Supervising the supervisors | Joseph Cuschieri

The MFSA has been under fire of late, especially over its apparent struggles to enact proper supervision and enforcement of the burgeoning financial services sector. Let’s start with logistics implicit in this criticism. What is the authority’s current staff complement, and is it sufficient to fulfil the obligations of its remit?

At the moment, we have roughly 310 employees working exclusively for the MFSA: that is, excluding the international tax unit, and other departments. However, we are projecting that within the next three years, the complement should be in the region of 480 employees. There are two aspects to this. On one hand, we need to ‘right-size’: in other words, we need another 150 personnel just to meet the authority’s HR exigencies today. On the other, we also need to cater for the growth that is coming up. The way I see it, Fintech [an amalgamation of financial services and IT] will translate into a massive push forwards: apart from crypto-assets, and other such developments. But the sector in general is growing exponentially across the board. We are seeing a steady flow of business coming in: in particular, the fastest-growing area is insurance. We are receiving many, many applications, even in the context of Brexit.

How will these new employees be distributed?

Roughly, 85% of them will be assigned to supervisory functions i.e., compliance, and enforcement, with the rest going to HR, support staff, etc. But the vast majority will be dedicated to supervisory roles. Don’t forget that today, we have more than 2,100 licence holders, covering all the relevant areas: banking, insurance, securities and markets, corporate services, trustees, wealth management, and so on. All these fall under our supervisory jurisdiction. And with the implementation of the Fourth Anti-Money Laundering Directive (AMLD-4), money laundering has also been added to our responsibilities. Meanwhile, the sector is constantly growing

At a glance, this seems to confirm previous criticism that the MFSA was, in fact, under-resourced to deal with such a large number of companies, some of which handled large sums of money. Isn’t it a much bigger problem today?

It is certainly a very big challenge. In fact, even certain institutions that oversee the MFSA’s functions – such as the International Monetary Fund, the European Banking Authority, the European Central Bank, IOPA, and all the regulators of the individual sectors – have often drawn our attention in their reviews to challenges in the supervisory capacity. But just to be clear: this does not arise from a lack of will on the MFSA’s part. We would like to strengthen that department, but it is not always easy to find the necessary local talent. As I said earlier, we need another 150 people. Where are we going to find them?

They are mostly going to the private sector, which, as you already know, pays much better than we do. The attrition rate has been high in the past three years: we lost of a lot of competent, experienced individuals who left us and went to work in the private sector. I want to eliminate that as much as possible. In fact, I’ve just carried out an exercise to improve the remuneration of staff, so that we will be in a better position to compete: to attract and retain new staff.

Meanwhile, there has been relentless international focus on Malta’s alleged involvement in economic crime, partly – but not exclusively – because of the Panama Papers revelations of 2016. Is Malta’s exposure to money laundering an inevitable consequence of the prevailing economic climate… that we have ‘accepted’ dirty money as an economic ‘inevitability’?

Up to a point, I would say the ‘acceptance’ has also been at European level. I recently read an article in the Financial Times, for instance, which stated that ‘Europe is clearly failing’ [in the fight against money laundering and organised crime]…

But Malta was mentioned in that report, along with a number of other countries…

Yes, but it wasn’t just about Malta. One difference, perhaps, is that being such a small country, we run a bigger risk of being targeted by money-laundering operations. So, we have to be more vigilant. But the risk is there for all countries, regardless how big or small they are. This is a problem that has to be addressed more aggressively at European level. In fact, there are now plans for a centralised European money laundering supervisory body. Because the situation as it stands today, under AMLD-4, is that each country is responsible for setting up its own internal AML structures. But there isn’t a common standard of processes or technical standards in place: each country responds to its own demands and necessities.

Many people seem to think that, the moment we find a breach, the proper thing to do is close down the bank. It doesn’t work like that; if it did, it would be the law of the jungle

Meanwhile money-laundering has now become very sophisticated: it takes place within company structures that are very difficult to monitor and trace. Today, financial supervision is becoming increasingly difficult. It’s not as straightforward as it was maybe 20 years ago.

Above all, there needs to be more international collaboration. I think that, rather than pointing fingers at individual countries like Malta, Estonia, Latvia, etc., we should be working together to strengthen governance across the board.

The MFSA has been accused of ‘sluggishness’ in responses to individual cases such as the BOV Property Fund – not a case of money-laundering, but still of financial mismanagement; and with regard to Pilatus, the FIAU complained that its reports were minimised or ignored. How do you respond to the general perception that MFSA treats such entities with kid-gloves?

