THE EYES OF THE WHOLE WORLD ARE ON MALTA. Social and economic issues of a Country

Massimo Ferracci * - Dimitri Barberini - 20/11/2020

Index:

Introduction

  1. FIAU role in the Maltese legal system.
  2. Analysis of the operational models of UIF and FIAU, two authorities with the need for cooperation. Criticalities and solutions.
  3. The European project INTERREG III.
  4. Compliance culture and conclusions.

 

 

Introduction.

Malta represents a financial “jewel” for whole Europe, of course; so much so that the estimate made by the Maltese financial authority (MFSA, The Malta Financial Services Authority), before the covid-19 period, had declared a positive trend with real GDP growth for the 2017-2018 two-year period of almost 7% and with an inflation of 1.5%; the subsequent evaluations instead for the three-year period (2019-2021) predicted an annual average of 4.5% GDP, the dream of every state. The ECB (Europe Central Bank) also expressed itself positively for the 2019 outlook; concerning consumption, economic productivity and economic circulation. It is inevitable that the -19 period has also caused important and negative impacts for Malta, repercussions in particular on productivity, but not dramatic and negative values ​​as expected. In support of an economic recovery for the Covid-19 emergency pandemic, the ECB has disbursed funds for 244 million that will be redistributed in the most affected sectors (tourism and commerce) with an economic deficit of 7%, since for many it is seen as bearable.

Furthermore, there are good prospects for the reabsorbing of financial losses caused by the pandemic and the lockdown in the second half of 2021. For some years, however, the ECB, the European Parliament and various international supervisory bodies have been asking the Maltese institutions to clarify some legal issues that have been affecting the global economy for about three years now. Going in order is the attack on the journalist Daphne Caruana Galizia, a Maltese citizen, killed on 16 October 2017.

There is the further investigation launched by the European executive with an infringement procedure (articles 258 and 259 of the TFEU) to shed light on the indulgent issue of so-called “golden passports”, in the face of a payment, through the European program “Citizenship for investments”, the investigation involved the states of Malta, Bulgaria and Cyprus. European authorities think they have been sold to criminals; With regard to Malta, MEP Markus Ferber, an expert in financial matters, recently stated: “We advise the Maltese authorities to investigate thoroughly what went wrong and whether crimes have been committed during the trial”; as it is believed that there has been involvement through manipulation of the issuance of these European passports.

Finally, to report how the economic reality and social interests are manipulated through companies and credit institutions, the involvement of four French credit institutions operating on the island of Malta (BNP Paribas, Société Générale, Natixis, CIC and Rivage Investment ), which would have omitted important actions regarding adequate checks on the customer and suspicious transactions reporting (STR) to the authorities in charge.

 

 

  1. FIAU role in the Maltese legal system. Criticalities and solutions.

The exercise of credit is covered by the Maltese Constitution of 1964 in art. 18: “The State shall encourage private economic enterprise”; the private sector, but also the public sector as a priority (Parliament, Government, Ministries and competent territorial offices) must not only incentivize the economy but above all monitor and ensure proper and lawful circulation throughout the nation according to international standards”. Unfortunately, Malta exhibits high corruption figures, a conduct that has allowed for many years and many foreign subjects, under payment, to set up companies which, despite not having legal requirements, have still been able to establish themselves, a set of phenomenon that then inevitably also affects outside, just think of the sale of gold passports for Europe or other criminal conducts (given the geographical and strategic position of Malta makes it a perfect carrier of goods and capital between the Mediterranean to the Middle East and Africa and vice versa ).

The FIAU (The Financial Intelligence Analysis Unit) was founded in 2002 and is the agency, dependent solely on the Ministry of Finance and the Central Bank of Malta (Bank of Malta), in charge of carrying out a series of checks to protect and safeguard the economy from criminal phenomena such as the prevention of money laundering and countering the financing of terrorism (PLMFTR), transfers on suspicious transactions of national and foreign currency (STRs-suspicious transactions), and tax crimes. In the year 2019, Malta received the inspection of the Moneyval inspection body (supervisory body of the Council of Europe), which requested the Maltese institutions to fill gaps, strengthen regulatory gaps (Subsidiary Legislation 373.01 of the Laws of Malta and Chapter 373 of the Laws of Malta) and review procedural practices that are suitable for combating the criminal activities listed above, if this does not happen within the time limits imposed by Moneyval, Malta would be the first country to be included in the FATF’s Grey List.

