BUT CAN WE POLICE IT?

BUT CAN WE POLICE IT?

Political analyst Manuel Delia speaks about the dire need to effectively police the economic sector if Malta is to match its offer to the world as a financial hub.

There was a moment at the time when Malta was getting ready to join the European Union when a number of choices had to be made. Joining the EU was, at the time, a form of graduation for a young, independent country. It was not unlike a wedding. The heady, exciting and naughty days of youth would now need to become a fond memory.

What would have been endearing behaviour in your teens - a little too much to drink, a little too much adventure in revolving door relationships, a little too many pranks - would no longer be acceptable in a married state.

Those four or five years before 2004 were a time of reckoning. A filtering examination by objective standards we had never faced since Independence and quite likely, and quite unfortunately, we never will again.

All our laws, our systems, our policies were reviewed and measured against a gold European standard and what fell short would need to be revised. Clearly there would be local specificities that would need taking account but equally clearly these would be kept to the bare minimum.

This was the time when we had to examine deeply Malta’s economic model. Naturally change had been in motion for some time already. The government had shed many unproductive industries and withdrew protection from other privately held economic activities that had no future. A deadline for a turnaround was set on that great millstone of our modern economic history: the dockyards.

But change was not only needed in the oil puddles of the harbour side. A long hard look at Malta’s status as a tax haven was needed as clearly that could not survive membership in a mainstream trade block. After all that’s the sort of thing people run away from to find shelter in tax havens.

Banking secrecy, anonymous ownership of companies, complicity in tax evasion: those would be off the cards. Yet, the negotiators of the time sought not to throw the baby with the bath water. Years of providing off-shore services created a body of expertise that could be useful to customers that would want to operate - efficiently, to be sure - in a white-listed jurisdiction.

It’s one of the unsung miracles of those negotiations that the EU was persuaded to allow Malta to continue to extend to nonresident customers of its financial services a spectacularly advantageous tax discount. It would not be a tax free package but as damned near tax free as anyone could hope while staying in Europe and not having to explain owning companies in banana republics or wayward tropical islands.

For many years this ‘deal’ stayed under the radar. The impact on tax revenues of the countries out of which business was syphoned to Malta was not such as to raise too many red flags. Certainly not in the good times.

The irony was that EU membership, that at face value looked like a threat to financial services in Malta, became its biggest asset. The concerns of the anti-EU campaigners - now prime minister and staff — that EU rules would suffocate Malta’s ability to “fix” things its own way proved misguided.

The attitude changed around the time of the 2008 financial crisis. Malta never got anywhere near needing bailouts to survive the crisis. Domestic banking was robust and the government of the time dealt with businesses on an individual basis, helping almost all of them wobble through the worst.

Famously Ireland and Cyprus - jurisdictions that also attracted businesses away from their mainland competitors with attractive tax offers - did need bailouts. That’s when the tax-payers asked to fund the bailouts became uneasy with the realisation that they habitually paid more tax to a government that could now afford to bail-out governments that systematically charged less than their real needs.

The issue of unfairness is of course not just a matter of borders. Only islanders tend to see things in the sense of hard political frontiers. The more fundamental unfairness is that global finance and tax shopping offers the very rich opportunities to pay less tax while the rest of us, stuck to the laws of our own land pay a greater share. →

"If we are unable to police the economic sectors we attract, we are effectively cheating our customers - the law- abiding ones..."

It’s not just that the tax advantages that Malta offers reduce the revenues of governments in countries where those tax payers conduct their business. It’s that the poor of those countries are stuck paying their government higher taxes while the rich among them stash their money in places where they need to pay less.

The financial crisis brought this pain to the top of the agenda. Avoiding the need for a bailout helped us dodge political pressure to make changes. The story is altogether different now. The Pilatus Bank scandal brought to the world’s attention inherent weaknesses in Malta’s ability to filter out money laundering and criminal transactions from the financial services it provides. News from inside the bank would have remained local - and very heavily denied - had the journalist that had published those stories not ended up blown up in a car bomb.

And of course four months after that car bombing the owner of the bank ended up the guest of the FBI in New York indicted for bank fraud and awaiting trial in 2019 that could send him to prison for two lifetimes. When that happened, scrutiny fell on Malta on a scale never seen before. The European Parliament stepped in, followed by the European Banking Authority, the European Central Bank and the European Commission is starting to make noise too.

While that happens, the FBI kept busy with other arrests in the United States for moneylaundering through Malta.

Quiet apart from the reasonable suspicion of political interference into law enforcement to protect senior political figures in Malta from prosecution for financial crimes, the manifest structural weakness in Malta’s law enforcement of these crimes screams out for solutions.

The weakest link is the police force that is beset by a culture that an action is criminal only if there is blood on the floor. Our laws are not designed to recognise organised crime especially if it is wearing a sharp suit and sipping espresso. Our police force employs a single qualified accountant who alone is expected to detect the crimes hidden in the reams of paper banks and financial institutions draw up to avoid the attention of the SEC and the FBI, let alone Floriana Headquarters.

Assuming, optimistically, surviving the enormous political fallout on the world stage of the scandals of the last three years, Malta will require major shifts to provide proportionate law enforcement if it is to match its offer to the world as a financial hub. Writing laws and licensing accountants is nowhere near enough.

If we are unable to police the economic sectors we attract, we are effectively cheating our customers - the law-abiding ones - by throwing them in the same cells with hardened criminals, indistinguishable except to trained law-enforcement eyes.

We are also cheating future generations of sustainable economic development. Because as any banker will tell you, the day you irretrievably lose your clients’ trust, is the day you close down your bank and become a roadside florist.

It looks like we’re again due some hard reckoning.