Maltese Cross bust: MFSA says it rested on PWC’s audits

Financial regulator says it carried out ‘off-site’ inspection based on documents from external auditors

The financial regulator is rebutting accusations of gross negligence in its supervision of Malta Cross Financial Services, by putting the responsibility on auditors PricewaterhouseCoopers, the external auditors of Maltese Cross, who green-lit the financial services firm’s annual returns.

Investors who lost some €6.2 million in savings they invested with Maltese Cross Financial Services, have threatened the financial regulator with legal action in a judicial protest filed Tuesday.

In their reply to the protest, the MFSA was silent on whether it was ready to renounce its statutory immunity: the investors say the MFSA failed to perform its fiduciary duties by never conducting annual inspections at Maltese Cross. They have challenged the MFSA to renounce its immunity and judicially defend the accusations.

But in their counter-protest, the MFSA said that throughout all the years since the misappropriation and manipulation started at Maltese Cross, PWC issued their auditors’ reports on the annual financial statements, as well as endorsed the financial returns submitted by the company to MFSA, and that the reports were all issued without any reserve.

The MFSA said that the auditors positively confirmed each year that Maltese Cross had systems in place adequate to safeguard clients’ assets.

Moreover, the MFSA pointed out that the auditors had never identified any internal control issues in the annual management letter issued by the auditor to the company and which document is also forwarded to the MFSA.

The MFSA said that it was because of this that no site visits were conducted. “The fact that on-site visits to the Maltese Cross offices were not carried out does not mean that it did not carry out its supervisory duties… off-site oversight and monitoring was done on the basis of the documentation from Maltese Cross and its external auditors.”

Investors want MFSA to renounce immunity

On the 5 September 2014, the MFSA wrote to investors in Maltese Cross over a shortfall of between €6 million and €7 million due to an alleged misuse and manipulation of clients’ assets.
Since then, police have charged director Jean Claude Bugeja, who has admitted to the shortfall in clients’ assets of about €6 million not being reflected in the company’s books.

Police accused Bugeja of money laundering and fraud between 2008 and 2014.

Investors demanded information and documentation from the MFSA a complete set of financial statements of Maltese Cross for the financial years 2007, 2008, 2009, 2010, 2011, 2012, and possibly 2013, rather than the abridged financial statements filed in the public records of the Registrar of Companies.

They claim there is sufficient evidence that the due diligence expected from MFSA over the seven years “during which the manipulation, misappropriation and fraud that took place at Maltese Cross, was missing, and indeed the illegal activity remained uncovered.”

“MFSA only acted when it was far too late to be of any practical assistance towards the safeguarding of the capital of the general investing public, including the claimants; during this seven-year period, it appears that no MFSA site visits or inspections at Maltese Cross, whether on a scheduled basis or surprise visits, took place, especially between 2009 and 2014.”

‘No supervisory system is waterproof’

The Malta Financial Services Authority has claimed that despite its supervisory efforts, the chances that licensed entities fail “cannot be eliminated”, when quizzed about Maltese Cross, whose books the MFSA did not inspect for six years.

“Notwithstanding the Authority’s supervisory effort, the chance that a licensed entity may fail cannot be eliminated. No supervisory system is waterproof and it is therefore unreasonable to expect supervisors to prevent all failures, particularly when we are dealing with humans whose behaviour might change during the years, together with their circumstances,” an MFSA spokesperson said on behalf of director-general Marianne Scicluna and chairman Joseph V. Bannister.