‘Malta must step up fight against corruption’ or risk investment scare, Brussels warns

Malta has been instructed by the European Commission to strengthen the supervision of its financial services industry with the effective enforcement of anti-money laundering framework rules and step up the fight against corruption.

The ‘warning’ comes as part of a package of recommendations for 2018 and 2019 issued to all member states as part of an ongoing review of reform programmes.

The other recommendations was to ensure the sustainability of the health care and the pension systems, by raising retirement age and restricting early retirement.

The EC said governance shortcomings in the anti-corruption framework may adversely affect the business climate and weigh negatively on investment.

“The effectiveness of Malta’s efforts to fight corruption needs to be further improved, especially with regards to the investigation and prosecution of corruption. Improving the governance framework is crucial to preserving Malta’s reputation and attractiveness as an international investment destination.”

The Commission said the Malta Financial Services Authority appears understaffed and concerns remained on its capacity to supervise a large cross-border financial system, in particular the non-bank segment.

Additionally, while gaming had significantly contributed to the Malta’s economic growth, this has also created challenges to the financial system’s integrity, calling for a strong anti-money laundering framework. Malta only recently transposed the 4th Anti Money Laundering Directive, to which the EC said that the effectiveness of its implementation remains to be assessed.

Malta also recently presented an integrated strategy to fight money laundering and terrorist financing. “However, challenges remain on ensuring proper implementation and effective enforcement of the recently adopted regulatory framework.”

Brussels said it would continue the fight against aggressive tax planning with a coordinated action of national policies. It said the absence of withholding taxes on dividends and royalties from EU residents in Malta to third-country residents could lead to those payments avoiding tax altogether, if they are also not subject to tax in the recipient country.

“Insufficient anti-abuse rules, combined with a relatively high rate and a stock-based regime, may provide opportunities for tax avoidance. The existence of some provisions in bilateral tax treaties between Malta and other EU Member States, coupled with Malta’s tax system, where a company that is resident but not domiciled in Malta is taxed on source and remittance basis, may be used by companies to engage in tax avoidance practices.”

The Commission also said that the performance of Malta’s health system has improved and waiting times are being reduced. But challenges remain in the redistribution of resources and activities from hospital to primary care.

Education and transport

Malta still has a high early-school leaving rate at 18.6% in 2017, the highest in the EU and with little improvement compared to the previous year, and the highest early school leaving rate for people with disabilities, which is at 50%, double the EU average.

The gap in science performance between students from the bottom versus the top performing schools is among the highest in the EU and 1.5 times the OECD average, and the share of low achievers in maths, science and reading is the fourth highest in the EU. “A comprehensive strategy to improve educational quality and reduce inequalities in educational outcomes between social groups and different school types is missing,” the EC said.

The EC also warned that Malta’s growing economy had increased pressure on roads. “The increase in the number of vehicles and in traffic leads to rising greenhouse gas emissions and negatively affects air quality. They may also negatively impact tourism, which represents an important pillar of Malta's economy. Therefore, the need to tackle the infrastructure gap goes hand in hand with the need for clean transport solutions.”

While Malta has a transport master plan for 2025 and will invest €700 million to upgrade rods, “the plan fails to set a clear target for the reduction of greenhouse gas emissions from transport and does not propose an effective monitoring system for implementation of the measures reported (besides a five-year review cycle).”