Our vision beyond March 2021 ushers a new dawn

Reading through the supplementary estimates in the 2021 budget proposals, one discovers how the pandemic has adversely affected our economy.

To start with, state expenditure increased by more than 12% during this period, as can be expected due to the increase in health-related expenses and payment of the first and subsequent tranches of COVID-19 supportive measures. This has increased public debt which is expected to reach 58.2% by end of 2020 or about €6.6 billion. Many would agree that such borrowing (especially from internal sources) is a necessary evil during a pandemic and helps to balance the drop of State revenue generation from a number of sectors. But it is not all doom and gloom since a host of positive aspects have arisen out of the misery imposed by the pandemic and one of these is that finally government is to launch Green Bonds by the Malta Stock Exchange.

These bonds shall facilitate the financing of projects which promote renewable energy and clean air solutions. Another casualty that hit us concerned the much hyped tourism sector. Experts concur it will never return to the pre-Covid-19 heights. This is a prophetic revelation that pushes us to overhaul the “cheap visitor” policy of quantity advocated by MTA.

The resulting crisis situation now calls for surgery not palliatives. Just paying wage supplements to hotels up to next March, which are practically closed for business is a stop-gap measure.

Ideally, an SPV will be created financed jointly with hotel owners and the State with sufficient funds to pull down under-performing assets and rebuild such plots with landscaped gardens and/or public highrise car parks. The rest of upmarket hotels will be upgraded to meet future demand from quality tourists. Naturally over the next decade there will be a focus on making the tourism industry a net zero carbon neutral sector. Apart from the drop in revenue from tourists (last year €2.2 billion) there was the forced closure of all but essential retail activity which resulted in a decrease of 28.8% in clothing and footwear and an 8.5% drop in expenditure on furnishings and household appliances during the first half of 2020.

All this, saw a decline in total Gross Value Added (GVA) in nominal terms of 5.2 per cent when compared to the same period in 2019. The decline in GVA was predominantly in the services sector and was driven primarily by the Wholesale and Retail Trade, Accommodation and Food services sector. Quoting the Supplementary Estimates, one reads how the main sectors which contributed to the drop in growth rate include the Manufacture of Textiles, Wearing Apparel and Leather Products, which recorded a decline of 24.1 per cent, while the Manufacture of Rubber, Plastic Products and Other Non-Metallic Mineral Products recorded a downturn of 8.7 per cent.

The next skeleton in the cupboard is the reputation of Malta as a financial services domicile which has been tarnished and negatively mentioned in reports by the Council of Europe, Venice Commission, GRECO and Moneyval. This has resulted in a knee jerk reaction by the main regulators such as MFSA, FIAU, Police, MBR, and others. The onset of the 4th and 5th Anti Money Laundering rules has jolted practitioners to rev up their compliance teams to meet the higher obligations (irrespective of their size and complexity).

This resulted in a sudden ratcheting of the screws by the regulators which some attribute to be the result of MoneyVal recommendations in its latest observations. For example, what used to be a friendly albeit overworked depository of company documents (ROC) has now morphed into a regulator in its own merits. MBR launching a new IT platform – block chain system – permitting all filings to be online such as setting up a company etc all via drop down menus.

The Moneyval spotlight gave a new approach to which MBR has to respond thus introducing friction with desk officers giving different feedback/accepting different kyc - efficiency consistency and a proportionate approach as goal. Most practitioners have by now experienced an increase in inspections, sanctions and fines. There is a feeling that the rank and file is unfairly carrying the blame caused in the past by some of the bigger operators such as the Big 4 audit and larger law firms. The attraction of bad apples such as Pilatus, Sata, Nemea banks, BOV- La Valette fund, VHL Health Care, Settanta Insurance, Falcon Funds, Price Club, ITS land valuation, Electrogas shaky structure, AUM land for University deal, the Premier Café, sale of Leovembrau factory among others, were certainly not the brain child of medium-tier corporate service providers (CSP). Rumour mill has it that MFSA have really stepped it up to tighten inspections and now appointed a head of AML to carry out AML supervisory units on all CSPs with a particular focus. There has been a drive to place the onus of filtering all new FDI investment on the shoulders of CSPs and this led to lifting the bar, by way of amendments to the CSP act plus a new code of conduct. To top it up, next comes a restructured FIAU, which in the past was heavily criticised for leaking to the media a number of confidential files on top investigations. Recently refinanced and with a much stronger team of experts, this enabled FIAU to launch a new set of Implementing Procedures for CSPs – expected to become in force by the end of the year. Many practitioners and CSPs have complained to IFSP about an imposition of the hefty fines and sanctions from FIAU/MFSA resulting from minor contraventions ostentatiously labeled as “serious breaches”. Such punitive fines seem out of kilter.

Is somebody cracking the whip following the chastisement from MoneyVal’s critical regulation of subject persons in the past? It seems that collectively Malta got rapped on the knuckles saying our fines are not being dissuasive enough. On the contrary, these have been in place since 2018 with 4th AMLD but regulators were accused of acting too late in transposing them. So now, the school master is hitting perceived truant school children with a tall stick.

Linked to the severe post-Covid drop in the financial services business, one expects that remedial action by regulators has to be proportionate. We cannot lose the babe with the bath water by focusing only on the short term horizon to March 2021, when the MoneyVal verdict will be out.