 

 

  1. Analysis of the operational models of UIF and FIAU, two authorities with the need for cooperation. Criticalities and solutions.

The UIF (Financial Intelligence Unit) is the Italian financial supervisory body based inside the Bank of Italy in Rome, was established by legislative decree of 29 November, no. 231 of 2007 (with the implementation of the third Anti-Money Laundering Directive), is the only national authority with the function of nalysing, collecting and sending sensitive data to the main investigative and judicial authorities in the field of economic and financial crimes. It could be defined that the FIAU is the twin of the UIF, one in Malta the other in Rome. Both of these two operating bodies perform the same functions, so much so that the so-called internationally recognized institution is grouped together in a single institution. FIU-Edgmont Group. Italy could give Maltese institutions and in particular the FIAU an aid not of a regulatory nature but of an operational nature, a singular quality that Italy has acquired over time and in the field, thanks to skills, professionalism and difficulties that it still lives today (financing of mafia activities and international terrorism) so much that it has allowed it to establish a synergy between obliged subjects and police authorities, enviable all over the world. The FIAU is also doing a good job: this can be seen with the application of the anti-money laundering legislation on the circulation of virtual currencies, the establishment two years ago of the NCC, (National coordinating committee on combating money laundering and funding of terrorism) and the important national cooperation initiatives such as the agreement with MGA – Malta Gaming Authority), a work that is perhaps not enough or insufficient: first of all, give priority to a constant regulatory update, review and re-evaluate the current procedures regarding the due diligence of customer, the operational schemes on anomaly indicators and Risk Based to Approach and finally broaden the audience of subjects with anti-money laundering obligations. However, further and important steps are also needed on the taxation and company law front: with more stringent rules for their constitution and identification of beneficial owners, thus avoiding the establishment of Off Shore companies or the presence of anomalous directors such as the so-called Wooden Heads and figureheads.

These are all “hot” issues to which, however, the FIAU must not remain impassive, as it cannot carry out on its own unless there is also a change of direction in the Maltese leaders and political factions.

Last but not least, the strengthening of the FIAU in international cooperation, between police forces and neighboring judicial authorities, also through the sharing and exchange of information with other authorities.

 

 

  1. The European project INTERREG III.

Although the relations between Italian and Maltese cultures are not the best, there is a European Fund project, wanted by the European Commission, called INTERREG (term coming from the interregional term); The program began before 2000 between some European countries and which came in 2015 to unite Italy, Sicily, with Malta. The program aims to promote the meeting between institutions, companies and social realities, financing activities and sectors such as intelligent technology, sustainability and also current and problematic issues between the two states; such as environmental protection, land and sea safety, cultural heritage, improvements to the quality of life and health of citizens.

The financial endowment is 51 million (54% has already been used), up to now 15 projects have already been approved and many others are in the process of being approved. The investments are redistributed according to 4 specific allocative assets and previously determined and are:

Asset n. 1 – Research and Innovation,

Asset n. 2 – Competitiveness of Companies,

Asset n. 3 – Environment and risk management

Asset n. 4 – Technical Assistance.

 

 

  1. Compliance culture and conclusions.

The international regulatory framework on anti-money laundering consists of an articulation of sources represented by international standards, European standards and international conventions. The FATF recommendations The International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation, developed by the FATF and summarized in forty Recommendations, represent the fundamental principles on the prevention and countering of money laundering and the financing of terrorism that countries are called to implement in the context of the respective legal, administrative and financial systems.

