has asked the finance ministry to provide it with suitable office space “in order to ensure the confidentiality of discussions and interviews.

“The procedure which the finance ministry is attempting to establish for access to files is illegal and unacceptable. The only acceptable procedure would be the file billing system.”


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