Cyprus failed to carry out screenings for billions in foreign investment, report reveals

Although Cyprus holds billions of the EU’s foreign direct investments (FDI), it has failed to carry out any screening mechanisms over the funds it received between 2020 and 2022, according to a report by the European Court of Auditors (ECA) published on Wednesday.

Highlighting weaknesses across the bloc on screening and reporting foreign direct investments, six countries were found to have carried out 92 per cent of all checks recorded, while 12 countries (Cyprus, Luxembourg, Ireland, Belgium, Sweden, Portugal, Slovakia, Bulgaria, Greece, Estonia, Estonia, Croatia and Slovenia) did not carry out any screenings at all.

Cyprus in fact, was identified as one of the six countries which does not have a screening mechanism.

Blind spots
“Screening of foreign investment in the EU is a work in progress,” said Mihails Kozlovs, the ECA member in charge of the audit. “As the EU’s safety net, it has some large holes in it. If the EU wishes to mitigate the risks better, both the Commission and all member states must repair the net.”

Cyprus accounted for 2.9 per cent of the inward investment stock in the EU between 2019 and 2021. Nonetheless, it gave no notifications relative to FDI to the EU, reflecting no screening mechanisms, the report highlighted.

“Screening of potentially harmful foreign investment in the EU suffers from blind spots which compromise effectiveness and efficiency when identifying, assessing and mitigating security and public-order risks in the entire EU.”

Links to criminal activity
Though it stressed openness to FDI is a key principle of the EU’s single market, investment in strategic sectors that are vital for security and public order in the EU (e.g. ports, nuclear plants, semi-conductors, or dual-use microchips) may at times create a risk of unwarranted control by non-EU investors.

This includes “those involved in criminal activity, or controlled by foreign governments or armed forces.” This risk may increase if EU countries do not coordinate their efforts, the report highlighted.

Though some countries failed to have any screening mechanism, other that had one considered different sectors as critical, or had different interpretations of key concepts of the EU rules adopted in 2020.

The auditors observed that several countries reported only those transactions that were likely to affect their own public order or security, thus depriving other member states and the Commission of a chance to assess the potential impact on them, or on EU programmes.

A key factor hindering the proper functioning of the system lies in the fact that EU rules do not require countries to set up a screening mechanism, and also allow them discretion in determining the scope of their national screening rules.

Additionally, countries are not obliged to report the outcome of their screening decisions to the Commission, even when it issues an opinion or other EU countries have shared their concerns.

Moving forward
The auditors recommended that the Commission seeks out the necessary amendments in the regulation to strengthen the EU FDI screening framework. This can be done by clarifying the key concepts of the framework and avoiding the current blind spots and inefficiencies, it specified.

Additionally, it urged the Commission to assess national screening mechanisms for compliance with regulatory standards, and streamline some practices like pre-screening and aligning criteria, timeframes and processes across member state screening mechanisms.

Thirdly, it suggested improving the cooperation mechanism and the Commission’s assessments for providing better justification of mitigating actions related to high-risk cases; and lastly, improving the reporting process.