The new CEO of the Malta Gaming Authority has called for an improvement in the culture of compliance, saying that this does not depend solely on the regulator and the government.
“Compliance cannot only belong to the regulator. It has to belong to everyone: the service provider, the licensee, the accounting firm working with them, the whole ecosystem,” said Heathcliff Farrugia in an interview.
“I would not say I am worried at this stage. But we either want compliance and to grow in a properly regulated way, or we start leaving loopholes and everyone will be happy in the short term – but find problems in the long term,” he warned.
Mr Farrugia took over a few months ago when his predecessor Joe Cuschieri moved to the Malta Financial Services Authority. Mr Farrugia had worked at the authority for five years prior to his promotion.
Last week the Times of Malta reported that a number of Maltese gaming companies licensed by the authority are being implicated by Italian prosecutors as serving as a money-laundering machine for Italian mafias. Last February, in the wake of growing concerns from Italy that gaming companies had been infiltrated by the Mafia, Mr Cuschieri had pledged to intensify controls.
Mr Farrugia was adamant that the regulator does its bit to ensure compliance, noting that it is not at all easy to obtain a licence in Malta and that its onboarding procedures have become increasingly rigorous.
“Other regulators tell us that we do double what they do when it comes to new applicants,” he said.
He ticked off a list of refusals over the past year and a half – such as 70 individuals who wanted a key position in a company or a directorship – and how many licences had been revoked.
As of January 1, online gaming companies became ‘subject persons’ under the 4th Anti-Money Laundering Directive and the authority has already conducted 33 onsite inspections, the results of which would be available by the end of this year.
All this showed how seriously the authority took compliance and regulation, “especially because of issues we had in the past”, he admitted.
“We learned our lesson and have strengthened our procedures. We are now also working increasingly on international collaboration as I believe that it is also important,” he added.
He said the authority uses international partners to conduct criminal probity checks on every individual in a company, at considerable cost.
The MGA is also working with its Italian counterparts, both with the regulator there and with an institution in Italy, which should lead to an MOU in the near future, resulting in exchange of information and collaboration that will help both sides.
“We need to make sure that there is not one shred of doubt that regulators like us are ready to collaborate. We already share a lot of information,” he said.
Asked about the European Commission saying Malta was a high risk for AML, he drew a distinction between the country and the gaming sector, but was honest about the fact that criminal organisations were experts at trying to find loopholes to exploit.
“I believe that our role as regulators is precisely that: to make sure that we find those loopholes ourselves and that we are agile and flexible enough to fix any issues we find immediately. I cannot say that we will never have another issue with any company. But I can reassure you that we are doing all that is, to an extent, humanly possible within the remit of the regulator.”
He was also pragmatic about the fact that Malta’s success makes any problems seem larger than they would be in other larger jurisdictions.
“The fact that a small country is punching above its weight and having so much economic success makes other countries scrutinise us. If you lie below the radar, it is quite different. That is why we need to step up compliance and the regulatory effort.”
We learned our lesson and have strengthened our procedures
One aspect which still looms over the industry is the impact of Brexit, which would not affect the licences – as those who operate within the UK already need a licence there – but rather the place of establishment.
Currently, the MGA allows operators to be established anywhere in the EU or EEA.
“The moment the UK exits, no one is really sure whether it – including Gibraltar – will be considered as a place of establishment. A UK company in the UK can today hold a Malta licence. Post-Brexit we do not know if that will still be allowed. That is why a number of operators are considering other options and setting up in the EU – and why some of them are thinking of moving from the UK.
“Large operators tend to hedge their risks so rather than having 100 per cent of their operations in one jurisdiction, they would have a number of HQs so that they always have a Plan B,” he explained.
Another challenge facing the industry is the shortage of human resources. The authority actually commissioned a skills gap survey which will be published in a few weeks, but he shook his head: “Demand will keep exceeding supply for some time!”
There is a turnover within the companies and also between them as they poach the best talent – who are able to negotiate the best salaries.
“With a huge sector like the financial services industry and the gaming sector, there will always be a demand for talent. We need to get used to the idea of importing talent, including from third countries.
“And locally, we got together last year with MCAST to launch the Institute for Gaming, which by MCAST standards had quite a good uptake of 46 students.”
The gaming sector still poaches students from other sectors but he admitted that the wage gap was narrowing as the industry was squeezed by compliance costs.
“But the wages are still high enough to attract employees from other industries,” he admitted.
The authority is also facing opportunities, and one is undoubtedly blockchain. But Mr Farrugia stressed that the authority was taking things slowly. Last month, after a wide ranging consultation, it issued guidelines on the test environment – known as a sandbox – which could be used by existing licensed operators to either use crytocurrencies or to use blockchain technology in a controlled way, for a year. These would be subjected to a number of additional restrictions over and above those that apply for fiat currencies.
“Operators will learn how the regulator is looking at this technology and vice versa. Then next year, we will tweak and adjust and make sure that we have the right regulations to allow these currencies.
“Cryptocurrencies will eventually be regulated and once they are, things will change and they will become normal business.”
Malta has decided to be the innovator in blockchain, rather than learning from other people’s mistakes. He fully subscribes to this strategy: “The way I see it, for other countries, being innovative is an option, but for us it is a must. Other countries can delay as they will anyhow eventually make it a success. But our only strength in being the first. Yes, it is a bit risky but ultimately we cannot afford to be second or third.
“Why is gaming a success nowadays? Not because there is no one else doing it. Quite the contrary. Because we started 15 years ago and the gaming ecosystem we have here – the accountants, the lawyers, the B2B and B2C companies – is so well established that our size as a gaming sector is our best selling point.
“Companies establish themselves here even if they do not need a Malta licence. Hopefully the same will happen for blockchain,” he said.