Financial Crime Risks in Malta

Malta may be an inconspicuous island state, but its reputation among financial law investigators precedes the small European country. European compliance bodies have closely monitored Malta in the last two years and have uncovered high risks of financial crime. Malta’s large online gambling and banking sector, its abundance of cryptocurrency flows, and its passport-purchase scheme have rendered it susceptible to financial crime. In particular, the death of Maltese investigative journalist Daphne Caruana Galizia, who was killed by a car bomb in October 2017, has drawn the attention of other European states to the corruption and money laundering risks on the heavily-populated island. Malta’s reputation further suffered when the European Central Bank withdrew the license of Malta’s Pilatus Bank over money-laundering and fraud allegations. European authorities have required the Maltese government to strengthen its regulatory frameworks and comply with European Union (EU) law.

By the time that Malta’s accession to the EU was approved in 2004, the island state had already manifested its economic strength within Europe. This was due to corporate tax schemes as low as 5% that attracted foreign investors, banks, and financial services. By contrast, the average corporate tax in Europe was 22%. Furthermore, Malta was the first European country to establish legislative regulations in order to invite an influx of cryptocurrencies. Binance, the world’s largest cryptocurrency exchange in terms of trading volume, decided to move headquarters from Hong Kong to Malta in 2018. This explains why much of Malta’s economy is driven by its large share of overseas investment. Approximately 45% of financial deposits in Malta belong to non-residents, and private wealth on the island state increased sharply by 20% in 2017.

Another development causing controversy in Europe is Malta’s relatively new passport-by-investment scheme. This program allows international investors to select from a range of options to obtain Maltese citizenship or permanent residency by paying the government 140,000 to 800,000 euro ($150,000 to $880,000) and additionally by buying or renting property in the country. Options include the “Individual Investor Programme” (IIP) as well as the “Malta Residency and Visa Programme” (MRVP). The EU and the Organization for Economic Co-Operation and Development (OECD) have criticized that the program substantially increases the risk of tax evasion in Malta.

The IIP is also a point of contention among the Maltese population. While the program generates revenue for the country, thus strengthening the economy, the government has not entirely convinced Maltese citizens of the prudence of the citizenship scheme. According to a Malta Today survey from September 26 to October 3, 2019, 56.3% of respondents disagree with the IIP. The largest share of those who disagreed support the Nationalist Party, Malta’s Christian-democratic opposition. Some voters of the governing, social-democratic Labour Party, however, also disagree with the passport scheme.

Moneyval, the Council of Europe’s committee on anti-money laundering and terrorism financing, investigated Malta’s compliance with the 40 recommendations of the intergovernmental organization Financial Action Task Force (FATF). It released a report of its findings in mid-2019. While Moneyval did not discern any non-compliance, the committee criticized Malta’s lack of supervision, money laundering investigation and prosecution, and confiscation. The committee recommended that Malta should “take action to improve national understanding of risks, threats and vulnerabilities” by strengthening these three components. Malta’s police reportedly did not make sufficient efforts to trace crimes in the financial sector and prosecute money laundering cases related to bribery, corruption, and other financial offenses. Responding to these findings, the Maltese government stated that it would create a one-year plan to implement Moneyval’s recommendations.

This is not the first time that Malta’s government has been warned by European authorities. The European Commission demanded from Malta’s Financial Intelligence Analysis Unit (FIAU) a greater degree of compliance with the EU’s fourth Anti-Money Laundering Directive. Furthermore, the EU required Malta to improve its sanctioning of domestic financial crimes. After the European Commission took action, the European Banking Authority investigated the FIAU and found that Malta had breached EU law. As a result, the European Banking Authority issued a formal recommendation on July 11, 2018. The FIAU was required to develop a plan for how it will adhere to these legal regulations moving forward. Once Malta tightens control and improves the prosecution of financial offenses, it is likely to experience financial setbacks and a decrease in foreign investment. However, considering the scrutiny of European authorities and the potential for legal repercussions, improving Malta’s compliance score in the eyes of European regulators is a vital component in managing reputational risk.

About the Author

Yasemin Zeisl

Yasemin Zeisl earned her MSc in International Relations and Affairs from the London School of Economics and Political Science (LSE). Yasemin is fluent in German and English and possesses advanced Japanese language skills.

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