At €1 billion in uncollected taxes, lack of prosecutions in Malta shocks observers

Evading taxes is somewhat of a national pastime that people from all spheres of life indulge in from time to time.

From unemployed people having bank deposits running into thousands, to hairdressers living the high life despite reporting a meagre income; from a politician who settles a €30,000 outstanding tax bill on the eve of a leadership election to businesspeople using offshore companies to buy printing equipment to avoid paying tax in Malta; the malaise is widespread.

And if you ever doubted the size of the problem, the National Audit Office annual report for 2019 gives some perspective.

In 2019, the Inland Revenue Department had arrears running into a massive €1.3 billion of which €997 million were considered not collectable. The self-assessment system alone contributed €646 million to those tax arrears of which a whopping €533 million were estimated uncollectible.

And no, the arrears did not start over the past years but are part of a legacy spanning decades.

Tax evasion is a problem with deep roots but is often given short shrift by politicians and public authorities. But the laissez affaire attitude has now come back to bite.

In its official communication last Friday, the Financial Action Task Force listed tax evasion as one of the reasons for Malta’s greylisting.

FATF said the Financial Intelligence Analysis Unit’s analysis has to increasingly focus on serious tax offences and money laundering cases in such a way that produces intelligence that “helps Maltese law enforcement detect and investigate cases in line with Malta’s identified money laundering risks related to tax evasion”.

In simple terms, tax evasion is a crime that has to be detected and prosecuted.

The FATF is concerned with the more rampant cases, where tax evasion runs into thousands and millions, and in some instances, is also the result of income derived from criminal activity. The end result is people and criminals trying to launder the ill-gotten gains or unpaid tax by hiding the money in offshore accounts, using cash for valuable purchases or using legitimate businesses to ‘wash’ the money.

FATF was also clear on the need for Malta to ensure that accurate information is collected on the ultimate beneficial owners of companies and effective sanctions are applied on professionals who fail to comply with reporting obligations.

The operative word in the press conference delivered by FATF chief Marcus Pleyer on Friday was “effective implementation”.

This means it is not enough to have robust laws and beef up institutions. What counts is action, and unfortunately, Malta has a lot to answer for in this regard.

The FATF decision may be unfair, given the volume of work done in the past 18 months and the willingness shown to investigate and prosecute major cases, but it also shakes to the core the ‘Maltese way’ of doing things.

The ongoing compilation of evidence against Yorgen Fenech is showing how the cosy relationship between businesspersons and public authorities can turn toxic. It shows the dangerous symbiosis between people in power and people with money, who feed off each other at the expense of the common good.

While the smallness of Malta makes it inevitable for people to know each other, clear rules of engagement are necessary and where those rules are broken there must be consequences.

The need to combat money laundering and tax evasion stems from the need to have a level playing field and a sustainable economy, Pleyer said on Friday. He also warned that Malta “must not downplay the seriousness of the matters at hand”.

The government has said it will cooperate with FATF and Moneyval to ensure that the concerns raised will be addressed in the shortest time possible.

There are no legal consequences for greylisting but things will get complicated in some sectors like financial services and gaming.

FATF did recognise Malta’s progress on several fronts since 2019, including resourcing the police and empowering prosecutors to investigate and charge complex money laundering cases, introducing a national confiscation policy as well as passing a non-conviction based confiscation law.

But Malta now needs to go for the kill and ensure that the changes introduced over the past 18 months deliver concrete results for now and for always.