The Malta Business Observer, 31 October 2019

NEWS

Issue 103

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October 31, 2019

Distributed with Times of Malta

BOV says de-risking follows “international best practices”

Packaging companies and plastic manufacturers discuss how they will be adapting to the new regulation to ban single-use plastics by 2021. see pages 5, 6 >

NEWS Helena Grech Bank of Valletta plc’s extensive derisking exercise, including a Know Your Client (KYC) retail client remediation exercise, comes off the back of discussions between the bank, the Malta Financial Services Authority (MFSA) and the European Central Bank (ECB), as well as the need to follow international best practices, the bank’s Money Laundering Reporting Officer (MLRO) said.

In an interview with The Malta Business Observer, the MLRO, who declined to give their name, said that “if you have correspondent banks, and they do not want to carry a certain risk, you need to remove it off your books as otherwise people will not want to do business with you. This is all part of the de-risking process.”

The comments follow increasing pressure on the bank to step up their de-risking procedures as a result of international scrutiny.

Last June, ING Bank, BOV’s last USD correspondent bank announced it would be ending its services to the Maltese bank on the 14th December. ING had also been undergoing a de-risking strategy after it was fined €775 million last September over money laundering breaches by criminals through the bank.

Deutsche Bank also terminated its USD correspondent banking relationship with BOV over two years ago. Indeed, in other comments given to the media this week, BOV has said that it is inching closer towards concluding a

e Parliamentary Secretary for Financial Services, Digital Economy and Innovation, Silvio Schembri, and Enrico Bradamante, Chairman of the iGaming industry’s trade association, iGEN, play down concerns of instability in the sector. see pages 9, 13 >

BUSINESS OPINION Architect and structural engineer, Dr Konrad Xuereb, analyses Budget 2020’s commitments on transportation and reiterates his stance on the vital importance of a mass transit system for the islands. see page 11 > new correspondent banking relationship that would process USD. The bank has also recently been in the news due to its decision to close down dozens of company accounts deemed “high-risk”, some of which belonged to iGaming firms – including Malta Gaming Authority licensees – following an ECB review.

Shedding light on the de-risking exercise, the bank’s MLRO explained that it involved mainly International Corporate Customers (ICC) and the bank’s International Personal Banking (IPB) customers.

“ICC customers are, in their majority, companies registered in Malta with the Registry of Companies, where the beneficial owner is not

“We make sure that those controlling the company have not chosen Malta simply to benefit from the tax rebate system while having zero connection with the island.” – MLRO, BOV Maltese and business activity happens outside of Malta.”

Asked whether they fall within the category of companies that register in Malta to benefit from the effective 5 per cent tax rebate

available to companies with foreign ownership, the reply was in the affirmative. “Looking at our company acceptance policy, the continued on page 3

STOCK MARKET REVIEW Christopher Mallia, the Head of Research and an Investment Advisor at Rizzo, Farrugia & Co, looks into the findings published by the Central Bank of Malta in their Financial Stability Report and explains what this means for the local economy. see pages 24, 25 >

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BOV business clients must have economic “nexus” in Malta continued from page 1 client, to have a bank account with BOV tied to their company, needs to have what we call an economic substance or nexus in Malta.”

The MLRO stressed that for such clients to have an account with the bank, BOV must ascertain that the company has an office in Malta, employees in Malta, and that the board of directors meets in Malta. “We make sure that those controlling the company have not chosen Malta simply to benefit from the tax rebate system while having zero connection with the island. We are in the process of closing off bank accounts for ICC clients with no ties to the island.”

With regard to International Personal Banking (IPB) customers, the MLRO highlighted that this category is composed of a mixture of clients, with some based outside EU/EEA jurisdictions. “Such clients would have come to Malta and opened a bank account to receive salaries, for example. If we see that they no longer have an economic nexus in Malta, we close their accounts.

Many such examples of this are Libyan nationals who would have come to Malta in the past but no longer have ties.”

Another category of clients whose accounts have been closed off by BOV are Individual Investor Programme (IIP) buyers, who would have come to Malta and opened an account with the bank in the process of acquiring a Maltese passport, but do not have an identifiable economic substance with Malta.

The MLRO explained that the entire de-risking process did not originate from a single directive or

regulation, such as the 5th AntiMoney Laundering (AML) Directive coming into force in January 2020, but rather, it came about following discussions with the MFSA and the European Central Bank.

In addition, “BOV must follow international best practices as it is an international bank.”

This de-risking exercise is being carried out hand-in-hand with a Know Your Client (KYC) remediation exercise with retail customers. Its aim is to ensure that data for each client, whether old or new, is uniform across the board, the MLRO stressed. They highlighted that, while BOV may assess a client’s activity in order to gain much of the information required, with the way compliance regulations have evolved, certain questions that are being asked to newly onboarded clients must also be ascertained with older clients directly.

“For example, when looking into source of wealth information we ask a set of questions to new clients. There are clients that we have a long history with, and while we can check for the information that we require by looking into the individual’s history, we are instead going to the client for the information we need in order to have uniformity in our data,” the MLRO explained.

Therefore, “in this way we can carry out a fair risk assessment on BOV’s client mix across the board.

The exercise is not complete but from our analysis so far it does not result that we have a high ratio of high-risk clients.”

Moving on to the coming into force of the EU’s 5th Anti-Money Laundering (AML) Directive on 10th January 2020, the MLRO stressed this would not herald in

sweeping changes, unlike the 4th AML Directive had. In this regard, the MLRO explained that when EU officials were concluding the 4th Directive, terrorism attacks in Brussels and France had exposed gaps in the legislation, mainly to do with terrorism financing and the issue of anonymity. Since the advent of cryptocurrencies and new financial instruments, it became clear that legislation would need to be passed to plug such gaps.

Among the changes brought in by the 5th Directive, cryptocurrencies and cryptocurrency exchanges are considered “obliged entities”, facing the same compliance regulations as other financial institutions. It also extends reporting obligations imposed in the 4th Directive to any legal arrangement that is similar to a trust and will make these registers publicly accessible where legitimate interest is shown. Moreover, it reduces the threshold of due diligence requirements on prepaid cards from €250 down to €150.

The MLRO stressed that the 5th AML Directive is no shock to the system because it is “a kind of amendment to the 4th Directive and because BOV has always erred on the conservative side.” Elaborating on this, the MLRO said that, for example, BOV’s threshold for prepaid cards in terms of due diligence checks stood at €150 when the law set the threshold at €250.

Nowadays, the bank has closed prepaid card services.

The bank, the MLRO said, does not accept clients with cryptocurrency dealings as this is outside its customer acceptance policy.

Therefore, provisions related to cryptocurrencies in the new Directive do not apply to the bank.

De-risking through the 5th AML Directive: bulk of negotiations took place during Malta Council Presidency The bulk of negotiations on the 5th Anti-Money Laundering (AML) Directive took place during Malta’s Presidency of the EU Council, and it was finalised during the subsequent Estonian Presidency, Finance Minister Edward Scicluna said when responding to a request for comment on the legislation which will be transposed into law by 20th January 2020.

The directive, he said, is “wider in scope than its predecessor,” covering more entities which will need to comply with AML obligations as well as regulations Combating the Financing of Terrorism (CFT), such as “financial asset operators, traders and intermediaries.” He also added that it widens the scope to include “real estate agents who are expected to carry out AML/CFT obligations when involved in the letting of immovable property.”

The Minister gave assurance that after transposing the 4th AML Directive, the National Coordination Committee “started work in earnest to transpose” the 5th.

“The Committee also laid out a plan for our institutions to be in a position to oversee the regulation and supervision of the financial services sector connected with the transposed directive. Concurrently, our regulatory institutions are regularly engaging with the stakeholders to prepare them meet the new obligations that are being introduced,” he concluded.

Also asked to comment on the readiness of local banks for the upcoming AML legislation, Secretary General of the Malta Banking Association, Karol Gabarretta said the association believed that MBA members are “on course to taking all necessary measures to implement” its requirements.

He added that “perusal of the Financial Intelligence Analysis Unit (FIAU) Consultation Document issued on 14th October detailing the proposed amendments to the Prevention of Money Laundering and Funding of Terrorism Regulations (PMLFTR) by means of which the directive will be transposed into Maltese law, indicates that while some of the new requirements may not be directly applicable to banks, those that are, would be adopted by the latter as required without any significant impact on their processes.”

