Between the grey and the white

Since Malta was removed from the Financial Action Task Force greylist, the nation has grappled with the enduring trauma and fear of returning to financial isolation. Manuel Delia investigates how the changes in regulation and oversight have reshaped industries, often with severe consequences for smaller businesses and charities.

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It's been longer since we've been taken off the Financial Action Task Force grey list than the time we've spent on it. The trauma has not passed. The fear of being sent back to solitary will probably never go away.

The experience changed the nation in some ways. The way smaller intermediaries and professionals started to be supervised after we got on the grey list has forced many of them out of that line of work. Smaller businesses or self-employed professionals simply cannot afford the time and money they need to spend on the administrative infrastructure to prove—not that they did not help customers launder money—but rather that they are set up to prevent a customer from laundering money even if they wanted to.

For many of these people, small-time financial services had become a chunk of their income. It was not enough to cover the costs required to provide the services properly, nor was it enough to cover the risk of hefty fines they would need to pay after a meticulous inspection revealed missing paperwork.

You know, that's fine. When we started insisting that butchers must chill their meat unless they're selling it immediately, some small-time butchers had to change profession because they could not afford to have shops. Sad for them. Better for us to keep salmonella at bay.

It's not all fine, though. Regulation and oversight have some unsavoury consequences, which are so burdensome, intrusive, and risky that some things are just not worth doing anymore. Setting up a voluntary organisation has become a veritable nightmare. Professionals have taken themselves out of the business of drawing statutes and registering new NGOs in full compliance with the law. Setting up foundations has become harder than building rockets.

You can see why. The legal vehicle of "NGO" has been systemically abused, particularly by non-residents, to set up complicated legal structures not intended for the betterment of society and the protection of the vulnerable but to help tax dodgers do their thing. Reducing the options for the tax dodgers, the money launderers, the drug lords, and the arms traffickers, is devoutly to be wished. We haven't yet entirely found a way of not closing the door on genuine charities, though.

A new charity will sweat blood just to get a bank account. There's no regard to how small it is and how little the money it expects to handle. The scrutiny that is designed to prevent cocaine millions from sleeping snugly at a high street branch is unleashed on the most minor association. Or the smallest business, for that matter. It remains brutal and, for some, virtually impossible to access the simple and necessary service of a checking account.

It's not just about the small and perfectly innocent, though. Post-greylisting, the FIAU put its boxing gloves on and slapped substantial fines on operators who failed to comply with the rules. In the last available annual report of the FIAU (2022, halfway through which year we graduated out of greylisting), nearly €3 million in administrative penalties were handed down.

"The determination and competence of the police to investigate money laundering remains questionable."

The same report, however, demonstrates an opposite trend. Decisions by the FIAU were challenged 24 times. In 18 of those cases, the penalties handed down by the agency were reduced or revoked altogether. From nearly €5 million in fines, just over €4 million were cancelled.

The problematic fines are the big ones. Indeed, most fines handed down by the FIAU are paid without much fuss. Of 579 fines imposed, only 61 were appealed: that's about 11%. However, those 11% of the fines amount to 74% of the value of the fines issued.

I remind you, these are 2022 figures. Anecdotally, we know from court reports that the problem has not gone away. The courts disagree with the FIAU that a fine of several hundreds of thousands of euros can be timidly termed an "administrative penalty". Instead, the courts think being fined money is like being sent to prison. It is a criminal punishment.

Faceless bureaucrats cannot hand down criminal punishments. Many of us would be in prison if it worked that way. Instead, prosecutors must prove their case in front of an independent court while the accused get the opportunity to defend themselves. That's not what happens with FIAU fines. There's no – let's call it – due process. It's a problem we haven't solved. And at this rate, contempt for the process is setting in. The FIAU hands down a six-figure fine that makes the headlines, but we know it to be purely symbolic because we know the courts will quash it from the outset.

As a result, lawbreakers have a guaranteed (and low) cap on their possible liability when caught doing the wrong thing. That's contempt. However, the FIAU, in turn, shows contempt for the court's rulings as well. Not a good look.

There has been an interesting development in this space. The FIAU is not just challenging service providers and professionals. Prosecutors also pursue them in criminal court together with their clients, whom prosecutors believe to have committed acts of fraud and money laundering.

Consider the Vitals case brought against Joseph Muscat, many of his colleagues, and Vitals and Steward officials who have allegedly bribed him. Interestingly, the lawyers, accountants, and auditors who handled the money were also in the dock. The case is ongoing, and all concerned deny any wrongdoing. However, the professions in which they work are watching this closely.

Rewind to before the Vitals case started. The data on enforcement we have is from 2022. That year, we saw record-breaking reporting, prosecution, and fines. It was the year we needed to convince the FATF to get us off the greylist. It worked.

"Lawbreakers have a guaranteed (and low) cap on their possible liability when caught doing the wrong thing."

What has happened since? Have we kept up the momentum? The 2023 annual report of the FIAU is due later this year. It should answer questions about numbers. Less so, questions about the quality of the action taken. Are we chasing money laundering in the right places? Are we clamping down on corruption and organised crime? Is this working?

Consider assets recovered from crime. The last available data from the Asset Recovery Bureau is also from 2022. That was a record year for the value of assets seized or frozen: €51.5 million compared with just €1.2 million two years earlier. Look closely at that number, though. It's pathetically small. It does not distinguish between assets that are temporarily seized pending conviction and the assets that are irrevocably confiscated after it. There's good reason to believe a good chunk is temporary.

Since that 2022 report, the law on asset freezes has been changed, radically reducing the scope of seizures. The Vitals case is challenging the seizures ordered on the assets of the accused, leveraging the doubts left by the new law. Defendants argue that the new law forces prosecutors to prove that the assets they ask to hold have come from the crimes they are alleging. That's going to be complicated.

Though our greylisting trauma has changed some things, some things have remained the same. The determination and the competence of the police to investigate money laundering remains questionable, especially if there's a chance that the corruption of politicians is involved. Then they just won't touch it. The quality of prosecution is also in doubt. There are, of course, competent staff at the Attorney General's office. However, they lack experience and resources, and the loyalty of the chief prosecutor to the fight against crime is, at best, hazy.

Judicial resources are also poor. Judges are stretched and overworked and spread across varied tasks. Trials are left pending for years, more than 10 in many cases. The officially watertight preservation of evidence is full of holes. Over and above that, in crimes involving politicians, judicial independence is under constant attack by the intrusion of executive overreach, if not blanket intimidation.

Knowing this present and how similar it is in many ways to that distant past before greylisting, what is the future for our financial services industry? How long can we pass these weaknesses as the purity of the whiteness of our enforcement?

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