The Recommendations, fully revised in 2012 and regularly updated, are accompanied by “Interpretative Notes” and a “Glossary” of definitions which form an integral part of them. The Recommendations define a comprehensive and coherent framework of measures to combat money laundering and terrorist financing. They also take into account the experience gained in applying the standards over the years, the critical issues encountered in the assessments of the national anti-money laundering systems and the evolution of risks. In particular a risk-based approach is adopted in the Recommendations: the consideration of risk informs the regulatory structure, the action of the Authorities, the compliance of the obliged parties. The basis of this approach is the performance of an accurate national risk assessment on a periodic basis.

The noteworthy elements introduced with the 2012 revision also include the expansion of the scope of predicate offenses for money laundering, which also includes tax violations, and the refinement of the preventive customer due diligence obligations, aimed at clarifying how to adapt to the characteristics of the risk and to strengthen its intensity in cases of greater exposure. The body of Recommendations also summarizes the standards for countering the financing of terrorism, introduced in 2001, as well as specific measures to address the financing of the proliferation of weapons of mass destruction, in accordance with the Resolutions of the United Nations Security Council.

The key themes of the Recommendations also include the role of Financial Intelligence Units (FIUs) at national level and the importance of the mechanisms of international collaboration between them. The rules, inspired by the standards of the Egmont Group, and the definition of (FIU) developed in this area, specify some aspects of the financial analysis activity and the scope of information (“financial”, “administrative” and “investigative”) that they must be available. Among other things, there is a general obligation for FIUs to cooperate as widely as possible with foreign counterparties, limiting the possibility of refusal to a few mandatory cases. The requirements of the requests and the possible methods for using the information exchanged are specified, subjecting any further use to the prior consent of the counterparty.

The European Union rules on the prevention and countering of money laundering and terrorist financing have acknowledged, over time, the evolution of international principles, with the aim of creating a harmonized regulatory environment among the Member States.

The European anti-money laundering commitment dates back to the early 1990s and has been reflected, over time, in five Directives and several other measures. The fifth Directive EU/2018/843, currently in force, brings targeted changes to the EU regulatory framework on some specific matters, completing the provisions introduced by the fourth Directive EU/2015/849. The fourth and fifth Anti-Money Laundering Directives strengthen the prevention system of the Member States in line with the lines traced by the FATF Recommendations of 2012 and enhance the risk-based approach, a fundamental criterion for the grading of preventive measures and controls.

The fourth Directive confirms the centrality of the role of the Financial Intelligence Units (FIUs) through a more articulated discipline that strengthens their prerogatives and expands their functions, also with reference to the predicate crimes of money laundering.

The provisions emphasize the fundamental requirements of autonomy and independence and adapt the same definition of FIU, specifying the tasks of receiving reports of suspicious transactions and other useful communications for in-depth analysis, analysis (more selective and targeted to cases of actual risk) and dissemination .

The rules on international collaboration have also been revised and expanded, providing, among other things, that the response to requests from foreign FIUs takes place using the same powers available for domestic analysis, regardless of any differences in the laws of the Member States and in the definition of predicate offenses.

Furthermore, the fourth Directive introduces an obligation of “automatic exchange” of reports of suspicious transactions with cross-border characteristics: FIUs are required to promptly forward, to the European counterparties concerned, the reports that “concern another Member State” (reports of suspicious transactions “cross-border”).

In the fourth Directive, the risk-based approach for the definition of prevention and contrast measures provides for the conduct of assessments on different complementary levels. The analysis carried out in each of the Member States through specific national risk assessments is accompanied by an exercise at the supranational level, coordinated by the European Commission. The Supranational risk assessment (SNRA) aims to identify and assess the risks caused by the interrelationships of threats and vulnerabilities present in different Member States and individually unobservable by them. The SNRA outlines an extensive risk mapping by business area and a list of the most widely used recycling methods.

In support, the Commission has formulated specific Recommendations to the Member States indicating the measures and initiatives to be undertaken to mitigate the risks.

