In the wake of the recent FATF assessment of Malta, many Opposition spokespersons have adopted a narrative that pre-2013 Malta was a well-respected financial centre but that all changed with the change in Government.
The reality is quite different. A quick flick through the IMF’s Article IV report on Malta issued in July 2013 sheds considerable light on Malta’s pre-2013 “golden standard”. It mentions anti-money laundering 22 times. To give some perspective, in the Article IV report for Germany made in the same year, anti-money laundering was mentioned 3 times, seven times less.
The 2013 Article IV report on Malta makes the following conclusion: “the framework remains largely untested, and the AML/CFT laws and regulations have not been sufficiently used”. It notes that while reporting obligations are in place, “the level of reporting of suspicious transactions for both money laundering and terrorism financing remains relatively low”. As for sanctioning of individuals, again the report states that rules are there but “these sanctions have not been sufficiently used, and the financial penalties that have been imposed were not necessarily dissuasive”. Turning to financial regulation by the MFSA and FIAU, “the number of on-site visits remains low and not commensurate with the size of the financial market”.
By contrast, in his recent interview with “independent journalist-turned PN strategist” Chris Peregin, Opposition Leader Bernard Grech denied that under-staffing was a problem under previous PN administrations, arguing that its manpower had to be increased after 2013 because “organised crime has increased astronomically”. The reality is that with just 13 workers, the FIAU in 2012 could hardly handle any of its tasks. Its paltry budget of less than €0.4 million was less than that of the annual children’s arts festival.
With just 13 workers, the FIAU in 2012 could hardly handle any of its tasks.
The IMF had noted severe deficiencies even in very sensitive areas. Notably it had mentioned that “the absence of a national risk assessment to identify the most risky areas for money laundering/terrorist financing gives rise to concerns with regard to the effective implementation of risk based supervisory activity.”
Rather than applauding Malta’s gold standard, the Directors of the IMF had instead argued that “the increasing complexity of Malta’s financial sector also warrants further strengthening of the anti-money laundering regime”. They had also sounded a warning that while there was a framework to prevent the funding of terrorist activities, “it has never been used”. The implication was the same as arguing that the fact that the police do not prosecute thieves, does not imply that no thefts are being carried out.
With regards to Malta’s relationship with the US Government, the clearest no-confidence signal that the American Government ever sent to Malta was in 1995 when it unilaterally decided to rescind the double taxation agreement that existed between the two nations.
A double taxation agreement is designed by two countries to ensure that citizens and businesses of both countries are only taxed once on their profits and income. The strength of Malta’s financial services sector is underpinned by the fact that we have an extensive network of double taxation agreements. In 1995, under the Fenech Adamiadministration, the Americans decided that they were no longer willing to take such an undertaking with Malta. When finally, in 2011, the Americans relented and granted a new double taxation agreement, then Minister Tonio Fenech had said that the agreement “goes a long way towards re-establishing Malta’s credentials of a transparent taxation system”.
It took the golden standard PN administration 16 years, more than three legislatures, to earn back the trust of the American Government. While one may debate the possible economic impact that the FATF decision will have, the impact of a lack of a double taxation agreement for 16 years was clear. In the sixteen years when Malta had a double taxation agreement with the US, our goods exports to North America rose by €145 million. In the sixteen years we did not have an agreement our goods exports rose by just €15 million.
The unfortunate truth is that Malta has taken too lightly the area of good governance for several decades. The events at the end of 2019 served as a wake-up call. There is a clear change in direction and commitment. It will be a challenge to undo the legacy of so many years of under-investment in governance systems, just like it has proven difficult to undo the legacy of so many years of under-investment in physical infrastructure.
However, the future progress of Malta depends on everyone joining a national effort to continue to improve standards. At the same time, for the voice of a little nation to be heard, we must have one voice. The example of Iceland is particularly relevant. We need to adopt their approach to successfully tackle this challenge and turn it into an opportunity.