Wanted: independent regulators for our financial sector

Even if money-laundering is a Europe-wide – indeed, global – problem, Malta’s laxity in coming to grips with the issue, still stands out

Cartoon by Mikiel Galea
Cartoon by Mikiel Galea

On Thursday, Justice EU Commissioner Vera Jourova raised some important questions about Malta’s regulation of its financial services sector.

The commissioner was here on a fact-finding mission to investigate Malta’s Individual Investor Programme (IIP), and the measures in place to combat money laundering, as well as to investigate the impartiality of the judiciary.

On the latter front, there seems to be little cause for concern. After meetings with Justice minister Owen Bonnici, the Chamber of Advocates, the Association of Judges and Magistrates and Chief Justice Joseph Azzopardi, Jourova noted that: “I didn’t get any worrying indications or information that the judiciary is under pressure. I didn’t get such information.”

Nonetheless, her conclusions about Malta’s financial regulations were less optimistic. Jourova said that while Malta was “undoubtedly an economic success story, there were worrying events that had drawn the attention of Europe to the island”, adding that “[her] role as justice commissioner is to sometimes ask difficult but honest questions.”

Among these questions was whether there was willingness on the part of local authorities to transpose the necessary EU money-laundering directives, and to ensure their enforcement. On this score, Jourova said that there were two sides to the issue.

“One is what there is on paper, and I am convinced that Malta will be doing everything to have the transposition done [...] The second is how rules are applied in practice and here I want to see more activity and a better functioning system because the Pilatus Bank case revealed that there are some shortcomings and the question remains whether it is just this one case or whether it revealed a systemic problem.”

More ominously, the Commissioner also hinted at the possibility of punitive measures. “Any time we [detect a] systemic problem with the implementation of EU law, the Commission has the possibility to launch infringement procedures,” she said, adding that she had instructed the EBA to delve deeper into the case.

Jourova also commented that: “We don’t want the EU to become a safe haven for people who want to launder money.”

If that were not enough, Commision vice-president Frans Timmernas  said that “the Commission fully agrees that the European Banking Authority (EBA) should assess whether the Maltese banking supervisors are fully equipped and free from conflicts of interest to perform their supervisory duties”, and that “the EBA should also assess whether the MFSA has fulfilled its obligations given the apparent lack of action against private banking institutions that continue to hold a licence to provide services in the EU.”

These concerns, voiced at highest levels of the EU, underscore the fact that Malta’s expanding economic growth requires massive regulation: the sort of regulation that can only come from strong and independent regulators and inspectors.

Sadly, it is equally obvious that the EU does not view Malta’s inbuilt regulatory authorities to be in control of the situation: or even, for that matter, above suspicion themselves. By openly questioning whether the Malta Financial Services Authority (MFSA) – Malta’s financial services and banking regulator – was ‘free from conflicts of interest’, he was effectively pointing towards possible political interference.

Taken together, these admonitions constitute a warning shot fired across Malta’s bows. It is now more than evident that the fall-out from the Pilatus Bank affair – which resulted in its chairman being arrested on money-laundering charges in the USA – has cast an indelible shadow over Malta’s banking and financial services sector. Admittedly, Malta cannot be viewed in isolation on this matter: Jourova herself acknowledged that Malta was not the only country facing such difficulties, and vowed to visit as many countries as possible in order to apply pressure in this regard, before her mandate is up.

But even if money-laundering is a Europe-wide – indeed, global – problem, Malta’s laxity in coming to grips with the issue, still stands out. Above all, recent experience strongly suggests that ‘independence’ and ‘autonomy’ – so necessary to the proper functioning of regulatory authorities in all spheres – are not conspicuous when it comes to investigations involving people in high office. Even if the inquiries are still ongoing, it is clear that the involvement of Cabinet ministers and high-ranking government officials (Konrad Mizzi and Keith Schembri allegedly held accounts with Pilatus) had an impact on the relevant institutions’ ability to function.

It is therefore unsurprising, that the EU clearly has its eyes on Malta over this very lack of inspection and regulation, and fears that so-called “state capture” is compromising these regulators.

The Maltese government has to take heed of these warnings. It is within its rights to defend its economic record and its successes on civil liberties, but the independence of institutions, and reaching optimal institutional capacity, is key to protecting Malta’s own economic growth. The so-called ‘problems of success’ – the added risks that come with unfettered economic growth – can only be mitigated by strong regulators and inspectors, as we have seen in cases of mafia infiltration.

From this perspective, it is pointless to complain of ‘bullying’ by the European Union. Quite frankly, until we get the assurance of strong independent-minded regulators, we should not expect the EU to let Malta off the hook.

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