The fifth Anti-Money Laundering Directive expands the scope of obliged subjects, including operators in virtual currencies; provides for more detailed rules for due diligence, especially in relation to the risks associated with the use of prepaid cards and counterparties in high-risk countries; extends the transparency measures of the beneficial ownership of companies and trusts by providing for the establishment of widely accessible and interconnected national registers; strengthens the powers of FIUs for home analysis and collaboration.

The European Commission is assigned the task of evaluating the effectiveness of cooperation between the FIUs of the Union and proposing the establishment of a “Coordination and support mechanism”.

In compliance with the provisions of the fourth and fifth Anti-Money Laundering Directives, on 24 July 2019 the Commission approved and published four Reports on the anti-money laundering system:

1) The new Supranational Risk Assessment reviews the risks identified in the first exercise to assess their persistence in the light of the recommendations made and the measures applied by the Member States; the assessment also identifies new risk factors of supranational significance.

2) The Report on the characteristics of the activities and collaboration of FIUs and on the “European Support and Coordination Mechanism”. The analysis is divided into four main themes:

  1. a) collaboration between European FIUs and third country FIUs;
  2. b) collaboration between Union FIUs;
  3. c) tasks of the European mechanism;
  4. d) possible role of FIUs and the mechanism in carrying out controls.

 

The action of the mechanism should develop the competences already attributed to the FIU Platform of the Union, focusing on the identified critical areas and on the conclusions and proposals formulated in the Mapping exercise (Mapping Exercise and Gap Analysis on FIU’s Powers and Obstacles for Obtaining and Exchanging Information).

3) The Report on money laundering cases involving banks in some EU countries examines the causes of the ineffectiveness of controls and elaborates proposals for greater harmonization of anti-money laundering rules and for better collaboration between supervisors and between them and the FIUs.

4)The Report on the interconnection of national bank account registers is aimed at identifying solutions for integrated access in each member country to the information contained in the various registers for the identification of financial relationships throughout the Union.

 

Additional European regulatory sources help to outline a comprehensive framework for anti-money laundering measures.

  • Regulation EU/2018/1672 expands the measures aimed at monitoring cross-border transport following cash, as well as sharing and using the related information. In the new regulation, the competent authorities (usually the Customs) are required to transmit to the FIU of the respective country on a fortnightly basis the declarations (relating to the transport of values ​​equal to or greater than 10,000 euros; the declaration concerns both traditional cash and further such as payment cards and other means suitable for incorporating liquid value. In addition to the declarations, the information relating to suspected cases of money laundering or terrorist financing found by the customs authorities must be transmitted to the FIU, without threshold limits, as well as to cases of violation the obligation to declare emerged during the checks.
  • The EU/2019/1153 Directive on information exchanges between FIUs, national investigative bodies and Europol, provides that FIUs can make their information available to investigative bodies and must have the power to acquire investigative information from police authorities.
  • The amendments to regulation EU/2010/1093 concerning the European Banking Authority (EBA), while confirming national competence in anti-money laundering controls, entrust the EBA with new responsibilities for carrying out assessments on national supervisory authorities; the exercise of enforcement and sanction actions; the application of binding mediation powers; the exercise of substitute powers in the event of inaction by national supervisors; the development of guidelines to facilitate controls and develop collaboration.

The EBA is empowered to acquire the information necessary for the new tasks from the competent national supervisory authorities. There is also a need for close coordination between the EBA and the FIUs, while respecting the status of the latter.

 

The culture of compliance on Malta and a solid financial system are the objective prerequisites for the important action of the FIAU both in terms of repression and organization of control measures and above all in terms of prevention, accustoming the entire community of supervised entities to the unconditional adhesion of autonomous control systems designed to preserve the risks of money laundering and terrorist financing.

This last activity of FIAU, in particular, in my opinion is the most admirable one destined to perpetuate itself over time.

                                                                                                           

                                                                                                       

* Prof. Dott. Massimo Ferracci Docente Universitario di Finanza Aziendale Avanzata Corporate Financial Adviser Indipendente Customer & Business Assessment AML/CFT Dual Use Export Controls – OFAC Regulations