Grey clouds are looming over the financial services sector

At a recent talk hosted at the Chamber of Commerce, Prime Minister Robert Abela was ebullient about the chances for Malta to get a positive reply from Moneyval based on recent improvements in governance.

A typical case was the reported rare news that a huge fine was slapped by FIAU on a gaming company after a series of shortcomings were uncovered.

This surely sends out the message that Malta means business and that gone are the days when the more reviled case of a rogue Iranian Pilatus Bank, then audited by KPMG, was cocooned and cosseted by the banking regulator regardless of a number of suspected infringements discovered by a FIAU inspection.

This seems to be the calm before the storm as one is conscious of the latest OECD’s downgrade. It is caused due to low or no supervision by the authorities entrusted to keep a watchful eye, particularly hitting the Malta Financial Services Authority (MFSA) and the Financial Intelligence Analyses Unit (FIAU).

Such tidings come out of the latest peer review by the OECD’s Global Forum, published a few days ago (this covers the seven-year period of Joseph Muscat’s illustrious administration starting 2013). The new peer review resulted in an overall ‘partially compliant’ rating, whereas the first-round report in 2013, it had concluded that Malta was ‘largely compliant’ with the standard.

It goes without saying that during prime minister Joseph Muscat’s reign thanks to his team, the GDP had doubled in value. This was no mean task.  Unfortunately, keepers of our financial conscience were caught unawares. The brinkmanship of Prof Bannister who ruled over MFSA as a colossus for almost 2 decades has bequeathed us such a tarred legacy.

The OECD had left seven years pass since 2013 when it then decided to carry out a root and branch overhaul of our regulatory prowess. Our garden was well decorated with blossoming flowers but in truth our citrus trees were rotten latently eaten up with pernicious diseases. Is the proverbial farmer (keeper of our national garden) caught in a bind and is now madly chopping down indiscriminately all trees in a drive to earn his reputation as a judicious steward of our heritage.

The detailed audit of OECD discovered thousands of inactive ( non performing ) companies registered at MBR which figure did not match the same list kept by Commissioner for Tax regarding non paying taxpayers. As if by magic, three months ago, MBR did a clean sweep of its faulty register and axed off thousands of defunct companies.

Other concerns identified refer to the effectiveness of enforcement and supervision activities to ensure the availability of ownership, accounting and banking information, particularly considering the falling compliance rates.  OECD asks: can exchange of information move smoothly with so many inactive companies whose real ownership is unknown? Among the recommendations made by the OECD team was the need for usual enhancement and supervision, mostly by the failing MFSA.

This comes as a top priority.  Sadly, the patient is now saddled with knee jerks tactics where supervision over CSP’s is put on overdrive and we shall all be forced to check whether the boogie man is hiding under each bed.  OECD concluded that Malta has not taken sufficient measures to address the recommendation given in 2013 thereby commented that it was only in 2020 that the government decided to strike off data about some 10,000 companies from MBR registry of companies.

Another classical knee jerk reaction occurred last March when MFSA announced that in just three months, the Malta Business Registry initiated defunct procedures against roughly 2,000 companies, with a total of 1,654 companies struck off for being non-compliant, as at February 2020.

A case of closing the barn door after the horse has bolted.

Another twist in the armory of reportage on cross-border tax arrangements was the Legal Notice 342 of 2019 published on 17 December 2019.  The new DAC 6 rules reflect the provisions of the Directive and impose mandatory disclosure by certain intermediaries (and taxpayers, in specified situations) of defined cross-border arrangements.  DAC6 imposes mandatory disclosure requirements with respect to certain arrangements with an EU cross-border element where the arrangements fall within certain “hallmarks” mentioned in the directive and in certain instances where the main or expected benefit of the arrangement is a tax advantage.

A mandatory automatic exchange of information on such reportable cross-border schemes is being introduced via the Common Communication Network (CCN) which will be set-up by the EU.  Back to the OECD report, it laments that officially “this procedure seeks to eliminate any abuse from directors and/or shareholders regarding the use of companies for an illegitimate purpose”.

But in the meantime, it does not rain but it pours for MBR. OECD criticised the hasty striking off of these companies lamenting that historical data about their actions and their ownership is now no longer available.  The reduction in transparency has made it harder to conduct due diligence and research on people who opened, owned or had a judicial role in companies registered in Malta.

Removing their on line data means that any wrongdoing that could be detected with the information being public, would now be hidden.

The next spotlight pointed over a number of crypto currency operators which had started in Malta without a license (availing themselves of the loophole consisting of a free ride during an extended transition period).

A brief circular from MFSA expressed its concern that a number of entities (so listed) had not licensed to provide any VFA services or other financial services nor have they initiated the application process to obtain a VFA services licence.

The Blockchain Island bubble which initially attracted over 340 applications ended as a damn squib since only 26 licensees were eventually complaint. Leon Siegmund, who sits on the board of Malta’s Blockchain Association, said the MFSA rules are misguided: “The regulation in Malta came out of a mindset of technocracy, rent-seeking and EU-obedience.  Exactly the opposite of what’s needed”.  Another skeleton in MFSA’s cupboard is banking regulation.

Last year the ECB found “general and systemic shortcomings” in the way Malta was handling the problems of financial crime. Very aptly was the defense of Marianne Scicluna, chief officer supervision at the MFSA.

She stated that “While the MFSA is first and foremost a regulator, it must also fulfill the role of industry partner in order to minimise the opportunities for criminals to use Malta as a vehicle for illicit activity”.

The nation waits with bated breath the outcome of the Moneyval report and its conclusions whether the island has sufficiently improved its arsenal to avoid greylisting.