The determinants of a country’s reputation are various, and loss of that reputation is rarely attributable to a single factor. Malta’s financial services sector suffered a big knock in recent months from the eruption of political tensions connected with the assassination of a journalist, the weak public governance, and the apparent lack of commitment to the rule of law. But it would be superficial to ignore other factors that have eroded Malta’s reputation in the last few years.
The anecdotal evidence from various business people about the difficulties they encounter to open bank accounts with foreign banks comes as no surprise to those within the financial sector who keep their ears to the ground. There is, of course, a growing emphasis by regulators that banks should not tolerate any activity by their clients that may indicate attempts to launder money. Anti-money-laundering directives are based on stringent due diligence procedures built on various factors, including the perceived risk of the country in which potential clients reside, the suitability profile of customers and the nature of the business they conduct.
A spokeswoman of the Spanish bank Caixa told Times of Malta that her bank has “no restrictions at all on doing business with individuals or companies with Maltese nationality or residence”. This is understandable. Banks cannot discriminate against individuals based on nationality. But they can and will apply stringent enhanced due diligence procedures to prevent risks emanating from countries with a poor reputation.
It is crucial to identify all the determinants that have affected Malta’s reputation negatively. Malta’s economic model, based on attracting e-gaming companies, cryptocurrency operators, payment gateways and selling of passports, combined with light-touch enforcement of proper regulation, have done little to endear the country to the international financial community.
Unfortunately, the government, the local policymakers and regulators may have acted too slowly and indecisively to stem the reputational risk in the bud.
Perhaps, even worse, after the political tensions somewhat calmed down following the election of a new prime minister, the message that is being sent is that it will be business as usual as far as the continuation of the economic strategy promoted by the government.
Malta still intends to keep selling passports and encouraging high risk activities to set up shop locally.
The argument that in other jurisdictions, including Germany and the UK, one can find more serious cases of alleged money laundering can only blunt the determination needed to regain the trust of international banks in Malta. The country is already exposed to a substantial risk as its biggest local bank now has minimal dollar clearing facilities with US banks.
Foreign banks are unlikely to remedy this situation by offering to service to Maltese businesses unless the country shows a steely determination to address the issues that have affected its loss or reputation.
The government can either continue to harbour the illusion that it is doing enough to repair its international reputation or engage in a soul-searching exercise about why Malta is no longer so trusted in the global financial community. This exercise should lead to a revision of the country’s economic strategy based on the maxim that reputational risk is a strategic risk that could undermine the sustainability of any economic blueprint.
A change in the country’s leadership is not enough to win back respectability in financial circles.