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Network News • 01-04-2021

Moneyval – redemption in sight

Author: George Mangion
Published on Business Today on 1 April 2021

The hope of deliverance based on a positive outcome of a final report from Moneyval experts on financial reforms – hangs like a Damocles sword over our heads. Our report was submitted by the government last October.

The rumour mill was gearing up to a positive report which would preclude us from being grey-listed as a high-risk country for financial crime. The heavy load of corruption and tax evasion cases arising out of the revelations of the assassinated journalist has mounted pressure on the government to speed up internal reforms to strengthen our regulations.

With hindsight, we noted that Malta had initially failed the first assessment from Moneyval in 2019, after which the government was given a year to patch up any legislative gaps in terms of money laundering and terrorist financing. Every practitioner who saw the build-up of a successful financial services sector hopes that this cloud will float away and let in the sunshine.

Realistically, we know that living on hope is a risky habit so the government has taken the bull by the horns and started a root and branch reform of our regulatory bodies. For some years, there have been suggestions to adding more resources to FIAU and MFSA.

While other EU countries have not escaped the incidence of financial tax scandals, yet in Malta, we pride ourselves that the regulatory net has always been effective to keep out the bad wolf. Recent events have proved this to be over-ambitious.

Tightening of governance has helped a lot and recently it culminated in police arrests of eleven suspected in collusion with serious money laundering schemes. The puzzle was compounded with the closure of three local banks and the scandals of Electrogas, Vital Health Care and the Montenegro Wind farm project where millions in backhanders were paid including money siphoned to politically connected interlocutors.

This has taken its toll on public opinion while we are still feeling the cold blast of negative publicity following the disclosure of Panama companies opened by the now-disbanded audit firm Nexia BT. Three Panama companies were destined for top members of the cabinet.

The Panama papers in 2016, revealed the extent of the role played by opaque companies and offshore arrangements in laundering criminal activities, including tax fraud. For seven years, judges and tax authorities followed in awe the slew of discreet revelations on corruption by the blogger – Daphne Caruana Galizia.

The slate must be wiped clean. We cannot afford to continue tarnishing our international reputation and undermine national institutions meticulously built over the years. Three years ago, the country passed through an emotional chapter exacerbated by the assassination of a journalist who was active in exposing financial crime and corruption in high places.

In a democracy, we respect freedom of speech and the rule of law. But such rights can be abused and stretched like a rubber band. The latter should not be pushed beyond its safety limit. All this was happening while Luxembourg, an EU country considered to be the pinnacle of financial probity was equally prominent in the news.

Some say our headaches pale in significance (this is no relief). I am referring to research carried out last year by Süddeutsche Zeitung, Le Monde, OCCRP and other media partners about the tax secrecy deals shrouded in mystery in Luxembourg. The latter continues in its trajectory as a thriving tax haven – even after the earlier LuxLeaks scandal. More than 250 billionaires run companies in Luxembourg with dubious investment funds. In total, a list of 64,458 beneficiaries was identified.

These assets form a sizable part of the world’s wealth. The Grand Duchy is no minion in harbouring the sins of fat cats. It shelters 37 of the 50 wealthiest French families who conveniently park their assets and investments through dozens of Luxembourg holding companies.

The scoop was given the catchword “OpenLux”. This blatantly reveals how companies first move their profits to Luxembourg via intra-company loans and then on to other tax havens. Malta is a minuscule actor by comparison. We never concealed questionable funds of such size and magnitude. The latter is suspected of originating from criminal activity or linked to criminals targeted by judicial investigations.

In its defence, the Grand Duchy rebuts such allegations. It says that it “rejects the claims made in these articles as well as the entirely unjustified portrayal of the country and its economy”. As a regulated country with the highest rate of GDP in the EU, Luxembourg contends that it continuously assesses and updates its supervisory architecture and arsenal of measures to combat money laundering and terrorist financing.

Squeaky clean and fully in line with all EU and international regulations and transparency standards. Its regulators apply, without exception, the full arsenal of EU and international measures to exchange information in tax matters and combat tax abuse and tax avoidance.

But the research reveals cracks in the edifice. It found funds linked to the Italian Mafia, the’Ndrangheta and the Russian underworld. The League, Italy’s far-right party, has hidden a secret fund there which is sought by the Italian authorities. People close to the Venezuelan regime have recycled corrupt government procurement funds.

The list of international assets held in Luxembourg is a gigantic inventory, including luxurious residences, chalets, yachts, helicopters, private jets and big planes, music catalogues, the rights to images and fine works of art. In short, it remains a hotbed of tax planning for companies and wealthy individuals through preferential tax regimes.

How can you muster control over such a rich territory when its trade register (equivalent to our MBR register) has only 59 employees to enforce more than 100,000 entities and to carry out an initial control of the declarations? Put into perspective while Malta’s own financial sector reaches 12% of GDP (prior to 2019) yet Luxembourg’s own financial sector accounts for a quarter of the country’s economy.

Back to Malta, and we note how recent financial regulations and tightening of the operations by MFSA and FIAU have been unprecedented and were designed to meet the exigencies reported by Moneyval in their initial inspection.

Only recently, the Maltese government has received the conclusions from the Council of Europe’s Moneyval group to the draft Enhanced Follow-Up Report, a crucial document for the future of the island’s banking and financial services industry.

There is a sigh of relief in the air among practitioners that our worst fears about grey-listing were unfounded and a renaissance of our financial domicile will return. 

The reform conducted on institutional reforms and regulatory, supervisory and legal changes has borne fruit. One hopes that with the passage of the pandemic, there will be a successful reopening of our domicile which may attract bona fide investors to shelter their nest eggs.

Author: George Mangion
Published on Business Today on 1 April 2021
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