Failure to tackle anti-money laundering shortcomings might threaten Malta’s financial stability - IMF

The International Monetary Fund has urged Malta to tackle shortcomings in its anti-money laundering and countering the financing of terrorism (AML/CFT) framework in a timely manner.

Not doing this, the IMF warned, could result in added difficulties connected with correspondent banking relationships (CBRS) for local banks, damage to the country’s attractiveness for investment, and threatened financial stability.

The IMF’s comments were published on Friday in its Concluding Statement, which described the preliminary findings of the organisation’s annual official mission to Malta.

“Failure to address identified shortcomings in the AML/CFT framework, as laid out by the Council of Europe’s AML body (MONEYVAL), could expose Malta’s financial system to financial integrity and reputational risks, threaten financial stability and magnify existing pressures on CBRs,” the IMF said.

“As a result, difficulties in processing payments could potentially arise as well as pressures on related sectors of the economy. The focus should be on improving and demonstrating the effectiveness of the AML/CFT framework,” it said. 

“In particular, the understanding of risks and the monitoring and supervision of banks and other high-risk sectors and programs—such as remote gaming, virtual financial assets, and the IIP—should continue to be strengthened. It is also key that AML/CFT enforcement actions are enhanced.”

The organisation noted in its Concluding Statement that Malta had “enjoyed very rapid economic growth in recent years as the economy rebalanced towards high value-added services.”

It said that prudent fiscal policy and timely structural reforms had helped boost employment and build fiscal buffers while promoting social cohesion. 

However, sustaining strong performance would require that Malta address key challenges, the IMF highlighted.

Chief amongst these was tackling AML/CFT framework deficiencies. Here, the IMF is recommending continuing ongoing reforms by prioritising efforts to address shortcomings in the implementation of AML/CFT framework.

Moreover, it said Malta should guarantee the long-term financial independence of the MFSA and continue enhancing its capacity. The MFSA, it said, remained “under strain due to the large number of financial institutions under supervision, the evolving regulatory environment and challenges associated with  new and complex products.” It this regard, it recommended that the watchdog’s supervisory capacity and crisis management framework be further enhanced.

It also recommended addressing limitations in the crisis management framework and further strengthening the analysis of financial risks outside of the banking sector while closing remaining gaps.

Another challenge, the IMF said, was the fact that economic growth has relied on large inflows of foreign labour, which is increasing the pressure on the island’s housing, infrastructure and natural resource management.

The organisation recommended structural reforms to address this, namely working harder to encourage the elderly and women to participate in the working world, the closing of skills-gaps, the fostering of innovation and the improvement of access to affordable housing.

It also also underlined that “improving governance would safeguard Malta’s business climate and its attractiveness for foreign investment.”

The IMF moreover identified a third challenge in the form of continued fiscal risks associated with contingent liabilities and long-term age-related spending, despite public debt having decreased markedly.

To help target this issue, the organisation recommended that Malta maintain its gradual structural consolidation excluding profits from the Individual Investor Program (IIP).

It said the country had to “continue addressing infrastructural needs while improving public investment efficiency and containing current expenditures.”

In this regard, it said “current-expenditure growth needs to remain contained in order to preserve healthy public finances, while support for social inclusion should continue through well-targeted measures.”

Fiscal risks should be lessened, the IMF said, through an enhanced risk management related to government guaranteed and state-owned enterprises, and by addressing long-term age-related spending pressures.

It also encouraged Malta to strengthen its revenues from taxes and to explore ways to diversify beyond corporate tax income proceeds.

Economy reaching cruising speeds

The IMF said that although economic activity remained above its long-term average, it was moderating and becoming increasingly dependent on domestic demand.

Real GDP is expected to have dropped to around 5% in 2019, from 7% in 2018, primarily due to weaker foreign demand. It is projected to further moderate to around 4% in 2020 as investment is affected by global uncertainty and as private consumption moderates.

IMF issues another positive certificate for Malta - government

In a reaction to the IMF’s Concluding Statement, the government said on Saturday that the organisation had given “another positive certificate” to Malta.

The government also noted the IMF’s recommendations to continue supporting social inclusion and infrastructural investment.

It added that it remained committed to implementing its comprehensive programme to strengthen the economic, institutional and social spheres.