The perception that Malta’s financial regulation is legally sound but weak in enforcement persists in some relevant international institutions. At a time when international regulatory bodies are less willing to take the government’s and the local regulator’s reassurances that all is well with our regulatory process, the time for in-depth reform may be overdue.
The European Banking Authority is the EU’s regulatory agency. It has power to overrule national regulators if they fail to regulate their banks properly. After the EBA received a European Commission request and a European Parliament report relating to the financial regulatory regime in Malta, it decided to conduct a “preliminary enquiry” into the supervision of Pilatus Bank.
The activities of Pilatus Bank have been in the news following allegations by murdered blogger Daphne Caruana Galizia on how the bank conducted its business with clients who are politically-exposed persons. She reported claims by a Russian whistle-blower saying the Panama company Egrant was owned by the Prime Minister’s wife. Both Prime Minister Joseph Muscat and Ms Muscat deny the allegations.
The Malta Financial Services Authority told MEPs visiting Malta last December they investigated Pilatus Bank and did not find anything that warranted the withdrawal of the bank’s licence. A leaked report by the FIAU, the government’s anti-money laundering agency, said failures to comply with money laundering laws had been noted during a compliance inspection in March 2016.
According to the agency, Pilatus Bank gave a lot of attention to reassure politically-exposed high-risk jurisdictions that their banking operations were treated with utmost secrecy. Pilatus Bank denies the allegations and filed a defamatory lawsuit against Ms Caruana Galizia in the US, since withdrawn. But the claims and the way the local regulatory bodies treated them continue to be raised regularly in the domestic and international media focusing a worrying spotlight on Malta’s reliability as a respectable financial services jurisdiction.
In the court of public opinion perceptions often matter more than reality. When people and institutions lose trust in the financial regulators’ ability to check abuse of power by politically-exposed persons, it becomes challenging to contain the collateral damage to a country’s financial services industry.
This element of subjectivity may be labelled as unfair by those who insist on the criminal law principle that evidence of abuse of power must be proven beyond reasonable doubt. Suspicion of abusive behaviour by politically-exposed persons and lax ineffective supervision by regulators are bound to motivate international regulators to conduct their own investigations. The EBA’s decision to investigate Pilatus has to be interpreted in this context. A damage limitation exercise is needed more than ever before in the history of Malta’s financial services industry. This activity cannot rely solely on a marketing campaign aimed at improving the industry’s image internationally.
The political will to ensure that the financial regulatory bodies in Malta are genuinely guaranteed the autonomy of operations must not only be strengthened but be seen to be so. Hoping that this damaging spotlight on Malta’s financial regulation will eventually be switched off may prove to be just wishful thinking.
Difficult political decisions may need to be made by the government which, despite its popular mandate, still suffers from a trust deficit in some relevant international fora.
This is a Times of Malta print editorial
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