Moneyval – big brother is watching | PKF

The challenges to our regulatory authorities are ongoing and in particular one cannot ignore the added scrutiny placed by an inspection this year to be carried out by Moneyval – an EU mechanism with powers to conduct ad hoc inspections. It represents a Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) which was established in 1997, and now serves as an independent monitoring mechanism within the Council of Europe.

It is an FATF Style Regional Body (FSRB) whose main aim is to ensure that member states have effective systems to counter money laundering and the funding of terrorism in place, and that they comply with the relevant international standards. As an institution, it assesses member states’ compliance in the legal, financial and law enforcement sectors through a peer review process of mutual evaluations.

The peer review system that has been adopted is based on the FATF model, though the process is undertaken against a more extensive set of anti-money laundering standards, including the FATF Recommendations, the EU’s Fourth Money Laundering Directive, as well as the 1998 UN and 1990 Council of Europe conventions. Malta fared well in the latest inspection in 2012 with a follow-up having taken place in 2015.

Since 2015 and following the PANA reports together with the Pilatus Bank closure one may expect a deeper look by Moneyval experts who are to arrive next November. In its previous inspection, Moneyval had noted that the number of on-site visits by the regulator was low.

In addition, the absence of a national risk assessment to identify risky areas for ML/FT gave rise to concerns with regard to the effective implementation of risk-based supervisory activity. Due to such observations and other factors – these led to instigate reform at the MFSA starting with a consultation exercise among practitioners and industry at large which was carried out last year. According to the Minister of Finance this Moneyval visit is a regular one and there should not be undue speculation in the press about it.

He placated the press saying the Committee has been carrying out such evaluations locally on a regular basis over a number of years. Naturally the alleged anti-money laundering transactions at Pilatus – an Iranian bank combined with the revelations arising out of a number of leaked FIAU reports on the same bank - these have triggered an inquiry by the European Banking Authority (EBA) based on a request by the European Commission and a report from the European Parliament.

EBA was asked to verify whether it is fully equipped and free from conflicts of interest to perform its supervisory duties. It was also asked to establish whether the MFSA had fulfilled its obligations as a national supervisory authority in extending the licence to Pilatus bank. EBA concluded its investigation and recently announced that there were no infringements but MFSA needs to tighten its AML arsenal and employ more resources.

Therefore, a recent announcement by the parliamentary secretary responsible for financial services that MFSA is to undergo a legislative revamp is most welcome. This revamp started by conducting a public consultation process launched last year. In the meantime, this article is advocating that the ideal reform will result in splitting the MFSA into two authorities – one harnessing the prudential regulatory function and another entity having separate management to oversee the financial conduct of regulated bodies.

As they say - having a super-regulator is like having all the eggs in one basket. Just consider the onerous responsibility the MFSA carries for the direct supervision of all regulated firms (including banks, funds, trusts, insurance and SICAVs). This includes both prudential and conduct of business purposes and, at the same time, carries an onerous duty to take remedial and timely enforcement action against firms wherever it identifies regulatory failures. Such a restructuring has its advantages since it extends power to make judgments over whether banks’ or listed funds’ or financial products pose a risk to financial stability or are likely to cause detriment to consumers.

For example, the UK, previously had a single regulator − the so-called FSA. The monolithic structure was split into two entities: the Prudential Regulatory Authority (PRA) and the Financial Service Authority was rebranded as the Financial Conduct Authority (FCA) with three areas of responsibility.

The first duty is the conduct of business supervision of banks, insurers and major investment firms followed by prudential and conduct of business and markets supervision of all regulated firms not falling within the remit of the PRA, and finally the enforcement process. It will subject banks, insurers and major investment firms to separate regulation for prudential and conduct purposes. The so-called “twin peaks” model which creates two new supervisors for regulated business has its merits if it is adopted by MFSA.

Certainly, one may appreciate that MFSA struggles to find expert staff even though it regularly trains them in various technical areas. Experienced staff may be tempted to resign to join more lucrative jobs with top law/audit firms and are difficult to replace in the short term.

As can be expected, MFSA will continue to face challenges in new areas such as IT, Blockchain and Fintech. The onset of three new VLT laws and use of guidelines in virtual currency domain has become the latest mountain to climb. It is an open secret that of late the island has faced competition from established EU centres when it comes to attract both regulated funds and insurance sectors.

It faced challenges regarding relocation of new business which moved to established EU centres in the process of seeking EU shelters to passport services due to Brexit. But not everything is doom and gloom. Observers recognise that our national AML/CFT framework is satisfactory but can be fine-tuned to become more water tight.

By the way, the authorities have conducted a National Risk Assessment (NRA) to identify our highest threats and vulnerabilities, as well as a gap assessment to identify those areas in our institutional framework which may need improvement. This is a comprehensive exercise that covers all key elements of our national framework: from supervision and intelligence gathering to investigation to prosecution and confiscation.

This NRA highlights seven initiatives, broken down into approximately 50 action points, to be implemented over the next three years. MFSA as the sole regulatory body for regulated business faces pressures to guide Corporate service providers making sure they comply with a number of directives such as the fourth and fifth AML and many others such as MIFID 2 and BEPS. In conclusion, the country needs a fair and efficient regulator to be able to maintain its competitive edge as a leading financial services centre.

It is with the combined use of pragmatic regulation, creative innovation and service diversification that can eventually lead us to surpass competition in the marketplace. On their part, practitioners pride themselves that they have upheld the highest probity standards in their quest to attract FDI. Experience teaches us how building and maintaining a good reputation can be likened to a fragile plant of slow growth.