This article was first published on Monday, June 21, 2021 before a global financial watchdog voted to place Malta on a grey list of untrustworthy jurisdictions.
Financial greylisting could seriously harm Malta’s economy, impacting foreign direct investment, money transactions, and even banking activity, a new study has found.
Malta will in the coming days find out whether or not it will be placed on a list of countries that are not considered to be doing enough in the fight against major financial crime.
The Financial Action Task Force, the leading global anti-money-laundering watchdog, will on Wednesday vote over whether or not to put Malta on its so-called ‘grey list’ of untrustworthy jurisdictions.
Although it is generally understood that ending up on the grey list could negatively impact the country, this has so far not been quantified locally.
But a paper published last month by the International Monetary Fund, maps out how greylisted countries have been hit over the years.
Referencing a number of academic and regulatory publications, the IMF report 'The Impact of Gray-Listing on Capital Flows: An Analysis Using Machine Learning' sheds light on what Malta could expect if the FATF gives the island the thumbs down on Wednesday.
1. Bank de-risking
According to the IMF, one of the first things likely to happen is known in the financial sector as “de-risking”.
This happens when banks terminate relationships with customers because they are now considered to be based in a high-risk jurisdiction.
De-risking is mostly done by banks to save on the hefty compliance costs that come from keeping these clients on their books.
However, it could have major repercussion on Malta, especially as it is already struggling to hold on to foreign banking partners that allow the country to carry out transactions in US dollars and other global currencies.
2. Investor confidence
De-risking could also impact Malta’s attractiveness to foreign investors.
In fact, the IMF says that the next domino likely to fall if Malta is greylisted could be investor confidence.
Greylisting, the IMF says, could lead investors to move resources out of the island and reduce their exposure to the country.
A 2016 study by the Centre for Global Development, quoted by the IMF, examined the effect of greylisting on cross-border payments to and from countries on the list.
The study used monthly transaction data between customers in every country connected to the SWIFT payment network between 2004 and 2014.
It found that being added to the grey list results in a seven to 10 per cent reduction in inward payments to greylisted countries.
3. Drop in foreign investment
The study also found that a greylisted country is more likely to see a decline in payments from other countries with weak anti-money laundering institutions while it is on the list.
The IMF experts also concluded that the estimated impacts on investment activity in and out of greylisted countries were significant.
Capital flows declined on average by 7.6 per cent of GDP when a country is greylisted. The IMF results also suggest that foreign direct investment declined on average by three per cent of GDP.
On the flip side, being on the greylist will mean Malta will have to get serious in its fight against money laundering.
Practitioners have told Times of Malta that the government must strike the right balance between ensuring strict enforcement of the rules while not stifling out business activity.
Regulators have argued that they have spent the last two years doubling their efforts to clamp down on questionable financial activity.
Government sources say Malta’s fate is now down to international politics.
What will happen next?
The FATF vote will be taken by representatives from 36 jurisdictions and two regional bodies.
Top government officials spent the weekend lobbying international partners ahead of an FATF plenary that will vote on Malta’s future.
Finance Minister Clyde Caruana flew out to Germany, which sits on the FATF plenary to hold last-ditch talks before Wednesday’s vote.
Sources said that senior officials from the finance and foreign affairs ministries have been locked in a series of crisis meetings with the Office of the Prime Minister that have dragged on for days.
In media comments, Caruana said Malta did everything it could and the results achieved in the Moneyval assessment were better than several other countries.
"Malta was very loyal to what it had been asked to do in the past months. We’ve delivered in full, and we’ve done what was asked out of conviction."
But the outcome of the FATF meeting was unknown, 'a closed box' he said.
Speaking again on Monday, Caruana said the country had implemented changes in good faith and would not be forced into concessions.
What is the ‘grey list’?
The FATF keeps two lists, one of black and the other grey.
Officially referred to as jurisdictions under increased monitoring, the grey list includes countries that global partners believe represent “a higher risk of money laundering and terrorism financing”.
Unlike the two rogue states on the FATF’s blacklist – North Korea and Iran, countries that have been greylisted formally commit to working with the FATF to enact reforms and step up their fight on major financial crime.
Countries on the grey list are subject to increased monitoring by the FATF, which either assesses them directly or uses FATF-style regional bodies, such as the Council of Europe’s Moneyval, to report on their progress.
While greylist classification is not as negative as the blacklist, greylisted countries may still face economic sanctions from other institutions like the IMF and the World Bank and experience adverse effects on trade.
Could Malta be greylisted forever?
Probably not. The grey list is updated regularly as new countries are added or as countries that pull up their socks are removed.
The current FATF grey list includes 17 countries from Albania to the Bahamas, Myanmar, Nicaragua, Pakistan and Panama.
Last year, Iceland placed on the grey list in 2019, announced that it had been removed after 12 months in which it had introduced a number of reforms.