When asked about whether it will cause any significant disruptions, Mr Gabarretta said that the intention in the minds of the legislators of the Directive was to continue to reduce money laundering risks “and not to cause any disruption in the operations of subject persons.”

Furthermore, he said that “if one applies the FIAU’s views in the said consultation document, the scope of the 5th AML Directive is to build upon the 4th AML Directive and to continue to strengthen the integrity of the EU’s financial system and the fight against money laundering and terrorism financing.”

Mr Gabarretta added that “the MBA strongly embraces the introduction of any additional measures, such as through this directive, which serve to mitigate risk in this key area as this would benefit not only its members but would also be a means of reducing jurisdictional risk.”

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Packaging firms and plastic manufacturers stress need for holistic approach to ban single-use plastics Emma Mattei Local plastic manufacturers and packaging companies have emphasised the need for care and investment at every stage of the product cycle, from pre-production, through to consumer habits and post-consumption recycling, if the ban on single-use plastics is to be truly effective by 2021.

Their comments, made to The Malta Business Observer, are in response to the latest Budget measures which have stepped up plans to ban single-use plastics within the timeframe, and outline the changes the firms have already taken to adopt more sustainable approaches and practices.

In this regard, Stephen Bonnici, HR and PAC Manager for General Soft Drinks (GSD) Co Ltd, stated that the company is well-placed to deliver on the objectives of the ban, which addresses, he specified “single-use plastic cutlery; singleuse plastic plates; plastic straws; cotton bud sticks made of plastic; plastic balloon sticks; oxo-degradable plastics; food containers and expanded polystyrene cups.”

Indeed, the ban is set to have an impact on the firm, which is responsible for manufacturing a wide range of soft drinks for brands owned by The Coca-Cola Company (TCCC) including Coca-Cola, Diet Coke, Coke Zero, Fanta, Dr Pepper, Sprite, Schweppes and Kristal, among others. Mr Bonnici also made reference to the introduction of a beverage container deposit system in 2020 – also announced in the recent Budget – which “will target the collection of beverage containers made out of plastic, glass and metal,” saying that the company is well poised to achieve the set targets, which include a 90 per cent collection target for plastic bottles by 2029 set by the EU.

“All our primary and secondary packaging are 100 per cent recyclable.” – Stephen Bonnici, HR and PAC Manager, General Soft Drinks Co Ltd

“GSD Marketing has been a leading force in bringing together all major stakeholders involved to set up a not-for-profit company that will be owned by three associations – namely a beverage producers’ association, a beverage importers’ association and a beverage retailers’ association – which will deliver the set collection and recycling objectives in the most effective and efficient way possible,” he explained.

Describing the firm’s current offering, Mr Bonnici was at pains to emphasise that “all our primary and secondary packaging are 100 per cent recyclable.” In addition to the EU targets James Quincey, President and CEO of The Coca-Cola Company announced a bold, ambitious goal – “to help collect and recycle a bottle or can for every one we sell by 2030, as well as to have the primary packaging of our beverage containers to be made of at least 50 per cent recycled material by 2030.”

The single-use plastic EU legislation is very specific in the products it is aimed at. Olaf Zahra, Chief Officer, Technology and Sustainability at Toly Group explained that primary cosmetic packaging, which is what Toly produces, is not considered single-use. “Cosmetics have a typical shelf life of one to three years and a life-span, once opened, of between 12 and 18 months,” said Mr Zahra.

Toly has recently introduced a number of products in materials that are either recycled or recyclable, bio-sourced or bio-degradable, he explained. “Although we are not a producer of single-use plastics, I would say that our industry is ahead of EU trends in the area of sustainability. The situation is very volatile as there is a lot of confusion about the subject,” he continued.

“However, plastics are only part of the sustainability effort, since changing materials will not change matters unless customer and con-

sumer habits are also altered,” stated Mr Zahra. “At Toly, we have focused our considerable innovation and creative talents on the subject of sustainability. We need to, and are, designing products that make it easy for the consumer to re-use or recycle. Making it easy will help change ingrained, bad habits. Plastic is not the issue per se. The over-use of packaging and treatment at the end of its life is the real problem,” said Mr Zahra.

Moreover, the products and materials used are only part of the picture. “At Toly, we take a holistic view to sustainability. From June this year we have moved into a new factory. It is a €20 million investment and a large part of that investment has gone into making sure that we reduce our impact on the environment,” said Mr Zahra.

In this regard, Toly has taken an in-depth look at where they were consuming the most electricity and improved their figures, where

possible, using geo-thermal principles to maximise the efficiency of water cooling, which is the biggest single consumer of electricity. “We have changed the design of the system so that we can use rainwater recovered from our roof for cooling,” said Mr Zahra.

“We are recovering the heat from our chillers and compressors, and using it in other processes. We have introduced LED lighting throughout, and a BMS to regulate and optimise all. We are currently in the process of adding photovoltaic panels that will produce up to 20 per cent of our electricity demand,” he concluded.

In the meantime, F.S. Engineering and Plastics Ltd, which specialises in plastic food packaging, and has evolved to offer a proprietary line of polyethylene food-handling material products, compliant with international standards, has also been seeking alternatives to plastic. Catering and confectionery companies, as well as companies trading in spices and herbs, are among the continued on page 6

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Long-term sustainability is key, packaging firms and manufacturers say continued from page 5 industries that rely on their market-specific products.

“We’ve been looking into alternative materials even though the price is high, but so far the national body has rejected them on the grounds that they leave micro plastics,” said Derek Saliba, the company’s Director. Recyclable plastic is currently heavy and opaque, not suitable for use in certain aspects of the food industry, where the packaging needs to be transparent which would involve using chemicals, he also explained.

The alternative products for food packaging, such as glass and metal, also require energy to produce and recycle. “Glass bottles, for example, when collected and reused, consume high quantities of water, and the process involves chemical use,” said Mr Saliba. “What we need is a circular economy, with the authorities working to incentivise recycling locally. Why do we just blame plastic? It’s also about how we dis-

“We need to, and are, designing products that make it easy for the consumer to re-use or recycle.” – Olaf Zahra, Chief Officer, Technology and Sustainability, Toly Group pose of these single-use products, which currently are imported.

Should we not also ask, what do we gain from plastic? There are still a lot of questions marks.”

F.S. Ltd will not be affected by the ban per se but has undertaken many changes. To this end, Mr Saliba explained that all their machines “are electrical and no longer hydraulic, so consumption is very low, and we’re looking to install solar panels on the roof; we have been doing this for 10 years and we were the first in Malta to make these changes, which means we

now use 70 per cent less energy.”

He also advocated for further clarity and more information. “I think many of us are not informed enough. There’s no doubt that we need to define single-use. In my opinion, all plastic could be considered single-use – a remote control gets thrown away when it no longer works – so perhaps we need to inform the public on how to dispose of it. Plastic is a resource and we should take care of it,” said Mr Saliba, stressing that “that’s the future, to work together and inform, not to ban.”

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Representatives of iGaming sector play down industry fears Rebecca Anastasi The Parliamentary Secretary for Financial Services, Digital Economy and Innovation, Silvio Schembri, and Enrico Bradamante, Chairman of the iGaming industry’s trade association, iGEN, have both played down concerns of instability in the sector following the announcements of job losses and bank account closures in the third quarter of 2019.

Towards the end of September, the Malta-based Stars Group, part of TSG Interactive Gaming Europe Ltd, made 80 of its local staff redundant, while Multilotto made a similar decision, affecting some 15 of its employees on the island – half its workforce. Moreover, this month, Bank of Valletta announced it would be closing the bank accounts of ‘high-risk clients’, some of which belonged to the iGaming sector, as part of their de-risking exercise.

Yet, in recent comments, both Mr Schembri and Mr Bradamante were at pains to emphasise that these developments did not constitute any sort of crisis in the industry.

“Like any other industry, iGaming companies go through restructuring exercises from time to time. But with a regulated industry of 289 operators, collectively employing more than 7,000 employees, together with an additional 3,000 employees working with service providers, this is understandable,” Mr Schembri said.

As proof, and in order to emphasise the current and continued health of the market, he pointed to the buoyant job vacancy numbers in the industry, underlining that, while some companies are ‘restructuring’, others are actively employ-

ing. “According to a study carried out by the Malta Gaming Authority, there are, at the moment, around 700 vacancies in the sector. And if one takes a look at the number of redundancies – arising mainly due to the duplication of posts – one notices that the supply does not surpass the demand sought by the operators,” he continued.

