Author: Dr Samuel Sciberras
Published 26th October 2020 on PKF Malta

The European Commission has initiated legal proceedings against Malta over the Individual Investor Program (IIP[1]) due to allegations that the scheme increased possibilities of money laundering, tax evasion and corruption.[2]

Malta, who joined the European Union in 2004, introduced the investment citizenship scheme in 2014 allowing a person to acquire a new nationality based on payment. The Commission had been issuing warnings about the risks posed by the schemes but had not taken any concrete action.

Nonetheless, the Commission has now written to Malta via a procedure called ‘Letter of Formal Notice’ requesting explanations on the immigrant investor program. Such a letter is the start of a process referred to as ‘Infringement Proceedings’.

Infringement Proceedings, deriving from Articles 258 and 260 of the Treaty for the Functioning of the European Union (TFEU), is divided into two parts: The Pre-Litigation Stage and Litigation Stage.

The Pre-litigation is an opportunity for the Member State to justify or remedy the infringement before the matter goes to the Court of Justice of the European Union (CJEU).

• A Letter of Formal Notice is sent to the Member State informing it of its breach of EU law. The letter, being an essential procedural requirement, must specify the obligation that the state has failed to fulfil. In the current national issue, the Maltese Government would have two months to reply to this letter, and if the Commission is of the opinion that the reply put forward is not satisfactory or that the matter has still not been resolved, the Commission may then issue a Reasoned Opinion. This opinion is somewhat of a last warning, but not an executive order having no legal effect, and must contain the same issues as the Letter of Formal Notice. The commission would usually give a prescribed period in which the state would have to comply.

Nevertheless, the Commission may then opt to initiate the second stage being the Litigation Stage in which it files a case at the CJEU against the Member State. The burden of proof lies on the Commission, and it is mandated to bring the proceedings itself in its supervisory role as the guardian of the treaties. For the case to be admissible, the pre-litigation stage has to be properly conducted, and pleas put forward by the Commission must be in line with those at the pre-litigation stage.

It is important to note that any a modification of national or supranational law after the pre-litigation stage does not prevent the Commission from going to Court. Likewise, if the Member State remedies the issue after the case has been filed, the action may still be brought because the state would have complied after the expiry of the prescribed period.

The action is objectively establishing if there was an infringement or not, and thus in its defence, a Member State cannot justify its infringement by proposing that it was not intentional or it did not ‘harm’ anyone. Defense typically consists of pleas refuting the breach in an objective manner or the challenging of the legality of the Union Act at stake.

The consequence of the action is that since these judgments apply erga omnes, a decision will have legal force on the Member State concerned, other Member States and the Commission itself. However, it is important to note that the Court will stop at a declaration of infringement and will not impose fines or penalties.

After the adjudication, the state would have the duty to remedy the infringement, but what happens if there is a continuation of non-compliance?

If the Commission is still of the opinion that the state concerned has still not taken the necessary measures to comply, it may bring the case before the Court for a second time, now without the Pre-Litigation stage. Now the CJEU may impose a lump sum and/or penalty payment as a measure to urge fast compliance.

The Maltese Government plans to defend the scheme since citizenship is a matter of Member State competence[3] and due to the overall good, it had brought. The axing of the scheme would presumably have negative consequences to Malta’s economy, especially due to the ongoing COVID-19.

Author: Dr Samuel Sciberras
Published 26th October 2020 on PKF Malta
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