Judge declares law regulating FIAU penalties unconstitutional

Landmark judgment expected to have wide-ranging ripple effect on handling of AML cases as judge rules law regulating FIAU penalties unconstitutional

The mechanism by which the FIAU issues administrative penalties has been struck down as unconstitutional by the courts
The mechanism by which the FIAU issues administrative penalties has been struck down as unconstitutional by the courts

A judge has declared the law regulating administrative penalties handed down by the FIAU to be unconstitutional and in breach of the subject person’s right to a fair trial.

The landmark judgment was handed down by Madame Justice Audrey Demicoli on Thursday in a constitutional case filed by Phoenix Payments Limited against the State Advocate and the FIAU in January 2022. The company was claiming to have suffered a breach of the constitutional right to a “fair trial by an independent and impartial court established by law.”

The company was objecting to a €435,576 fine that had been imposed on it by the Financial Intelligence Analysis Unit, over various money laundering breaches. Phoenix Payments, also known as Paytah, had been at the centre of regulatory and criminal investigations in several European jurisdictions, apart from facing claims from victims who made deposits through Paytah and its affiliates.

In the Constitutional case before the First Hall of the Civil Court, the FIAU had claimed that it was not a legitimate defendant as its functions were established by law and did not include creating the legal framework which was being impugned by the plaintiff. 

Whilst agreeing that the FIAU could not be judged for alleged fundamental rights breaches, the judge however noted that it was not only the law which was being contested, but also the methods adopted and investigative process which had led the FIAU to reach its decision, as well as allegations that the FIAU had “acted arbitrarily and abused its powers” in the implementing procedures.

The State Advocate had also disagreed with the plaintiff’s assertion that the financial penalty imposed on it were criminal in nature.

Applying what are known as the “Engel criteria,” which is used by European courts to establish whether a case dealt with a ‘criminal charge’ as defined in the European Convention on Human Rights, the judge noted that the nature of the offence for which the administrative fine in question had been issued was not compensatory in nature, but was intended to serve as a deterrent. 

The judgement embraces principles established by case law which had determined that administrative fines of a punitive nature are to be treated as emerging from criminal charges, which in turn, triggered the subject’s Constitutional right to a fair hearing before an independent and impartial court established by law. 

The court ruled that the administrative fine inflicted in this case was indeed punitive in nature and that the Constitutional fair trial safeguards applied, as a result.

“While it is true that…a subject person on whom an administrative punishment had been imposed has the right of recourse to the Court of Appeal…this court finds that this does not neutralise or correct the anti-constitutionality of the proceedings before the FIAU,” said the judge in reply to the defendants’ argument that Phoenix had not exhausted its ordinary remedies before filing Constitutional proceedings. “The right to a fair trial applies from the moment the person is accused and not after a decision is given by an entity [the FIAU] which is not a Court under the Code of Organisation and Civil Procedure.” 

As a result of this, the judge declared the decision resulting from the FIAU’s investigation into compliance failures, as well as the article of the Prevention of Money Laundering and Funding of Terrorism Regulations establishing penalties, to be null .

In view of this declaration, the court abstained from continuing to take cognisance of the plaintiff’s other claims, ruling it unnecessary to continue to examine the process leading to the decision and the decision itself.

In recognition of the fact that the law itself was being declared unconstitutional, and that the FIAU was simply carrying out its duties as obliged to under that law, it was not ordered to bear costs, which were to be borne solely by the State Advocate.

The judge ordered the registrar of courts to deliver a copy of the judgement to the Speaker of the House. 

In a reaction to the ruling published on Facebook, Jerome Caruana Cilia, the Opposition spokesperson for finance, said that he had been urging the government to tackle this issue for months. 

In comments to MaltaToday, Charles Cassar, a lawyer specialising in the compliance field, also emphasised the importance of the ruling, saying that the judgment will change the way the Maltese authorities handle such cases.

“This is an important decision, because it means that the enforcement process as it currently stands is unconstitutional and therefore unenforceable. I expect the FIAU will appeal it. There may be international scrutiny and criticism, given the country's recent challenges in the anti-financial crime sphere, including greylisting. If confirmed on appeal, this would mean that FIAU will need to follow a different enforcement process. That may entail, for example, FIAU needing to take subject persons to court in order to enforce. This would make the enforcement process lengthier and more challenging, although it would ensure that appropriate procedural guardrails are in place.”