These redundancies, he said, were the result of mergers and acquisitions which have taken place in private enterprises geared up for change. “Many times, this will result in the creation of new jobs and the removal of duplicated ones. But this is common in any other industry,” he stated.

Moving on to BOV’s announced closures of some iGaming companies’ business accounts, Mr Schembri stressed that the bank’s decision had nothing to do with the current health of the remote gaming sector in Malta. “BOV’s de-risking exercise involved other types of businesses, not just iGaming. From the information we have, less than 20 from the 289 MGA licensed entities were impacted with this decision,” he said, adding that he is “informed” that these companies are “already in talks with other local banks, who will be offering the services to them.”

Furthermore, he stated that the cache and reputation of the MGA licence was not affected by this decision taken by the bank, insisting that “the bank’s decision to stop offering its services is not related to the MGA licence. The two things are absolutely not related,” he said.

He also stressed that this news did not impact on the mood in the industry. “Whereas it is never an ideal situation to have a bank being forced to close banking

services to any business, I am not informed that this has had any major effects on the industry, in view of the fact that a very small number of licensed operators were affected,” he underlined.

Concluding, the Parliamentary Secretary stood firm in re-asserting the authorities’ championing of the entire sector, saying that “as a Government, we will continue to support this industry”. To emphasise this, he highlighted interaction with key stakeholders. “I regularly meet trade associations continued on page 13

“Whereas it is never an ideal situation to have a bank being forced to close banking services to any business, I am not informed that this has had any major effects on the industry.” – Silvio Schembri, Parliamentary Secretary for Financial Services, Digital Economy and Innovation

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e Malta Business Observer is Malta’s leading business newspaper distributed with Times of Malta every month.

Acting Managing Editor Rebecca Anastasi

EDITORIAL

Balancing risk management and client priorities In recent months, barely a week goes by without some news threatening to create unease and unsettle businesses’ sense of stability with regards to the banking sector. On the 12th October, reports in the media announced that Deutsche Bank was pulling the plug on its correspondent banking services to local financial institutions, while HSBC’s decision to close eight branches as part of, what they said, were plans to modernise their network – although not related directly to their business banking portfolio – made some question whether there was more to the story.

In the meantime, Bank of Valletta also saw its last US dollar correspondent banking arrangements with Dutch bank, ING, scuppered as the institution announced it would terminate its services by this coming December. Moreover, news of bank account closures – affecting, what BOV said were, “high-risk clients” – caused ripples in the iGaming sector when it emerged that some of those affected were Malta Gaming Authority licensees.

And, although some of those account closures have now been reversed, and BOV is working solidly on acquiring alternative arrangements to continue offering US dollar services, the bank has attracted its fair share of criticism on the way the former, specifically, was handled. With this in mind, and in this edition of The Malta Business Observer, we speak to BOV’s Money Laundering Reporting Officer (MLRO) to find out more about the story behind the – sometimes sensationalist – headlines.

What emerges is a picture which sees the bank putting increased focus on de-risking, pushing it to make some tough decisions which have – it

must be admitted – affected some Maltese firms’ and companies’ dayto-day operations. As part of the exercise, the bank’s MLRO emphasised that their approach has been based on calculable risks and if their correspondent banks do not want to carry a certain risk, then this has to be removed. This approach has also caused the bank to look at its company acceptance policy and has driven the institution to only accept firms which have an “economic substance or nexus in Malta.”

Also, in this edition, we speak to the Parliamentary Secretary for Financial Services, Digital Economy and Innovation, Silvio Schembri, and Enrico Bradamante, Chairman of the iGaming industry’s trade association, iGEN, to get their insight on the effects these banking pressures have had on companies in the sector. In their comments, both stressed that recent developments do not constitute any sort of crisis in the industry.

And, indeed, while the bank’s decisions have been valid – and fair – particularly when viewed in the light of the increased scrutiny placed on Malta following the Moneyval report, effort must be made to ensure communication channels remain open with businesses and commercial clients. It is only by clarifying the stresses and the actions being taken can all stakeholders truly be on the same page to tackle any concerns and help continue buoying Malta’s economy upward.

For open channels between the financial institutions and the clients they serve will also help ease the tension encountered when enterprises hit a wall in their bank dealings. And, if impediments to business become the order to the day, the entire country will be left reeling from the effects.

Publishers Allied Newspapers Ltd. Content House Group Ltd.

Advertising Enquiries Tel: 2132 0713 Email: info@contenthouse.com.mt Advertising Sales Matthew Spiteri Director of Sales and Business Development Jean Mark Meli Senior Brand Sales Executive Lindsey Napier Director of Sales and Operations Sue Ann Pisani Advertising Coordinator Printer Progress Press Ltd.

BUSINESS OPINION

Budget 2020: Prioritising sustainable transport?

Konrad Xuereb

The Budget, announced in midOctober, contains concise measures on capital and infrastructure investments, with the main Budget commitments on transport projects focused on continued road improvement, widening and tunnel projects; new transport connections by sea; and a car tunnel link between Malta and Gozo.

The Budget commits to an expenditure of €100 million per annum for road widening and improvement measures, in line with the Government’s seven-year €700 million commitment in this sector.

Key projects referred to in the Budget are Central Link, the Msida flyover and the four tunnels connecting Pembroke to St Julian’s.

These large infrastructural projects are ambitious in nature, yet do not appear to address the key challenges facing Malta, namely population growth, sustainable transport and environmental protection. The road widening and road tunnel strategies being proposed will only lead to an increase in cars on the

roads, contributing to lasting environmental damage due to the loss of Malta’s limited countryside and increased pollution.

It is positive to note that the Budget also invests funds in pedestrian bridges and highlights plans for connectivity by sea, with a statement for proposed connections between coastal towns like Marsaxlokk, Marsascala, St Paul’s Bay, St Julian’s and Mellieha. Providing alternative transport modes is the way forward and the Government should persevere along these lines.

The Budget also commits to a car tunnel between Malta and Gozo. From a strategic perspective, it is evident that a physical connection between Malta and Gozo should not be seen in isolation but as part of a nationwide public transport system. A car tunnel will entail long ramps at either end, causing irreparable damage to the environment, agricultural land and any as-yet undiscovered archaeology. The car tunnel will also result in bottlenecks at the tunnel exit points, increasing, rather than reducing, the islands’ traffic problem. Traffic accidents involving individual vehicles could also pose a safety risk inside the tunnel, leading to the possible closure of the tunnel in the case of a fire, for instance. This would in turn result in potential connectivity problems to Gozo if the ferry service goes out of business because of the car tunnel.

The Budget also emphasises a shift towards less-polluting cars and a new fleet of buses. This is a commendable initiative, especially

if the focus turns on reducing the number of cars in the streets.

A change in policy towards the implementation of a mass transit system is crucial and this should be addressed with urgency in the current and forthcoming Budgets. A metro would provide a fast and reliable connection between towns, connecting major residential, tourist and business zones. By helping to reduce the number of cars on the roads, such a system would make the current road-widening and car tunnel projects redundant.

Studies clearly show that a national metro system, coupled with a system of shuttle buses, would provide a considerably faster connection between towns, irrespective of weather conditions and providing strategic connections between hospitals, residential areas, transport hubs and industrial zones. A metro would also complement ‘multi-modal’ transport systems, including ferries, buses and cycling routes, and would allow the implementation of dedicated bus lanes, with concurrent investment in new buses and routes.

A metro system would link the densely populated towns of Mosta, Lija/Attard/Balzan, Birkirkara, Mriehel, Qormi, Luqa airport, Birzebbuga, Zejtun, Paola, Valletta, Msida (Mater Dei/University), Sliema, St Julian’s, Pembroke/ Paceville, St Paul’s Bay and Mellieha, and extend to Gozo. Non-stop shuttle bus services from the metro stations would then provide fast connectivity to other towns not lying on the metro line (for example, shuttle buses from Marsaxlokk to Birzebbuga, and so on). It would also allow

Gozitans working or studying in Malta to return to Gozo on a daily basis – a mere 35 minutes journey from Valletta to Victoria, Gozo.

