Moneyval, pandemic and ostriches

Few can omit to notice the Damocles sword hanging over our heads due to the upcoming Moneyval report next year.

It is a challenge for which MFSA has quickly dug up the trenches and steadied the fort ramparts against a foe that may at a worst case scenario, greylist our financial services domicile.

What is Moneyval? It is an institution, which assesses member states’ compliance in the legal, financial and law enforcement sectors through a peer review process of mutual evaluations. The peer review system that has been adopted is based on the FATF model, though the process is undertaken against a more extensive set of antimoney laundering standards, including the FATF Recommendations, the EU’s Fourth and Fifth Money Laundering Directive, as well as the 1998 UN and 1990 Council of Europe conventions. The latest Moneyval report on Malta, which was published in July 2019, was generally negative.

In fact, Malta was rated as “low” or “moderate” in nine of 11 areas under review with supervision, prosecution and confiscation being areas of particular weaknesses. These findings meant that fundamental or major improvements were required across the board. Moneyval will now finally assess Malta’s efforts and give its verdict to the global body, the Financial Action Task Force, which fights money laundering and the financing of terrorism. Sources said the FATF will be taking a hard look at the police as well as the main regulators.

A report was compiled and forwarded to the Council of Europe’s experts on 5 October and assesses the legislative changes implemented by Malta after an assessment of its anti-money laundering regime. A team of experts from the FATF will visit Malta between December and early 2021, for a final assessment on whether Malta is to be put on a list of untrustworthy financial jurisdictions.

What is so different now since the last inspection which occurred in 2012/3? The obvious answer is that following the PANA reports and the Pilatus bank closure (among others) one may expect a deeper look by Moneyval. In its previous inspection, Moneyval had noted that the number of onsite visits and volume of prosecutions was low. In addition, it was a smart move for government to conduct a national risk assessment to identify risky areas for ML/FT. Anything short of its recommendations will give rise to concerns with regard to the effective implementation of risk based supervisory activity. Due to such observations and other factors, these led the MFSA to instigate reforms starting with a consultation exercise among practitioners and industry at large which was carried out last year.

Quoting Richard Daynes, a legal advisor with the US embassy in Malta, during a webinar hosted by ACAMS Malta chapter, he did not sound very convinced of a positive verdict. Last June, Daynes told attendees of the webinar that Malta still had a lot to accomplish. In his words: “Unless something happens very quickly, the likelihood of greylisting is going to happen and it could really be disastrous for Malta.”

However, the prime minister speaking at a conference organised by the Chamber of Commerce, felt sure that Malta will pass the test. This may be fortuitous and one hopes that enough good marks are garnered from a number of reforms implemented since the last Moneyval inspection. One hopes that in the short time left, this is doable and that the combined efforts of the MFSA and the FIAU will help clean the stables and lock in the horses.

The authorities have conducted a National Risk Assessment (NRA) to identify our highest threats and vulnerabilities, as well as a gap assessment to identify those areas in our institutional framework which may need improvement.

This is a comprehensive exercise that covers all key elements of our national framework: from supervision and intelligence gathering to investigation to prosecution and confiscation. In the meantime, this article is advocating that ideally the MFSA is split into two authorities – one harnessing the prudential regulatory function and another entity having separate management to oversee the financial conduct of regulated bodies. Another reform is to distance the MFSA from the strings of Castille, which currently appoints the CEO and the members on the supervisory board. Having all the eggs in one basket comes at a price.

Just consider the onerous responsibility the MFSA has for the direct supervision of all regulated firms (including banks, funds, trusts, Crypto currency, Fintech, listing of companies, insurance and Sicavs). This includes both prudential and conduct of business purposes and, at the same time, carries an onerous duty to take remedial and timely enforcement action against firms wherever it identifies regulatory failures.

Such a restructuring has its advantages since it extends power to make judgments over whether banks or listed funds or financial products pose a risk to financial stability or are likely to cause detriment to consumers. For example, the UK, previously had a single regulator − the so-called FSA.

The monolithic structure was unceremoniously split into two entities: the Prudential Regulatory Authority (PRA) and the Financial Service Authority was rebranded as the Financial Conduct Authority (FCA) with three areas of responsibility. The first duty is the conduct of business supervision of banks, insurers and major investment firms followed by prudential and conduct of business and markets supervision of all regulated firms not falling within the remit of the PRA, and finally the enforcement process. It will subject banks, insurers and major investment firms to separate regulation for prudential and conduct purposes. The socalled “twin peaks” model which creates two supervisors for regulated business has its merits and helps avoid past mistakes in supervision.

Allow me now to change subject and visit the hot topic of the pandemic, which seems to get more prolific. Currently Malta has the highest rate of cases per thousand in Europe. This has put additional strain on medical front liners and the limited number of beds at the ITU has been quickly booked by deserving COVID patients. The mantra by doctors to all is social distancing and use of face masks. The term “social distancing” refers to efforts that aim, through a variety of means, to decrease or interrupt transmission of COVID-19 in a population by minimising physical contact between potentially infected individuals and healthy individuals or between population groups with high rates of transmission and population groups with no or a low level of transmission.

Doctors’ unions are feeling the strain and recently exclaimed that with daily numbers rising in the hundreds, the Prime Minister cannot behave like an ostrich with its head in the sand and state that it is business as usual, while deaths continue to occur from COVID every day. On their part, our health authorities are doing a sterling job and are not sinking their heads in the sand but bravely facing the additional and thankless burden of an unrelenting pandemic. Let us all support and bless their efforts.