€6.2 million Maltese Cross bust • ‘Unreasonable’ to expect MFSA to prevent all failures

The Malta Financial Services Authority has stated that despite its supervisory efforts, the chances that licensed entities fail “cannot be eliminated” when quizzed about the €6.2 million alleged misappropriation at the Maltese Cross Financial Services firm, whose books the MFSA did not inspect for six years.

“Notwithstanding the Authority’s supervisory effort, the chance that a licensed entity may fail cannot be eliminated. No supervisory system is waterproof and it is therefore unreasonable to expect supervisors to prevent all failures, particularly when we are dealing with humans whose behaviour might change during the years, together with their circumstances,” an MFSA spokesperson said on behalf of director-general Marianne Scicluna and chairman Joseph V. Bannister.

Over the past five years, hundreds of millions in investors’ money has been lost by Maltese financial services firms and banks, who have been accused of selling complex financial instruments to retail clients, sometimes under false premises.

The MFSA has often been under pressure for failing to act faster on accusations of mis-selling or to order compensation for wronged clients.

But in the charges against accountant Jean Claude Bugeja, who lost over €6.2 million in clients’ investments in a bid to recover a €250,000 loss, it was revealed that the MFSA had not carried out an inspection for six years, a court was told.

Bugeja was said to have lost €250,000 in a €1 million investment in 2008, and then, in trying to recoup the loss, misappropriated investors’ funds which he eventually lost over a six-year span. During questioning, Bugeja was said to have described the system as “very easy” to exploit, claiming that the MFSA’s last inspection of the company’s books was in 2008. During the MFSA inspection, Bugeja told police, he gave auditors a summary of what the clients had and not what they were meant to receive, and that the MFSA auditors only checked with the banks’ documents and not with the clients themselves.

“No legal or regulatory system has ever guaranteed or can ever guarantee against criminal fraud or similar wrongdoing,” the MFSA said when asked about these claims in court.

“There is risk in every business or profession, even where this is regulated and supervised. However, in circumstances where, through a malfunction, market malpractice or fraud, a licensed entity fails, the MFSA will take all necessary measures to safeguard investors’ interests.”

One of the MFSA’s major critics, stockbroker Paul Bonello, who is still demanding full compensation from Bank of Valletta for the loss of some €50 million in investors’ savings in a property fund, said the MFSA’s lackadaisical approach to the Maltese Cross case was disconcerting.

“It’s a relatively small case but its implications for the investment services sector are very serious. It is indeed of grave concern that this case has been allowed to happen, dealing yet another blow to retail investor confidence. It is disconcerting to note that the suspected lack of any MFSA on-site inspections at Maltese Cross has in- deed been the case,” Bonello said.

“Properly effected inspections, also consisting of the verification of existence of assets and their reconciliation to client portfolio statements, would have unearthed the fraud six years ago.

“To add further cause for concern, the MFSA has not considered it opportune – in the two months since this case came to light – to undertake an industry-wide exercise to give comfort to the public that what happened at Maltese Cross is not happening elsewhere. And the question is inevitable: why has the MFSA chosen to be so imprudent in the circumstances and failed to undertake this health-check and verify that there are no similar cases? Why is MFSA – with its 237-man workforce – putting its head in the sand? Is it afraid of the result?”

Questions put to the MFSA as to whether it had conducted any new inspections since the Maltese Cross case, were not answered. “Supervision is a complex undertaking, particularly in a sector that is dynamic and which has experienced significant growth,” the MFSA spokesperson said.

“On-site inspections are just one aspect of the MFSA’s supervisory mechanism for investor protection, which has various components including off-site supervision, the monitoring of trading in financial instruments and the investigation of suspicious transactions.”

The MFSA said its supervisory processes aim at identifying potential risks to investor protection, and to mitigate such risks through regulatory intervention.

On a number of occasions the MFSA has taken regulatory action against licensed entities for breaches of regulation, which breaches had been identified as a result of supervision.

Maltese Cross saga

Jean-Claude Bugeja – who owns 85% of the firm’s shares – has now been ordered to resign from his post by the MFSA.

The financial watchdog also suspended the company’s operations and banned Bugeja from providing any financial services and prohibited him from accessing the company’s records, IT system, or offices.

In 2008, Bugeja invested €1 million in a BNP Paribas Fund, raising just under €700,000. Bugeja proceeded to liquidate €300,000 in clients’ assets without informing anyone, an investment that actually generated a profit €8,730.

But a subsequent €1 million investment in another BNP Paribas fund lost €250,000, and in a bid recover the losses, Bugeja continued to make more investments, opting for more risky investments which could yield a higher profit.

Eventually, by 2014, the total losses stood at €6.2 million, and only €500,000 remained of clients’ funds.