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This article has first been published by lovinmalta  on 26/06/2021

Malta’s FATF Grey listing: what happens next?

News travelled fast as Malta was voted into the grey list (officially ‘placed under increased monitoring’) by the global inter-governmental financial crime watchdog FATF last Wednesday, and publicly formalized yesterday by FATF President Marcus Pleyer. What needs to be faster, is Malta’s immediate action to bounce back sooner rather later.

The MONEYVAL context

The vote at the FATF plenary on 23rd June 2021 follows on a mutual evaluation exercise by MONEYVAL, the FATF regional counterpart. In its July 2019 report, MONEYVAL had outlined deficiencies in Malta’s alignment to the FATF Recommendations (internationally agreed principles to combat money laundering and the financing of terrorism), placing Malta on enhanced follow-up status.

We have since seen continuous regulatory reforms, bolstered regulatory resources, a new Police Commissioner and a dedicated Financial Crimes Investigations Department resulting in a drastic increase of regulatory inspections and the first salient criminal arraignments. The follow-up MONEYAL 1st enhanced review published this April 2021 acknowledged Malta’s improvements and classified Malta as no longer substantially non-compliant to any of the FATF Recommendations yet retaining Malta on its enhanced follow-up watch.

The MONEYVAL experience focuses largely on the technical and regulatory compliance, whereas the FATF goes further into the effectiveness of implementation, or lack of.

Regulatory Changes and Enhanced Enforcement

The MONEYVAL report clearly stirred regulatory changes. Investment through enhanced technology and doubling of human resources at key regulators such as the FIAU have resulted in increased awareness and supervision.

It is no secret that statistics of all sorts have shot up in 2020 with STRs (suspicious transaction reports) more than tripling when compared to 2018 and a cursory look at the FIAU website listing around €5.5 million worth of administrative fines under 2020 compared to less than €60,000 under 2019. Similarly, according to annual reports, the MFSA issued 44 administrative measures and fines in 2020 as opposed to 11 in 2019.

Updates in the anti-money laundering and counter-financing terrorism laws and regulations such as the Prevention of Money Laundering and Financing of Terrorism Regulations and the FIAU Implementing Procedures were ongoing. New laws and changes were also affected such as the €10,000 cash restriction, and an entire reform of the CSP framework increasing compliance requirements and removing the exemption for warranted professionals.

Supervision and Enforcement won’t catch a break

We have come a long way in a short time, but long-awaited reforms were not enough. This increased pace of regulatory supervision and enforcement will maintain or increase its momentum.

What happens after regulatory visits and businesses’ raising of suspicious reports? We should expect prosecutions, expediated court proceedings and financial crime asset recovery to increase.

The impetus provided by the BO register and non-compliant or defunct company striking will be expected to experience acceleration. A wave against tax crimes would also be envisaged.

What will the grey listed climate look like?

The FATF grey list effectively tells global counterparts that Malta is committed to work with the FATF to address strategic deficiencies in combatting money laundering, terrorist financing and financial crime in general. Businesses, banks, and authorities around the globe refer to it to categorize jurisdictional reputability when assessing their risks.

This will play a crucial role in foreign direct investment choosing to do business with a country given that this would imply a higher risk jurisdiction. Malta-based businesses will also face more thorough due diligence requirements based on risk analysis when conducting business overseas or dealing with overseas banks. Some businesses’ risk appetite simply does not entertain businesses from higher risk jurisdictions altogether. Those that continue doing business will require more checks and increase periodic reviews to mitigate increased risk exposure.

Although it would not mean that there will necessary be a financial services sector or gaming exodus, it is inevitable that businesses forming part of larger international groups will be re-assessing the fact that now their corporate structure includes a setup in a grey listed country. This does not mean it will necessarily or automatically result in leaving, but the faster we are off it the better.

Anti-financial crime and regulatory compliance will become even more relevant and take center-stage in the running of our businesses as more intense international scrutiny continues.

How long is this grey cloud for?

Whereas some countries may have taken up to four years to be declassified, Iceland addressed its deficiencies in less than a year to find itself off the list in June 2020. The latest company to be removed from the grey list this June 2021 is Ghana, which has been on the list since 2018.

Once published, the required Action Plan requested by the FATF would need to be addressed in a structured consistent manner to avoid prolonging the period since such evaluations can only be re-assessed according to periodic meetings’ agenda. No mistakes or shortcomings are afforded. FATF procedures outline that there is no way to consider removal from the grey list without addressing all action plan requirements.

The shorter time spent on the list, the shorter the period of reputability and risk consideration. Any business which may consider moving away from our shores due to de-risking or increased cost of compliance would find it less sensible to do so if we are off the list faster.

We must now go through our grieving process, but we must look ahead. There is a lot to be done and a concerted effort amongst all stakeholders to get us out in one piece fast should be the only item on everyone’s agenda.

The spotlight on tax crime and beneficial ownership

In the official post-plenary press conference by the FATF, President Pleyer repeated clearly that the main deficiencies of concern relate to criminal tax and related money laundering, accuracy and timeliness of beneficial ownership, and the intelligence analysis applied between regulatory and enforcement authorities on such. Weak checks and complex structures exposed to funneling proceeds of crime, and difficulty to blanketly enforce upon tax crimes, are high on the agenda.

Tangible actions to pave the way

Some strategic actions to position us in a stronger position to respond may include:

  • Increased human, skill and technological resources to the police and each and every regulator involved in the entire process, and the introduction of a Financial Crime Court specifically equipped with necessary expertise and tools to focus and expediate any such prosecutions
  • Introduction of a holistic information-sharing process to ensure continuity and targeted intelligence supported through smooth information-sharing platforms to be utilized among all Supervisory Authorities feeding into enforcement
  • The cash restriction regulation needs to be promoted possibly through incentivizing non-cash payment methods and monitoring on the ground
  • Focus on high-value goods and cash-intensive business dealings – use of cash is not the only risk and regulatory supervision needs to extend to such sectors
  • Introduction of similar principles to the private sector in the public sector, such as ongoing screening, risk assessment and conflict of interest measures to government board appointments and positions of trust carried out by independent bodies including initial assessment and ongoing monitoring
  • Setting up of an inter-governmental authority that promotes financial crime prevention through a bottom-up approach, serving as a helping hand and friendly ear to subject persons, licensed entities as well as the general public – a one-stop shop of sorts across the different regulators involved
  • A nation-wide educational campaign to change our culture at grass-root level ranging from the general public to up-and-coming professionals in the field – equipping the next generation with necessary skills and appetite towards compliance
  • Incentivizing both businesses investing in equipping their own business with better compliance as well as businesses investing to offer compliance services and solutions in Malta
  • A national remediation strategy roping in all stakeholders to address the culture towards tax crimes coupled with a remediation stage to incentivize change – closely followed by a dissuasive enforcement stage

Let us take this opportunity to fix what needs fixing and come out of this with a renewed identity away from ‘grey listed’ to ‘leaders in anti-financial crime’.