FIAU penalties unconstitutional, court says

The Court of Appeal has dead-legged the powers of Malta’s Financial Intelligence Analysis Unit (FIAU), saying the regulator cannot assume on itself the power to issue onerous fines against the firms it regulates.

Mr Justice Lawrence Mintoff granted a ‘luxury credit card’ company – Insignia – €10,000 in damages after finding that the FIAU’s powers to act as prosecutor, judge, jury and executioner, breached fair hearing rights. The FIAU is tasked with anti-money laundering investigative powers.

It was the second decision by a Maltese Court that has undermined the powers of the FIAU, after a financial services firm fined a record €1.2 million for its shortcomings won the right not to have its name published before a final court appeal upholds the FIAU’s decision.

This time however, the court found that the FIAU’s powers to both inspect firms under its purview and then fine them, undermines constitutional and European fair trial rights.

Insignia, which runs a membership-only credit card provider for ultra-rich spenders – and at one point recruited former Labour minister Chris Cardona as an advisor – was fined €373,670 over money-laundering compliance breaches by the FIAU. It had also been fined €147,000 by the Malta Financial Services Authority and later reduced when restrictions were lifted..

The FIAU said Insignia had failed to raise an internal investigation over a suspicious transaction report. In one serious case, a PEP (politically-exposed person) was rated as high-risk due to his adverse media links pertaining to ties with the Russian mafia. In one case, the company onboarded a client in April 2018 who was considered to be ‘medium risk’, and later assigned a ‘high’ risk rating in January 2019. The risk increase stemmed from serious red-flags since the customer was in 2012 convicted of £2 million in illicit tickets’ fraud.

Insignia claimed its right to a fair trial meant that the FIAU’s own administrative procedure had to be subject to a full judicial review of the decision.

“Although these cases are not conventionally ‘criminal’, the accused should have a remedy before a court, with the right to indicate substantive and legal points at least at a stage of appeal,” the company’s lawyers told the court.

Insignia insisted that the FIAU was not an independent and autonomous authority, being directly financed by a government ministry and governed by a hand-picked board of directors under the ministry’s purview. “The FIAU can never be impartial because it is a public authority that acts as investigator, prosecutor and court at the same time.”

Insignia made reference to the 2018 case filed by the Nationalist Party’s secretary-general against the Electoral Commission, which challenged the regulator’s powers to act as investigator with the power to impose substantial fines on political parties falling foul of the party financing rules. In that case, the Constitutional Court found the nature of the offences were criminal in nature and had to be heard solely by a court and not by any other judicial organ.

Insignia insisted that the FIAU investigative process does not grant it a proper remedy such as presenting submissions or written pleadings.

In his decision, Mr Justice Lawrence Mintoff said EU member states could not disregard previous decisions by the European Court of Justice on such regulators, when these take administrative decisions on matters that are of a criminal nature.

“It is clear that since a fine is intended to serve as a penalty but also a deterrent vis-à-vis the person alleged to have breached their obligations, it can no longer be regarded as an administrative fine... where the penalty may even be within a maximum of €5 million, the intention of the legislator was to provide both a deterrent but also of a penalty...

“The respondent State Attorney admits the FIAU’s decision may have ‘serious effects’ on the applicant society. Indeed this may give rise to the possibility of imposing an exaggerated and perhaps even unfair administrative penalty in the event of a minor infringement, and it is precisely to limit any arbitrary conduct by the FIAU that citizens must be protected by the Constitution and the European Convention of Human Rights,” the judge said.

The Court said that nowhere could Insignia present its evidence before the FIAU reached its decision, because the FIAU’s compliance committee “can never be regarded as independent and impartial in these circumstances, nor is it a tribunal established by law because it is the FIAU itself which chooses to constitute it, and even regulates its proceedings arbitrarily, it leaves no doubt that there is no parity of the arms in terms of the respective parties.”