Combating tax crime is an overarching challenge | Andy Ellul

The issues highlighted by the FATF that led to Malta’s greylisting clearly indicate that the fight against financial crime needs to extend beyond the remit of the regulated sector.

The onus to ensure compliance with anti-money laundering laws and regulations has to date been placed predominantly on the financial services sector. Subject persons in the financial services sector, gaming, real estate agents and professionals such as corporate service providers, lawyers, notaries and accountants have been inspected by regulators and some have been administered hefty fines due to compliance breaches. Significant penalties and naming the offenders are tools used by regulators to send a strong message to the sector that the jurisdiction does not tolerate lax controls that could lead to grave reputational damage. Subject persons are handed the responsibility to fill the role of gatekeepers and help maintain a robust financial system.

A more in-depth analysis and understanding of the issues identified by FATF leads to a question on whether the jurisdiction needs to look beyond the regulated sector to ensure that Malta is truly protected against financial crime.

A simple definition of money laundering would be “the process by which criminals disguise the original ownership and control of the proceeds of crime by making such proceeds appear to have derived from a legitimate source”.  The definition clearly indicates that focusing on the regulated sector and placing responsibility predominantly on this sector to act as the gatekeepers for protecting the jurisdiction from financial crime is not enough. One must consider the fact that a lot of criminals will not try to clean their dirty money through the financial system, which entails a highly rigorous process – including answering numerous uncomfortable questions and providing a mountain of documentation. This is very much the case with one of the main points highlighted by the FATF, namely, tax crimes.

Tax evasion crimes are a result of undeclared income with the objective of not paying the tax due on that income. Tax evasion has been a headache for Governments globally and a challenge for authorities to properly identify and control. Tax evasion had been identified as a high-risk threat for the money laundering of domestic proceeds of crime in the latest National Risk Assessment carried out in 2018.

The jurisdiction is cognizant that tax evasion is a vulnerability that poses the highest threat for money laundering. The government has been actively addressing this challenge and is in advanced stages of transposing new legislation – such as the newly enacted Proceeds of Crime Act, which facilitates the identification, tracing, freezing and confiscation of proceeds of crime.

Dr Bernard Grech, the person who presents himself as an alternative Prime Minister, had failed to pay his tax dues until the eve of throwing his candidature to lead the party in opposition. Surreal, almost.

However, a major challenge for Malta to combat tax-related crimes is its cash-intensive culture, which poses the highest risk and major obstacle in identifying tax evasion. Cash is deemed high-risk for money laundering mainly due to a lack of ‘audit trail’, making it increasingly challenging to trace the source of funding.

Identifying and verifying the source of funding in a transaction is key to understanding whether the origin of the funds is coming from a legal source, for example, employment, sale of shares, inheritance etc. This explanation brings me back to the argument that tax crimes extend much beyond the regulated sector.  A cash-intensive culture – such as that prevalent in Malta – is a legacy issue which is a bit challenging to overcome as it requires a culture shift which cannot occur overnight.

The government has, however, challenged this cultural prevalence by introducing regulations which impose a capping of €10,000 on the use of cash for the acquisition of valuable items including property, jewellery, vehicles and artwork. The imposition of this regulation clearly shows that government is prioritising combating financial crime over populism – a stark difference from the Nationalist opposition which during a 25-year span in government never addressed this overwhelming issue but; on the contrary, it fuelled it.

Moreover, during recent years one can only admire the increase in the scrutiny during border controls which led to huge amounts of undeclared cash being confiscated.

Another vulnerability that could possibly lead to tax crimes is the creation of complex corporate structures that obscure the trail of funds and the true ownership of the company, set up specifically with the intent to evade tax. The use of nominee shareholders and other such instruments – very popular in the nineties and beyond – can further conceal the true ownership of a company. As a result, any profits earned by these companies might remain under the control of the ultimate beneficial owner but might not be declared to authorities and subsequently taxed.

This issue links with the other point highlighted by the FATF relating to the lack of transparency in ownership structures. The Malta Business Registry has been actively addressing this issue by carrying out due diligence and onsite inspections on companies and taking action where companies either do not provide the necessary information on the beneficial ownership or provide inaccurate information.

The CEO of the MBR has noted that Malta is one of the few jurisdictions to carry out onsite inspections on companies to verify the Beneficial Owners, and that as of July 2021, around 10,000 companies were struck off following an extensive due diligence process.

Reducing tax crimes requires educating the country to further understand that what is paid in taxes will be re-injected in the economy, and ultimately used to improve basic and essential services such as education, health, and road infrastructure, benefiting us all.

In the last eight years, Labour has invested heavily in the people and made sure that no minority was left behind.

Andy Ellul is a Labour Party candidate