Malta has reached a junction with two diverging tracks ahead: one based on short-term roadwidening strategies with lasting environmental damage, and another based on a long-term mass transit system that addresses the key challenges facing Malta, namely population growth, sustainable transport and environmental protection. The choice is

clear and the shift towards mass transit is a national priority. This transition would invariably entail a period of five to 10 years of inconvenience, with say reduced use of cars, but the long-term benefits of adopting a metro would be astronomical for such a densely congested, traffic-choked, island.

No pain no gain.

Dr Konrad Xuereb is the founding director of KonceptX, an architectural and structural engineering firm with offices in Malta and London.

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“BOV’s de-risking exercise involved other types of businesses, not just iGaming” – Silvio Schembri continued from page 9 representing this sector to make sure we are always listening and taking action where there is need,” he said.

One of these key stakeholders – and another representative of the sector – is Mr Bradamante who echoed much of Mr Schembri’s thoughts on the current layoffs and the movement caused by the bank account closures. With reference to the former, he noted that the announcements of redundancies were “a result of economic forces”, emphasising that “companies go through cycles during which they need to look at the costs.” Prioritising the bottom line, he said, has meant that some firms decided to move their operations to lower-cost jurisdictions.

Moreover, he said, “the industry is still very dynamic. Bet365 are starting to move in,” with the net influx of jobs and firms still retaining buoyancy. “It is still positive.

There are plenty of vacancies in the iGaming sector and what

we’re starting to see, in actual fact, is industry consolidation.” Thus, the layoffs were the result of firms merging and acquiring smaller companies, in his view.

“The industry is maturing.

Growth rates are slowing down; profits are being squeezed – mainly because of all the compliance and regulations we need to adhere to – so there are changes.

But, the industry, on the whole, is still increasing revenues, and boosting staff, so all this is still positive for Malta,” he underlined.

Moving on to the bank account closures, Mr Bradamante also pointed out that the iGaming sector was not “singled out” in this exercise, even though “this is how it was represented in the media.” He underlined that there were other industries which were affected, though he did add that BOV’s decision did not come out of the blue.

“It was expected. There were rumours following the Moneyval report and arising from the broader scrutiny Malta has been subjected to. So, the bank had to de-risk and

BOV is a critical bank for Malta.

They had to address this as part of a broader conversation and actions being taken as a result of certain investigations,” he specified.

However, the iGen Chairman expressed his disappointment with the way the news was communicated. “It could have been done in a better way, in a less damaging way.” Despite this, he re-asserted that it was understandable that the bank – like all private businesses – needed to assess its business. “From a profitability and compliance perspective, there are elements which need to be taken into consideration. The fact, however, that a number of MGA licensees received the letter announcing bank account closures was also disappointing, but banks need to conduct reviews,” he noted.

Despite this, his outlook remained positive, even in this regard. “Overall, the Government has been proactive and there’s been a real attempt to foster an environment where new banks can

come in. Having a bank account for any company is indispensable.

But the good news is that there are other banks on the horizon, some of whom already have an elec-

tronic banking licence and are in the process of getting a full banking licence. These are able to service any industry, including iGaming,” he concluded.

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ANALYSIS

Budget 2020: Business community reacts with mixed feelings Helena Grech Members of the business community are at odds on the effectiveness of the 2020 Budget in terms of boosting competitiveness and the commercial attractiveness of Malta in the international business sphere.

Both the Malta Chamber of Commerce, Enterprise and Industry and the Malta Chamber for Small and Medium Sized Enterprises remarked that the Budget veered towards addressing social issues rather than focusing on Malta’s economy, while the Malta Developers’ Association has heaped praise on the Budget measures related to the construction sector.

The 2020 Budget, themed Sustaining Inclusive Growth was announced on Monday 14th October in a three-and-a-halfhour-long Budget speech in Parliament delivered by Finance Minister Edward Scicluna. Many applauded the fact that the Budget did not contain any surprise taxes or measures, and that it was largely an exercise in carrying out the Labour Party’s 2017 electoral manifesto.

Providing the business perspective, the Malta Chamber President, Perit David Xuereb said Budget 2020 is “quite strong on the social aspect of things” and “moderately developed on the environment side”. He also commended the lack of “unwelcome surprises on our businesses,” guaranteeing “an element of positive certainty for our business community”. However, “the Chamber feels that more could have been done on the business side,” he noted.

Moreover, “the Chamber feels little was proposed to encourage entrepreneurs to develop and grow, especially when one considers the need for motivation in the new and disruptive industries we expect from the country’s vision in the forthcoming years”.

Perit Xuereb also lamented the Budget’s lack of attention to Research, Technology Development and Innovation (RTDI), despite the Chamber having proposed serious and tangible investment in this area, which it feels is one of the main credible solutions to ascertain a level of long-term competitiveness.

Such investment is vital for the overall health of the market, he said. “Malta’s economy has developed over the years, but we cannot continue to expect to attract investment solely on price-competitiveness. We need to attract higher value-added sectors and this should be supported through a serious investment in product and/or process innovation via RTDI and associated infrastructure.”

Meanwhile, Perit Xuereb praised the Government’s push to incentivise new sectors such

as technology, aviation, startups, video game development and eSports. However, he expressed his disappointment that the Budget lacked initiatives that “support the manufacturing industry, something which the Chamber already noted with the Minister responsible.”

He concluded by saying that the Chamber looks “forward to learning more about the initiatives the Minister launched during his speech, and is eager to actively contribute in favour of Malta’s sustainable economic growth in the interest of all of our nation’s economic activities.”

Echoing much of these thoughts, the CEO of the Chamber of Small and Medium Enterprises (GRTU), Abigail Mamo, commented that the lobby group has “not seen any direct and particular impact of the Budget on the business community.”

She went on to say that “there is, however, an expressed commitment from the Government to maintain a good economic momentum whilst moving towards increased sustainability.” She remarked that this would affect businesses, “as it will the rest of the economy and society, in a positive manner.”

Ms Mamo said the GRTU’s “overview of the Budget was mainly positive for this reason. The economy is doing well, overall, and sustaining this is the most important action that could be taken – letting businesses work and facilitating growth is the priority.”

Asked about whether more could have been done for the business community, she replied in the affirmative, remarking that the Budget “was more social than pro-business”. Having said that, Ms Mamo observed that “targeted social aid was a main pillar in this year’s Budget and the Government did the right thing by shouldering this responsibility fully.

There was also no attempt to make employers compensate for social benefits.”

While she remarked that the positive economic environment Malta finds itself in should not be taken for granted, and that probusiness action should be ultimately taken beyond the Budget, Ms Mamo regrets that the GRTU has not observed any measures addressing SMEs specifically.

“It should be noted that, in the way that there is a level of disparity at society level, the same applies to business. The different segments that make up our SMEs are not far-

“We need to attract higher valueadded sectors and this should be supported through a serious investment in product and/or process innovation via RTDI and associated infrastructure.” – Perit David Xuereb, President, Malta Chamber ing in the same manner. On average, SMEs are doing well, but this should not be the policy maker’s measure for action. More detailed analysis is necessary in order to see which groups require targeted action. Increased competition, unfair competitive advantages, and traditional structures, are among the reasons as to why some sectors are falling behind.”

Both the GRTU and the Malta Chamber highlighted that the additional day of leave granted

by Government for 2020 is placing added pressure on employers. It is the third extra day awarded by the Government in the current legislature.

Ms Mamo commended the tax incentive for part-time employees who are not in managerial positions earning less than €20,000 and who will be taxed a flat rate of 15 per cent for the first 100 hours of overtime.

She said this is a good measure in principle. However, it amounts to two hours of overtime per week.

On the other hand, the President of the Malta Developers’ Association Sandro Chetcuti found the 2020 Budget measures addressing the real estate sector and construction industry to be “very positive”.

He remarked that the “incentives, particularly those for first-time buyers; the assistance to lower income earners to purchase their first

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property; the extension of all existing schemes; and the tax reduction on contracts when property rights are ceded, will keep the feel-good factor for those who see property as a long-term investment.”

Mr Chetcuti stressed that the “aggressive” incentives for the disposal of old construction machinery by providing grants for replacement, at a maximum cost of €200,000, “will motivate those contractors who are willing to modernise their machinery for a greener and healthier environment.”

When asked about the impact of the Budget on construction companies, Mr Chetcuti said that he believes they should “continue specialising and, subsequently, become more professional. There will come a time, in the not-so-distantfuture, when companies which are not organised or up to standard will be unable to compete.”

