The FATF decision to greylist Malta as a financial centre triggered all the predictable reactions – political, economic, legal and financial. The opposition blamed post-2013 governance under the Joseph Muscat administration for having destroyed Malta’s reputation. The government called the FATF decision “unjustified” since it had implemented 55 out of 58 requirements laid out in the Council of Europe’s Moneyval assessment of Malta’s legislative, regulatory and enforcement systems covering financial services.

Business and professional organisations went partway with the view that post-2013 happenings account for the current situation. We were told that Maltese businesses do not “deserve” to be burdened with FATF strictures. Another statement extolled the proficiency and very high standards of local financial professionals. A “warning” by FATF president Marcus Pleyer for Malta not to minimise the FATF decision was highlighted by the media. The prime minister and his finance minister repeated they would proceed to carry out expeditiously what the FATF demanded.

I have already said this elsewhere – the FATF decision is a very serious setback for the Maltese economy but it is far from being the end of the world. What worries me is the rather short-sighted assessment of it being made on all sides.

We need to review the whole scope and future of financial services in our economy. To which better add internet gaming, and if you like, the passport for investments scheme.

The financial sector emerged during the first Eddie Fenech Adami administration in the late 1980 as ‘offshore’ services. They were revamped as ‘onshore’ services in the mid-1990s, and again retooled in the early 2000s during the EU membership negotiations to make them palatable to the union. For some two years following membership, the sector’s activities dipped but then again took off, with a further spurt post-2013. Meanwhile as of the mid-2000s, internet gaming services started coming well into the picture and are still doing ‘fine’.   During all this period, maritime services, though less in the limelight, expanded considerably.

Malta attracted business mainly from medium-sized corporations and wealthy individuals. Its competitive advantages were and are (compared to other financial centres) the low tax rates on declared profits, the cheap charges for financial services rendered, low operating and living costs, no personal security problems and (with hindsight) lax regulation.

 Setting a low tax rate on corporate profits was a method employed in Malta since the 1960s, basically to attract foreign direct investment in industries and hotels. As financial services picked up over the years, we registered significant – by Maltese standards – inflows of ‘investment’ funds. They would only come to the island to be garaged here and not to finance local projects. Even so, on an ongoing basis, they made a positive impact on our balance of payments.

From the start, the question was: what value added was Malta, as a financial ‘centre’, providing for itself? Karmenu Mifsud Bonnici, himself an expert in tax law, when leader of the opposition and later, would argue that it was all a matter of providing a cover for persons wishing to avoid paying their tax dues. Personally, I worried that Malta would be attracting drug and criminal money for laundering but was then persuaded that in-built safeguards could and would prevent this.

In and of themselves, apart from ancillary spillovers, where lies the inherent economic value added of financial services?- Alfred Sant

However, though we blithely overlooked this most of the time, taxation and money-laundering issues were there right from the start. By 1996 already, the financial authorities in Malta were at loggerheads with the US Department of the Treasury over the tax rules applied here. Defusing the problem to the satisfaction of the US authorities was not an easy task.

At the European Parliament, the majority opinion is now that Malta is a ‘tax haven’ – and this has got nothing to do with Joseph Muscat and his works. To be fair, Luxembourg and Cyprus, for instance, have been tarred with the same brush – but then they were not summoned by Moneyval to correct institutional failings in their financial regulation on the scale that we were. Most failings predated 2013.

On one occasion, listening at a European Parliament hearing of Malta’s financial regulators, I was surprised at how regulation was compartmentalised to the extent that practically nobody was responsible to bring an issue to resolution. Confidentiality seemed to mean that up and down the regulatory chain, certain information from one compartment could not be passed on to the next one. It’s a recipe for paralysis.

Hopefully, work being done in the wake of the Moneyval process will fully streamline and energise regulation and supervision. Yet, the recent complaint registered by a magistrate presiding over a financial case does not bode well.  She was presented with five boxes of evidence, which she had to sort out, instead of having a clean-cut case presented to her in court. This apart from the current ‘constitutional’ spat about the powers of regulators to charge fines. Indeed, legal and court procedures, not so transparent nor expeditious, will likely continue to inhibit outside confidence in our enforcement structures: legal action seems to be never-ending...

Then, to be honest, individual professional performance has been patchy. ‘Wiliness’ (makakkerija) is an extolled virtue in Malta, but it still seems to be of the sort that prevailed in the traditional village – good for making arrangements between ‘us’, less than clever as seen by outsiders. Awareness of conflicts of interest too often seems inexistent.

Governments (PL and PN) accepted that the head of MFSA could have ongoing private responsibilities in the financial sector. Lawyers and accountants (some of them ex-politicians and ex-public officials) lent their names to companies about which they knew little, or fronted for them. High regulatory officials chaperoned and were very good friends with prominent and not so prominent financial services operators (the instance highlighted in the media recently is surely only the tip of the iceberg). 

It is time to face some tough questions even if they will not please the anti-Muscat brigade, financial practitioners and the internet trolls of both parties.

Here they go: In and of themselves, apart from ancillary spillovers, where lies the inherent economic value added of financial services? While they may have given us a good ride, are financial services driving us into a dead end economically and internationally?

Have they led us down a road for which we were only superficially prepared and for which we did not tool up properly?  As of now, do we have what it takes, by way of knowhow and standards in regulation, supervision and enforcement, to run financial services effectively and transparently?

Alfred Sant, Labour MEP, former prime minister