It is true that the perception exists. Each financial institution is obliged by law to abide by money-laundering procedures. And when we carry out inspections, there are specific procedures that we have to follow: how to do KYC checks, source of wealth checks, and so on. So, in our inspections of banks and financial institutions, we ensure that they are abiding by the procedures laid down by the FIAU and the MFSA: to check whether those procedures are in place, and are functioning properly. But there are procedures we have to abide by, too. If, for argument’s sake, we identify certain gaps or shortcomings, our job is to draw the institution’s attention to them, to ask for feedback, and to request that any outstanding problems are rectified…

... not to close the bank down…

Exactly. There is also the perception that that is our role; but in reality, what happens is that we list out all the problems, alert the institution in writing, then organise follow-up inspections to ensure that the problems are rectified. If so, we close the case. If, on the other hand, they persist… we can fine the institution concerned. Yet many people seem to think that, the moment we find a breach, the proper thing to do is close down the bank. It doesn’t work like that; if it did, it would be the law of the jungle… even because our remit does not extend to that form of action. Another thing is that it is not our job to respond to the media. In the case of Pilatus, and also other institutions, the decisions we take are in any case subject to appeal, through the Financial Services Appeals Board. Now; you might ask, am I happy with our current enforcement capability? My answer would be ‘no’. We definitely need to improve.

How does one improve the efficacy of the regulator, in a way that also satisfies public expectations that things are being done properly?

Honestly, I do believe that things at the authority are done in good faith. We have some very competent and efficient people who are experts in the sector. But I also think we need to take certain decisions. Often, we end up wasting a lot of time – for want of a better expression – analysing and re-analysing, to-ing and fro-ing over individual cases, etc. And there is a good reason for this: it’s not just for the sake of it, but to ensure that every decision we take – especially enforcement actions – is based on solid, 100% watertight evidence.

Withdrawing a bank’s licence is not like closing a grocery shop: there are serious implications. So we tend to be super cautious to make sure our decisions are well-grounded and well thought out. But we need to improve, and shorten the timeframe for analysis so that decisions can be taken more expeditiously.

Nonetheless the perception of laxity has been fanned relentlessly by the international press. Has it damaged our reputation: to the extent, perhaps, of actually affecting individual sectors?

It depends: in terms of business flow, I haven’t seen any effects personally. But I do come into contact with practitioners locally who tell me, ‘I heard this’, or ‘I read that’ or ‘Some investors raised this issue during a meeting’, etc. So I think I would be burying my head in the sand, if I thought all these negative articles about Malta were negligible. They are not doing us any favours, that’s for sure. Especially the ones that exaggerate the situation. In reality, however, when people come here and speak to us – when they meet our technical people, and we explain the local procedures and how they work – they quickly realise that Malta is, in fact, a serious place to do business.

But criticism has not been limited only to money-laundering. How do you respond, for instance, to charges that Malta is a tax haven?

I would say that a tax haven is the one thing Malta certainly is not. For starters, our fiscal regime is OECD compliant: there is a level of transparency that applies equally to everyone. This was certified even by the PANA committee. And [Malta-registered companies] pay VAT. The 5% rate is in fact charged only on the distribution of dividends, and the refund which the UBO gets. The company as a whole still pays 35% just like all the others. And there are other taxes to be paid. A tax haven, on the other hand, is where you pay no tax at all – zero. Clearly, that is not applicable to Malta.

But isn’t there also an ethical dimension to the issue? The argument against tax competition is also that countries which undercut tax rates, are redirecting tax money which would otherwise be paid in the countries where the profits were generated. This is reflected in criticism directed at Malta by, among others, France and Germany…

But today, with BEPS [Base Erosion and Profit Shifting Action Plan], things are no longer that straightforward. The days when people set up their companies in a particular country, and paid all their taxes there, are now over. The tax authorities will be looking at where the company decisions are being taken, where the economic activity is taking place, etc., and tax the company accordingly.

There are now regulations in place regarding transfer pricing; and even regulating where the board meets, or where the management structure has been set up. So, quite frankly, I don’t see that argument really holding up any more.

Besides, I think that a country is well within its rights to establish an attractive fiscal regime, in the attempt to entice more business to set up locally. We already went through this process, when applying to join the EU in 2004. Our fiscal system came under scrutiny then, and it was approved with the blessing of the EU. So, it’s not really fair for countries like Germany and France to come complaining now, 10 years down the line, about the economic structures we have built on those very foundations...

Nonetheless there is pressure piling up at EU level for, among other things, tax harmonisation. How do you see the eventual outcome of this pressure?

A lot of this pressure is coming from Germany and France; and the fact that the UK is leaving [the EU] is not good news for us. It is no secret that the UK was an ally of Malta, in the sense that we had certain principles in common regarding tax sovereignty. But it’s hard to make accurate predictions. One factor is whether Malta remains totally isolated in its opposition to tax harmonisation. If we are alone in combating fiscal harmonisation, the prospects do not look good. If, on the other hand, our arguments are supported by ‘ally’ countries… we should be able to withstand the pressure.