Mr Chetcuti, moving away from his peers in the business community, said that the MDA believes more should be done to increase the minimum wage. In the MDA’s view, “economic growth, achieved in the last years, is not reflected in the take-home pay and an increase in the minimum wage would make workers more productive.”

Asked about whether, overall, the MDA views the 2020 Budget to be positive or negative, he said

that “the 2020 Budget is one of the best Budgets ever presented. This is due to sustainable economic growth. It is a holistic attitude from Government wherein it is cautiously incentivising the lower- and middle-income earners and is being more sensitive towards the environment.”

“Economic growth, achieved in the last years, is not reflected in the take-home pay and an increase in the minimum wage would make workers more productive.”

– Sandro Chetcuti, President, MDA

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CASE STUDY

E&S Group ventures into crypto-advisory services Emma Mattei

“At E&S we guide clients that want to operate a crypto exchange, in the setting up of a company – from offering advisory services to making sure clients remain compliant.”

Legal firm and corporate service provider E&S Group has adopted a strategy to position itself as a leading provider of crypto-advisory assistance for international clients, both individuals and businesses.

Dr Mariella Baldacchino, Partner and Director at E&S Group, has emphasised the firm’s commitment to aiding Malta’s strategy to position itself as the “blockchain island”, by ensuring that the services being offered tally with the needs of the industry. “At E&S we guide clients that want to operate a crypto exchange, in the setting up of a company – from offering advisory services to making sure clients remain compliant. Exchanges play an important role in the massive growth of cryptocurrencies. It is where people can trade cryptocurrencies for other digital currencies or traditional currencies, and the most vital feature of any trading exchange is liquidity,” she said.

Apart from providing a “a full array of legal, corporate, tax and advisory services” across the board, the company has, indeed, adapted its knowledge base to include the principles of cryptocurrency in order to develop services that are adaptable to the nature of the crypto-economy. As a result, advisory services being offered by E&S Group are in the realm of over-the-counter (OTC) crypto trading; tokenomics; Initial Coin Offering (ICO); the setting up of crypto exchanges and Security Token Offerings (STO).

These are being provided with centralised or decentralised exchanges. In order to clarify, Dr Baldacchino underlined the essential difference between the two: with centralised exchanges, intermediaries, such as companies, act as middle-men in order to facilitate trading on their platform. In exchange for providing this service, centralised exchanges collect trading fees. Therefore, centralised exchanges act as the first point of contact for individuals that are interested in trading cryptocurrency.

“Many individuals seek to have an interface that can connect them to both cryptocurrency trading and the real economy, and centralised exchanges provide that,” said Dr Baldacchino, adding that “centralised exchanges often require personal information and proof of identity in order to trade on their platform, while decentralised exchanges are more private.”

In contrast, the decentralised exchange implies trading cryptocurrency without intermediaries, directly through the blockchain. “Decentralised cryp-

tocurrency exchanges don’t have access to customer’s assets or information. They serve as the layer for trade orders that execute matching and routing functions,” continued Dr Baldacchino.

Therefore, “instead of matching buy orders and sell orders in an order book, a decentralised exchange operates by matching the people behind those buy and sell orders. Decentralised exchanges do not hold cryptocurrency for users, and, instead, users are connected directly with each other, so they do not have to worry about the security of their cryptocurrency sitting on an exchange. Due to the smaller audience on decentralised exchanges, they have much lower trading volumes than centralised ones. This means that finding an acceptable trade can be a difficult process,” she said.

The firm’s offering is in line with Malta’s progressive approach to cryptocurrencies, Dr Baldacchino said. “The Maltese Government introduced landmark legislation to define a new regulatory framework for cryptocurrencies applicable to crypto exchanges, ICOs, brokers, wallet providers and so on. Malta’s vision is to create a thriving blockchain economy by providing regulatory certainty and consumer protection to a market environment that is unregulated in many countries,” she underlined.

In order to fulfil the requirements to operate, the firm had to acquire a licence from the Malta Financial Services Authority, as stipulated by the Virtual Financial Assets (VFA) Act. “As part of the licence process, the MFSA must be satisfied that the applicant satisfies all the requirements set by the VFA Act, the Regulations and Chapter 3 of the VFA Rulebook including requirements relating to financial resources, capital adequacy and professional indemnity insurance,” explained Dr Baldacchino.

Indeed, and as per the MFSA, the licensing process requires a substantial degree of paperwork which includes: the submission of the licence application form; the incorporation documents from the company; and a programme of operations with details on the systems, compliance measures, security access protocols and any other matters as required by the applicable rules and by the Authority, the Group’s Partner continued. The MFSA and the VFA agent also undertake a separate ‘fit and proper’ test in respect of the applicant, she added.

Moreover, the firm is conscientious when it comes to ensuring all the proper anti-money laundering (AML) regulations are adhered to, the Partner stressed.

“The anti-money laundering con-

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CASE STUDY

cerns are a risk that we face worldwide,” continued Dr Baldacchino, “and not only in relation to blockchain and crypto.

Issuers and crypto exchanges should comply with AML and CFT regulations in order to discourage any illicit transactions.”

In addition, she noted that the challenge lies because cryptocurrencies are able to disrupt international laws that are designed to protect against money laundering, leaving governments to struggle with the potential aftermath However, the concerns are pertinent, she explained. By way of example, she said that peer-topeer transaction authentication was created to permit coin holders to bypass institutional intermediaries, which otherwise act as essential gatekeepers in the global

AML regime.

“Also, the anonymity of cryptocurrency counterparties can also discourage the KnowYourCustomer on which existing AML regimes depend,” said Dr Baldacchino.

Furthermore, “the online ecosystem surrounding cryptocurrency opens new cyber vulnerabilities, especially in relation to prevention of reversibility when a fraudulent or unlawful transaction has occurred.” Despite this, she noted positive developments with regards to international legislation. “One of the most important ones is the 5th Anti-Money Laundering Directive, which marks a key development in cryptocurrency regulation, now providing clarity to cryptocurrency businesses on their AML and CTF obligations,” she concluded.

“Issuers and crypto exchanges should comply with AML and CFT regulations in order to discourage any illicit transactions.”

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CASE STUDY

GoTo One-Way fleet saves 1,000 tonnes in CO2 emissions Jo Caruana GoTo – Malta’s leading car sharing solution – has registered 1,000 tonnes in CO2 emission savings, with each of its vehicles potentially replacing 16 cars in the streets, thus reducing traffic, pressure for parking and pollution, the firm’s CEO Liran Golan said.

Having set up and opened its doors in 2018, the organisation has built a diverse team that has managed to effectively carve a niche in the industry by offering mobility sharing.

Mr Golan said it has been incredible to see the team grow since the enterprise opened its doors, and to get stronger as valuable talent joined in, simultaneously bringing different skills and backgrounds to the table. “That, in itself, generated a huge impact in the way we operate and sustain growth,” he said.

This forward-looking approach ties in with GoTo’s vision to become the preferred way people move around in Malta and Gozo.

“We want our customers to feel like, if it’s worth making the trip, then the best way to get there is

“We believe that we will fulfil our mission of improving urban lifestyles by developing shared transportation solutions and providing freedom of mobility.” with GoTo,” he continued. “We believe that we will fulfil our mission of improving urban lifestyles by developing shared transportation solutions and providing freedom of mobility.”

Mr Golan stated he believes the company’s team is constantly growing stronger because everyone in it shares that vision. Together, they passionately work around the clock to make sure their customers get the best experience possible, whether by making their vehicles available in the most demanding areas, providing excellent support, or acting fast to solve the technical issues that inevitably arise.

“And we don’t only want to be the preferred mobility solution

because of the quality of our service,” he asserted. “But, also because we believe that the world can be better if we learn to share more. Sharing means treating everything with more respect, because we consciously acknowledge the next person. Because we are the next person. And because, by doing that, we can all bring more balance to the planet – by consuming less, by needing to produce less, and by using more of what’s already available.”

With this in mind, GoTo is building a company culture around these beliefs and centred on core values that include integrity, trust, passion, diversity, commitment to customers and teamwork. “That creates accountability and synergy

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CASE STUDY

inside the team. And you can feel the energy that comes from that as soon as you step in our office.

We’re incredibly proud of it,” the CEO smiled.

