‘Malta’s financial juridisction needs a revamp’ | Joseph Cuschieri

There is serious talk about Malta’s possible grey listing from Moneyval. Let’s start with the brass tacks: why is it crucial for Malta to avoid this greylisting in terms of doing business?

The MFSA is on track and well-prepared for the Moneyval assessment later on this year. A detailed action plan based on the Moneyval recommendations had been drawn up which is being monitored on an ongoing basis in collaboration with the National Co-ordinating Committee within the Ministry of Finance. The MFSA team is fully focused on ensuring a positive outcome for the MFSA. A positive Moneyval assessment for Malta is critical in ensuring that we remain a trusted international financial centre, maintain our competitiveness and continue growing the sector in a sustainable fashion in the long-term. Grey-listing on the other hand will make it very challenging and difficult to operate as a European financial centre and may result in a contraction of the economy in general. This may also include the loss of US dollar correspondent banking due to the fact that Malta would be listed as a high-risk jurisdiction by the FATF – where as a result, jurisdictions dealing with Malta would need to apply enhanced due diligence checks and other risk mitigation actions which would make international trading and banking more challenging.

Having said this, I personally believe that if we stay focused on the national Moneyval action plan with “all hands-on deck”, we should be able to avoid greylisting.  

Before delving into the changes at MFSA under your tenure, what does Malta and specifically the MFSA have to do to avoid this grey listing – what are the priorities?

The MFSA will continue raising the bar in terms of supervisory and enforcement standards. We are already moving in this direction through the work being carried out by the MFSA, FIAU and other agencies. A number of actions worth mentioning: [a] the Authority has integrated AML/CFT risks and internal control oversight into its prudential and conduct supervisory processes; [b] it’s updating of the Authority’s AML/CFT sectoral risk analysis; [c] it has updated the Authority’s risk based approach to supervision to integrate AML/CFT risks across its supervisory activities. Furthermore, we have invested heavily in capacity building, sourcing of international expertise and the setting up of a financial crime compliance unit. Having said this, the bottom line is all about effectiveness – our ability as a jurisdiction to enforce effectively cases relating to money laundering and expedite prosecutions and asset confiscations.

The finance minister said that the FIAU will probably become Malta’s financial crimes agency and the MFSA could be headed towards a more bolstered investigative and supervisory role. Do you think this is the appropriate course of action?

I believe that what the Finance Minister said would be a step in the right direction. The way Malta as a jurisdiction supervises and investigates financial crime needs a revamp. There are many models we could emulate, e.g. the UK and other European jurisdictions. I personally agree that the FIAU should become the national financial crime agency with investigative and prosecution powers on top of its current remit. If government decides that the MFSA assumes the role of an AML/CFT supervisor for the financial services sector, we are prepared to assume that role. We would of course need to ensure we have the necessary capacity to take on board added responsibilities.    

How will the MFSA prepare itself for this new role? For example, it only launched a joint investigation on Pilatus Bank with the FIAU late in the day (early 2018). Can it become the investigator which, going by its past record, it never was?

Malta’s anti-money laundering watchdog is presently the FIAU. The MFSA’s current remit relates solely to prudential and conduct supervision of licensed entities, including the investigation of misconduct within the financial system. If the government decides to vest the MFSA with additional responsibility for the direct supervision of AML/CFT regulations within the financial services sector, the Authority will also be in a position to take action in this regard.

What changes have taken place inside the MFSA since you took on this role – how do you describe the major changes you have introduced?

There has been an intensification of efforts to transform the Authority to meet the global challenges emanating from the financial services sector, in addressing the recommendations of international standard setters and keeping up with the implementation of its ambitious three-year strategic plan which sets out the key priorities for the Authority. The focus on efficiency and effectiveness with respect to authorisation and supervision have intensified as well. Our focus is primarily addressed towards growing sustainably in a safer environment, steering away from risky business models and set-ups.

Changes which are ongoing include the establishment of a dedicated risk function, strengthening of enforcement as well as investment in technology and data management. The Authority embarked on a major digitalisation process governed by an IT strategy which will see an investment of €20 million over the next four years. The Authority has already started the process to source a new Supervisory Cycle Management System (SCMS) which will enhance its efficiency and cost effectiveness. The investment in Data Management and Business Intelligence tools will strengthen the MFSA’s position as a data-driven supervisor. 

Another major change is the setting up of the Financial Crime Compliance Unit, mentioned earlier, to reinforce the MFSA’s role in preventing the use and involvement of authorised persons in money laundering and the financing of terrorism. The MFSA has also triggered a number of initiatives to strengthen the industry’s competitiveness and sustainability such as the launch of the Fintech Strategy. With respect to capital markets, the MFSA has developed a new strategy, focusing on revisions to the regulatory framework and enhancing its supervisory capacity and investor education. Other initiatives include the development of an Asset Management Strategy and the launch of a FinTech regulatory sandbox. These initiatives will be announced in the coming weeks.

Don’t you think that Malta’s regime of so called ‘letterbox’ companies, and our tax competitiveness regime, is also a lightning rod for unwanted publicity and bad financial practice? Or would you say this problem is spread across the rest of Europe...?

There are four elements which distinguish Malta as a jurisdiction of choice for financial services: [a] a forward-looking regulatory framework, which is constantly being developed; [b] a strive for efficiency in financial supervision; [c] a pool of professionals that are available to support the industry’s development and growth; and [d] a competitive and transparent tax regime. Malta’s tax regime is compliant with EU, OECD and international standards, including the relevant provisions on transparency and exchange of information. In financial services, Malta does not promote itself as a jurisdiction for letterbox entities. Indeed, the MFSA mandates that entities should have substance in Malta – substance both in terms of governance structures and the day-to-day conduct of business. This is verified at authorisation stage, as well as throughout the entity’s life cycle.

 Do you agree with critics who accuse Malta of promoting aggressive tax planning practices? Do you see the general sentiment inside the European Union one day leading to a forcible reform of the way we attract this kind of business?

I disagree. EU tax harmonisation is not something new and as in other sectors, the EU’s tax framework is the subject of ongoing debate and changes are constantly on the EU’s policy makers’ agenda. Whether there would be a forcible reform on the way we attract business remains to be seen and we should always prepare for any eventuality. Having said this, practitioners in Malta should continue exercising prudence at all times when providing services to clients on tax matters, acting not only in the best interest of their clients, but should at the same time also ensure that the jurisdiction’s reputation is properly safeguarded.

This week the MFSA finally suspended Satabank’s licence. Since taking over you have acted faster on these cases than the previous MFSA governor – what has changed in terms of MFSA practice?

The Satabank licence was cancelled by the ECB following the MFSA’s recommendation, as detailed in the MFSA’s Public Notice last Wednesday. Raising compliance standards and increasing the effectiveness of our supervision and enforcement are mission-critical priorities for the MFSA. We are also approaching supervision and enforcement interventions by applying international best practices – this will help in improving the compliance culture across the entire sector. For example, the approach taken by the MFSA and the FIAU with respect to the controlled release of funds at Satabank ensured that suspicious funds were flagged and reported to the FIAU accordingly through STRs while funds identified as legitimate were paid.

This ensured that innocent depositors were not penalised through our regulatory intervention.