It is a strategy that is working from both from a bottom-line perspective and in the competitive world of human resources, as the team has grown to over 30 people in just a year.

“The best thing about that is they are all crazy about making the GoTo experience better,” Mr Golan continued, explaining that he drives every team member to, not only understand what the company does, but to embrace its wider mission. “To achieve that, we have an open communication channel across the entire company. We also hold monthly meetings with everyone to share where our business stands, its accomplishments, and our goals and plans for the future. In doing that, we believe we can bring – and keep – everyone on board and continue to be mission-driven.”

Diversity is also a crucial factor at GoTo, with the company having a lot of its background and technology coming from its team in Israel. “Diversity is in our DNA, and we believe that the mixture of different cultures, beliefs and backgrounds is a key ingredient of our success so far,” Mr Golan stated.

The company doesn’t need to look too far to see how it’s playing out, either. In its leadership team alone, Mr Golan is Israeli; its COO, Liana Cremona, is Maltese; and its CMO, Johnny Tominaga, is Brazilian. “They all bring unique takes to every situation, which incentivises discussion and allows for more creative approaches to every challenge we face – and that is then passed on across the entire organisation,” Mr Golan said.

Sustainability, meanwhile, is at the centre of everything the company does – from the vehicles it offers and its range of services, to the selection of materials it uses in its office. “Having 85 per cent of our fleet made up of electric vehicles is an obvious example, but the fact that we’re offering shared mobility solutions is also a key aspect when it comes to how we think of bringing sustainability to the market.”

Now – with a year behind them – the whole team is ready to take their shared GoTo vision to the next level, beginning by tirelessly seeking great talent and ensuring every member of the team shares a common vision. “We plan to keep expanding by understanding different consumer mobility needs and addressing them with great shared mobility solutions,” Mr Golan concluded.

“Diversity is in our DNA, and we believe that the mixture of different cultures, beliefs and backgrounds is a key ingredient of our success so far.”

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BUSINESS UPDATES

Taking payments further With the global payments industry’s worth set to be about $2 trillion in 2020, the world is George Kakouras’ oyster. The Managing Director of Apco Systems, operator of the ApcoPay platform, is relishing the opportunities that lie in wait as his team work to take the brand to new markets.

Everyone in Malta who’s involved in payments has heard or worked with ApcoPay. How did the company position itself as a prominent player?

“The team at Apco Systems has worked incredibly hard over the past 15 years to make ApcoPay an industry leader and the go-to payments specialist in Malta.

This is a passionate team of experts – a small team, but highly efficient and nimble – who are pro-active people who can customise, implement and deploy payment solutions rapidly. At the same time, they focus a great deal of energy on innovation and development so they’re always at the top of their game.

We now work with 1,200 merchants in more than 25 countries who are active in travel, forex, crypto, transport, retail, services, gaming and eSports. We are proud to have a portfolio of clients featuring some of the foremost companies in their field. The Government of Malta is also a client which is an important stamp of trust in us as a provider.

We are a reliable key business partner. We support our clients’ growth. We have stood side by side with companies as they have expanded their operations globally and we have enabled them to do so with alacrity. It is a source of great pride to see clients succeed and know you had a part to play in that journey.

Gaming is a part of our DNA – our business has grown in tandem with Malta’s gaming community and we have supported the extensive internationalisation of many of our clients. Several have gone on to become truly global players in the industry.”

What are the strengths of ApcoPay’s offering?

“We are a global payments provider offering one platform that allows for unified integration in a single instance. Essentially, we provide businesses with everything they need to accept all kinds of payments from anywhere. It’s a very straightforward business model.

Our forte is building partnerships with renowned brands in the financial industry and this has become the cornerstone of ApcoPay’s offering. Our all-inone platform is recognised by more than 40 credit card acquiring banks, supports over 240 payment methods and accepts more than 100 currencies, including crypto.

ApcoPay is a global gateway with global reach. We’ve built in smart routing, data driven opti-

misation, fraud prevention, tokenisation, 3DS…all the best in class. Clients have access to a full service customer portal and all the reporting and analytics they need to manage, analyse and optimise payments in real time. ApcoPay is reliable, secure and scalable. This is our calling card.”

What’s your perspective of the current payments market?

“What a time to be in the payments business! Some forecasts put the value of the global business at $2 trillion by 2020 so there are significant opportunities. The payments market is shaped by technology and customer behaviour so we must be able to adapt and adopt quickly, particularly to digital trends.

In the past five years, cash transactions have fallen further from 89 to 77 per cent. Alternative payment options are gaining ground, especially among the youngest users who only carry their phone with them.

Electronic payment transactions across the EU are growing consistently, at double the EU’s GDP growth rate. In emerging markets, electronic payments will spike and there will be considerable technological leap-frogging as these economies enjoy late mover advantages.”

What are the building blocks of Apco Systems’ strategy at this juncture for the industry?

“We keep some factors in mind as we map our journey: smartphone penetration rates, increased internet access, and sustained fraud prevention efforts by authorities.

We will continue to inject ApcoPay with innovation through consistent investment in development and expertise to ensure our competitiveness as we tap new markets. Undoubtedly, we will be in the mobile wallet space with a solid offering.

Like their own customers, clients in all our business verticals are rightfully increasingly demanding and it’s crucial that we pre-empt their needs.”

Where would Apco Systems like to be in the short-term future?

“We are determined to become the most reputable payments company in a handful of markets outside Malta where we believe we can compete effectively and where we can maintain a local presence cost-effectively. There are emerging markets where payments are growing at a very inter-

APCO SYSTEMS MANAGING DIRECTOR GEORGE KAKOURAS: “OUR FORTE IS BUILDING PARTNERSHIPS WITH RENOWNED BRANDS IN THE FINANCIAL INDUSTRY. THIS HAS BECOME THE CORNERSTONE OF APCOPAY’S OFFERING.”

esting rate around Europe. Two are my native Greece, and Cyprus.

In Greece, the new government’s first 100 days bode well.

Taxes on consumer goods have been eased and capital controls have been lifted. There is an air of optimism in Greece that the upturn is looming. We have appointed a Country Manager for Greece who will be based in Athens with a brief to secure business from similar verticals to the ones we target from Malta.

Cyprus’ commercial landscape bears many similarities with Malta’s. There is a thriving gaming community with payments re-

“We are determined to become the most reputable payments company in a handful of markets outside Malta where we believe we can compete effectively and where we can maintain a local presence cost-effectively.” quirements that we can address very well and sectors we can tap into effectively. We have language and cultural advantages that we

can exploit in both these markets.

In the longer term we also have our sights on specific markets in Asia, Latin America and Africa.”

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BUSINESS UPDATES

Environmentally-conscious building design A lot is said about the different ways in which an employer can improve the working experience for their staff. Yet, one of the most often overlooked aspects is the building where they actually work.

With such a boom in development dominating the country, it’s refreshing to see developers who are taking health and the environment into consideration in their designs.

Leadership in energy and environmental design (LEED®) The Quad Business Towers is the first development in Malta to apply for Platinum level LEED® certification, the highest such accreditation available. LEED® certifications are audited and monitored by the internationally recognised U.S. Green Building Council. The certification is awarded by allocating points for sustainable building materials and methods over a number of different categories such as sustainable sites, water efficiency, energy and atmosphere, and so forth.

The process of certification is lengthy and detailed. It requires a high level of supervision of site sustainability measures during construction; the implementation of sustainable building measures; and the careful selection of materials which can deliver the highest standard of indoor working environments. Therefore, the undertaking of such a certification cannot be taken lightly. A LEED® Platinum certificate is a demonstration of prioritising quality and sustainability at every step of the build.

The end result of a LEED® Platinum certified building is a space which reduces water and energy consumption, has excellent indoor air quality, ample natural light and a comfortable working atmosphere, with the ultimate aim being to minimise the building’s impact on the environment. Commercially, the choice to abide by sustainable building methods pays dividends since the site becomes a desirable location for discerning businesses who are conscious of their environmental and sustainability responsibilities.

The Quad Business Towers The Quad Business Towers, currently under construction and forecast to be operational in 2021, is well on its way to becoming the first Maltese development to achieve the Platinum LEED® certification. The architectural and engineering designs have been carried out in consultation with our LEED® consultants to ensure that the required sustainable materials are selected, and methods implemented.

Design features such as high efficiency air conditioning units, which capture and recycle the condensate; technology which ensures the capture and use of rain-

water; specifically designed façade glazing with strict thermal properties; an on-site grey water treatment unit; the use of photovoltaic panels; the use of presence detectors; and other such methods are all being implemented at the Quad. Aside from this, a LEED® approved construction waste management plan, erosion and sedimentation control plan are in force at the site.

All of these measures would not be possible without the strong collaborative effort between The Quad Business Towers, their project management team, engineers, architects, and the contractors on site.

Without the dedication and buy-in of the main contractors, the required quality of a LEED ® Platinum building could not be achieved.

These are: Elbros Construction Ltd (civil construction); Mekanika Limited providing the mechanical and electrical engineering; HVAC and elevator services; and JSD (JD Operations Limited) carrying out the façade works.

For more information www.thequad.com.mt

visit

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STOCK MARKET REVIEW

Important findings from the CBM’s Financial Stability Report

Christopher Mallia One of the functions of a central bank is to ensure financial stability within its jurisdiction. In this respect, the Central Bank of Malta (CBM) published its analyses and findings in an annual publication referred to as the Financial Stability Report (FSR) which is also supplemented by an interim report. On 28th August 2019, the Central Bank of Malta published the eleventh edition of the FSR. The FSR reviews and assesses the macro-financial conditions and developments of the Maltese financial system. It also evaluates the resilience of the system and identifies sources of potential systemic risk. In the FSR, the CBM also makes the necessary recommendations to preserve and also enhance the resilience of the financial system.

The latest FSR is based on data as of the end of 2018 and the CBM, once again, confirmed that the six core domestic banks that remain the most systematically-relevant credit institutions for the Maltese economy are APS Bank Ltd, Banif Bank (Malta) plc, Bank of Valetta plc, HSBC Bank Malta plc, Lombard Bank Malta plc and MeDirect Bank (Malta) plc. It is also important to highlight that Bank

of Valletta plc, HSBC Bank Malta plc and MDB Group Ltd (which is the parent company of MeDirect Bank (Malta) plc) are also classified as Other Systematically Important Institutions (O-SII) in terms of the European Banking Authority guidelines and, as such, are also directly scrutinised by the European Central Bank.

The FSR is a lengthy publication which most investors are unlikely to read in detail. As such, today’s article is intended to highlight the main findings of this report which should be given due consideration.

The FSR notes that 2018 was characterised by a challenging external environment in contrast to the buoyant economic activity

in Malta. In fact, whilst international economies were adversely impacted by geopolitical uncertainties, escalating trade conflicts, as well as instability across emerging economies, Malta’s economy continued to thrive on the back of higher consumption expenditure and growth in net exports driven by the expansion in the services sector.

Going forward, this trend is expected to persist with vulnerabilities from within the local financial system perceived to remain much lower than external risks. In fact, although economic growth in Malta is expected to moderate, it is still expected to exceed the average for the whole of the Eurozone. The latest

forecasts by the European Commission indicate that Malta is expected to register a 5.3 per cent growth in Gross Domestic Product (GDP) in 2019 and growth of 4.8 per cent in 2020. This is less than the 6.7 per cent GDP growth achieved in 2018 but significantly better than the anticipated growth of 1.2 per cent in 2019 and 1.4 per cent in 2020 for the whole of the Euro area. Furthermore, the Central Bank of Malta notes that this strong economic momentum in the local economy is somewhat shielding Malta from external risks, particularly those related to international geopolitical uncertainties (which the Central Bank of Malta is classifying as posing elevated risks) and the increas-

ing risks related to the weak economic conditions in the Euro area and public debt sustainability issues across some Euro area countries including Italy.

The FSR also delves into the local banking system, which is split into three categories, namely the core domestic banks, non-core domestic banks (having limited operational exposure to the domestic market) and international banks which almost exclusively deal with non-residents. With respect to core domestic banks, the aggregate profitability weakened during 2018, which resulted in a post-tax return on equity of just 6.2 per cent. This reflects some one-off provisions (including the €75 million litigation provision that BOV set aside in the first six months of the year) but is also due to waning net interest income as well as rising operational expenses. The latter is a recurring theme across the European banking industry and various analysts have indicated in recent months the need for European banks to step up their efforts in restructuring their business model in order to be able to withstand the ‘lower for longer’ interest rate scenario, sustain the increasingly demanding regulatory requirements, as well as implement a digital transformation strategy whilst also ensuring an adequate and sustainable profit. This is very challenging indeed as even the European Banking Authority (EBA) has recently added business model sustainability as one of its key supervisory priorities for 2020. Locally, HSBC Bank Malta plc has already taken the lead. Following the significant restructuring undertaken over the past few years, HSBC Bank Malta plc recently announced its plans for the modernisation and downsizing of its branch network supported by the additional focus

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on digitisation with the aim of maximising “the opportunities from the rapidly changing way customers are using banks”.

On the other hand, the FSR positively notes that the local core domestic banks still hold ample liquidity and could also withstand an extreme set of conditions as designed under the stress tests conducted in 2018 and in early 2019.

In fact, under such hypothetical scenarios, the levels of liquidity remained comfortably above minimum regulatory requirements. It is also reassuring to note that core domestic banks continue to be largely funded through customer deposits. Moreover, 90 per cent of total customer deposits are resident deposits.

Core domestic banks also have adequate capital ratios which should also enable banks to withstand adverse conditions as evidenced through the aforementioned stress tests. Moreover, the FSR confirmed that the local banks classified as O-SII continued to comply with the build-up of an OSII capital buffer. In fact, as from 2016, MeDirect Bank (Malta) plc, HSBC Bank Malta plc and Bank of Valletta plc started building this capital buffer to reach the required level of 0.5 per cent, 1.5 per cent and 2 per cent respectively. It is also noteworthy to highlight that in

contrast to earlier FSRs, the CBM has not emphasised the importance for banks to maintain a prudent dividend policy, possibly in view of the close regulatory supervision to which banks are being subjected in this respect. In fact, national supervisory authorities can withhold dividend payments if banks do not meet their respective capital requirements and buffers.

Meanwhile, the latest FSR focuses on the lending trends within local core domestic banks. The CBM noted that during 2018 the growth in assets across core domestic banks was almost entirely driven by an increase in customer loans which, in turn, was mostly related to mortgages for resident households. As a result, by the end of 2018, mortgages accounted for 49.5 per cent of resident loans compared to 48.2 per cent in 2017. Likewise, in view of the buoyant local property market, the number of loans granted to the construction and real estate sector also increased albeit at a slower pace. Collectively, property-related loans accounted for around 63 per cent of all core domestic bank loans compared to just above 52 per cent in 2008. This concentration in sectoral lending has been highlighted by the CBM as one of the growing risks for local banks emanating from within the local financial system.

Given this growth in propertyrelated lending, possibly fuelled by the low interest rate scenario among other factors, the CBM undertook a special study on the trends in the local property market and related financing. The FSR notes that a well-functioning property market is important for economic and financial stability. The study indicates that, in view of the rising property prices, the monthly average repayments on propertyrelated loans have surged and surpassed the record levels seen in 2007. Furthermore, whilst the FSR acknowledges that ratios of property prices and average repayments to income have not increased as much, it also stated that there are increasing pockets of vulnerability. Particularly, the FSR explains that whilst the prevailing low interest scenario may act as an incentive for higher leverage, a less accommodative monetary policy stance in the future (considering that mortgages usually carry a very long repayment period) may accelerate debt servicing and credit risks especially in the local context whereby the majority of mortgage credit is granted at variable interest rates.

Nonetheless, the FSR states that the strong momentum in the local economy also led to a contraction in the level of non-per-

Rizzo, Farrugia & Co. (Stockbrokers) Ltd, “Rizzo Farrugia”, is a member of the Malta Stock Exchange and licensed by the Malta Financial Services Authority. This report has been prepared in accordance with legal requirements. It has not been disclosed to the company/s herein mentioned before its publication. It is based on public information only and is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. The author and other relevant persons may not trade in the securities to which this report relates (other than executing unsolicited client orders) until such time as the recipients of this report have had a reasonable opportunity to act thereon. Rizzo Farrugia, its directors, the author of this report, other employees or Rizzo Farrugia on behalf of its clients, have holdings in the securities herein mentioned and may at any time make purchases and/or sales in them as principal or agent, and may also have other business relationships with the company/s. Stock markets are volatile and subject to fluctuations which cannot be reasonably foreseen. Past performance is not necessarily indicative of future results. Neither Rizzo Farrugia, nor any of its directors or employees accept any liability for any loss or damage arising out of the use of all or any part thereof and no representation or warranty is provided in respect of the reliability of the information contained in this report. © 2019 Rizzo, Farrugia & Co. (Stockbrokers) Ltd. All rights reserved

forming loans particularly in the construction and real estate sector which now account for 33.2 per cent of total non-performing loans of core domestic banks compared to 36.2 per cent in 2017. Meanwhile, loan loss provisions increased during 2018 following the introduction of more cautious policy measures. The authorities also introduced other measures to ensure that local banks maintain a prudent approach to lending.

Overall, the FSR gives a positive view of the local banking sector on

the back of the economic growth being registered which is also mitigating the risks emanating from abroad. Nonetheless, all stakeholders must remain vigilant as vulnerabilities do exist, including jurisdictional reputation risks, whilst the local economy progresses through cycles that may also include less buoyant times in the future.

Christopher Mallia is the Head of Research and an Investment Advisor at Rizzo, Farrugia & Co (Stockbrokers) Limited

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New vPBX solution keeps your business always online Since your team, suppliers and clients are always on the move, your business should be too. You never want to miss any important calls and updates, so a smooth connection is essential, wherever you are. That’s where GO’s Virtual PBX comes in.

e Notch Conference Centre: a building which goes beyond your expectations Welcome to The Notch Conference Centre, a newly created space to host professional events; boost trade relations, business and networking; and act as a catalyst for knowledge. We have taken the expected to the surprising based on the philosophy that an event needs to be brought alive. Our role is to be our customers’ ally, sharing their vision and reinventing ourselves constantly to provide results that meet their expectations.

Our emblematic building is the perfect balance of beauty, functionality and versatility. Its spectacular façade and entrance are ideal for showcasing your event. The centre’s rooms and auditoria offer infinite versatility for all types of events, whatever their size.

The three-storey building features a foyer, reception area and a multipurpose conference room, seating 98 persons in theatre style on the ground floor, making it an ideal space for exhibitions or catering events. The conference room on the first floor can seat a total of 210 delegates, suitable for large meetings and opening or closing ceremonies with large audiences. The top floor offers a world of options and essential flexibility with our five break-out rooms, the perfect complement to your event. Transformable and functional space is created by using adjustable soundproof panels, allowing you to create as much space as needed.

Complement your event with the latest state of the art audio visual equipment and a dedicated highspeed internet connection. Raised adjustable flooring provides endless set-up options allowing you to fully control the configuration of your event. On-site parking is also available providing a complete hasslefree experience.

We invite you to come over to view our venues and facilities in order to help you picture your event.

For further information and to book your event contact our dedicated Sales Team on 2138 5926 or events@urbanvalleyresort.com. We will ensure your meetings and events run successfully, every time.

GO Business vPBX benefits If you have a GO vPBX and an internet connection, you have full access to your office. Not only is this reliable, but it’s also on the cloud. This means that no hardware is necessary, and with a “pay per seat” subscription, you get the flexibility to add or remove lines as your business

changes or grows. Meanwhile you will avoid time and costs associated with additional setups - thus freeing up resources to let your business grow.

Get that professional edge with extensive features like call forwarding, hunting groups, auto attendant and free internal calls between colleagues. You can easily get a cost-effective,

personalised vPBX Solution, which is especially handy if you’re an organisation looking to scale up operations or even just starting out.

Interested? Get in touch with us today for more information about GO’s vPBX solutions!

Email us on info@gobusiness.com.mt or visit www.go.com.mt/business/vpbx.

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October 31, 2019

BUSINESS UPDATES

Malta’s premier international business awards take place this month Twelve finalists will be competing in the 2019 Malta International Business Awards (MIBA), taking place on the 22nd November.

Malta’s premier international business awards, created by TradeMalta with the strategic support of HSBC Malta, will award businesses across a range of categories. These are: Exporter of the Year in Small, Medium, Large, and Emerging Markets; Innovation Exporter of the Year; High Potential Exporter of the Year; Online Exporter; and Overall Exporter of the Year.

The twelve finalists, some of whom have been shortlisted across a number of categories are: Stargate Studios Malta; Hand-

sOn Systems; Strand Palace Agencies; AquaBioTech Group; Mediterranean Ceramics; Loqus Group; Pet Nutrition House; FreeHour; Thought3D; DC Aviation; Avifilm Export Corporation; and PT Matic Environmental Services.

The 2019 Malta International Business Awards also enjoy the endorsement of the Ministry for Foreign Affairs and Trade Promotion, the sponsorship of audit firm Grant Thornton and Emirates Airline, and the partnership of marketing and communications firm BPC International Ltd, as well as the architectural signing company Big Exhibits.

Passengers travelling internationally with Turkish Airlines discover Istanbul with the Touristanbul project Flying to 126 countries around the world, with its base at the intersection of Asia and Europe, Turkish Airlines continues to introduce Istanbul to its passengers with exceptional services. Touristanbul, the complimentary city tour of the flag carrier for its international transit passengers, offers a wonderful Istanbul experience for those who use Istanbul as the transfer location.

Thanks to the complimentary city tours of Turkish Airlines, available to those passengers who have a con-

nection time of between six and 24 hours, travellers have the chance to get familiar with Istanbul’s history and cultural values. Picked up at Istanbul Airport by the Touristanbul vehicle, passengers are returned to the airport for their flights after the tour of the city is complete. The tourists are accompanied by a guide.

With six different programmes every day - 365 days of the year 67,416 transit passengers discovered different parts of Istanbul in 2018. The goal for 2019 is 80,000 passengers.

Palaces and museums draw great interest Flying to the most countries in the world, Turkish Airlines prepares its Touristanbul programme with its flight plan in mind. With six different tours organized every day, passengers can attend the one most suited to their flights.

Cultural landmarks such as the Blue Mosque, Hagia Sophia, Topkapı Palace and Caferağa Medresseh draw great interest from the passengers.

e Malta Business OBSERVER |

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October 31, 2019

BUSINESS UPDATES

Don’t gamble with your regulatory responsibilities Is problem gambling becoming something of a public health emergency? This is the question on everyone’s mind in the iGaming industry, and, to be completely frank, we need to take it seriously. Improved player protection measures and quicker, more effective detection of addictive behaviour patterns is at the very top of the priority list, with tighter regulation surrounding anti-money laundering (AML) measures also at the centre of the discussion globally.

The biggest industry names are sitting up and paying attention to these new regulatory demands, investing significant resources and their budget in a bid to, not only meet these challenges headon, but surpass expectations to boot. The issue remains, however, that changes to gaming regulations are coming up hard and fast, with most industry players struggling to keep up.

Finding the balance between compliance and customer experience So, the real question is, are your systems robust, yet agile enough, to keep up with these regulatory changes? How will this impact your most loyal customers and VIPs? Industry leaders do place a premium on compliance, but they must also meet and anticipate changes without compromising on customer experience. iGaming companies need to maintain a compliant, frictionless, efficient experience for their genuine players, but actually getting there using a manual approach or legacy system in this dynamic regulatory environment is becoming more difficult every day. Futureproofing your business is more important than ever before, so try and invest in the latest technology early on in the game.

First, up the ante and identify at-risk players ASAP with behav-

ioural monitoring. You’ll be able to provide support earlier on, and when it comes to anti-money laundering measures, it’ll allow you to detect suspicious behavioural patterns at a granular level.

Next, look at ways to effectively leverage technology to drive transformation and meet the ever-changing industry demands. You may need to overhaul your legacy systems first, but there are a whole host of modern

solutions available to keep you ahead of the game.

Work smarter with automated transaction monitoring ComplyRadar utilises a full riskbased approach to eliminate disruption to genuine customers, detect potential criminal or problematic behaviour, and demonstrate full ongoing compliance. It sends you notifications on the transactions that matter and enables you to automat-

ically apply a full-pattern analysis to instantly see suspicious transactions in real time. You can then manage flagged transactions through a comprehensive, fully audited review process leading to the closing of a case. For more information on how ComplyRadar can help you maintain the right balance between stringent regulation and excellent customer experience, visit www.comply-radar.com or email info@computimesoftware.com.