Evaluating Malta’s economic revival

Author: George Mangion
Published on Business Today 2nd May 2019

With only a few weeks to go for the European and local council elections, the government is doing its best to showcase its economic performance.

The Central Bank of Malta report lauds the administration for its stellar performance and provides statistics to back this assertion.

It’s main line of contention is the achievement of a modest surplus which has surfaced in the past three years compared with chronic deficits in the previous 30 years.

This surplus peaked in 2017 at €387.2 and has slowed down to €250.8 in 2018. The surplus is calculated as the difference between total revenue €4,783.2 million and expenditure €4,532.4 million of General Government.

One may laud the administration in its policy of fiscal control which over the past six years has seen debt as a share of gross domestic product continue to decline. This peaked at 72% in 2012 and has now eased to 46%.

One needs to explain that according to the Maastricht Treaty, the gross nominal consolidated debt should not exceed 60% of GDP otherwise an excessive deficit mechanism status will be triggered and laggards have to suffer punitive fines until the situation is regularised.

In September 2018, the stock of general government debt amounted to €5,512.0 million, down by €234.8 million when compared with June 2018. This was largely due to a €233.1 million decrease in the stock of long-term securities.

Comparing 2018 over 2017, total revenue increased by €353.8 million, while total expenditure increased by €490.2 million. One notes that the decrease in general government debt was more pronounced than the surplus recorded in 2018 which as stated earlier had decreased from the record level achieved in 2017.

In order to arrive at the General Government sector’s positive balance for 2018, adjustments are made to the balance of the Government’s Consolidated Fund which in fact registered a deficit of €70.2 million – a decrease over the surplus of €182.7 million recorded in 2017.

One can explain this situation as follows.

This positive change is attributed to the accrual basis of accounting demanded under the Brussels rule, in which case accounting for the full proceeds (not the statutory 30% portion) from Investment and Passport scheme.

Obviously, this is a contributing factor which one expects to be of a temporary nature given the constant pressure from the Opposition to stop it.

Having briefly visited the salient economic achievements of our economy, one may ask how this growth compares with other countries which have also leaped ahead of the curve.

The first champion in the group of ex-Communist countries is Poland. It is the 8th biggest economy in the European Union. The country’s industrial base combines coal, textile, chemical, machinery, iron, and steel sectors and has expanded more recently to include fertilisers, petrochemicals, machine tools, electrical machinery, electronics, cars and shipbuilding.

Since 1989, it has increased its GDP per capita by almost 150%, more than any other country on the continent. Since 1995, it has also become the fastest-growing large economy in the world beating even the Asian tigers such as South Korea, Singapore and Taiwan.

Poland’s ongoing GDP growth performance is reaching 5% in 2018 and a projected 3.5-4% growth in 2019 and 2020. Other economic athletes are Czechia and Slovakia. These pose an unsmiling challenge to Malta’s own performance.

In fact, only 1.5% of young employed Czechs and 3.8% of young employed Slovaks were at risk of poverty in 2017.  In the Czechia, the at-risk-of-poverty rate among young employed people reached a peak of 5.2% in 2012, and the following year in Slovakia (6.1%).  As of January 2019, the unemployment rate in the Czechia was the lowest in the EU at 1.9%.

This compares with the rate in Malta of 3.5% in the fourth quarter of 2018.  One is surprised to read that Norway’s unemployment rate matches that of Malta at 3.8% but hit a record low of 2.4% in 2007.

An Asian champion is Singapore. This country is reputed to thrive on latest innovation and regularly funds start-ups and its SME’s to reach higher rates of economic success. It is no exaggeration, that its stellar growth is the envy of many EU countries and Malta could do well to learn some lessons from its commercial acumen.

Singapore’s seasonally adjusted unemployment rate stood at 2.2% in the first quarter 2019. It remained the highest jobless rate since the second quarter of 2017, amid signs of external economic headwinds and uncertainties in 2019.

Moving on, we meet the success of Japan where its jobless rate increased to 2.5% in March 2019 from a five-month low of 2.3%.

Having seen the picture of economic successes registered by competing countries, one cannot rest on our laurels even though it appears that Malta has started the righteous path to a stable recovery.

Our industry is still suffering from low technology and the country needs to double its contribution towards innovation and training of its workers to meet the exigencies of the so-called 4th industrial revolution.  Having said that, one lauds the government’s debt strategy. This ensures that the financing needs of the public sector are met at the lowest possible costs and that its debt service payment obligations are met in a timely manner.

The other positive aspect is that the debt levels (mostly local government stocks and bonds) remain sustainable while simultaneously minimising interest rate risk.

The cost of servicing debt is gradually diminishing yet one cannot overlook the fact that there is no sinking fund to repay such bonds. Reducing debt by a primary surplus, depends solely on the turnout of higher exports and the continued flow of proceeds from the IIP scheme. Quoting the Central Bank reports, it states that both components are expected to mitigate the upward pressure that interest expenditure once the build-up of debt recedes.

One appreciates the pressure on government to think out of the box in order to maintain economic growth and achieve its social responsibility to improve the well-being of citizens. More funding is needed to provide affordable social houses given the recent meteoric rise of property prices (this exceeds that of Hong Kong) and government aid to address the creeping cost of living for the low-income groups and pensioners.

Otherwise, the isle of milk and honey can aspire to move forward to meet its quest in reaching the top position as one of the gifted economic achievers.


George Mangion

Author: George Mangion
Published on Business Today 2nd May 2019
Get in touch: info@pkfmalta.com | +356 21 493 041

Pushing our fate with Greco, Moneyval, IMF and Venice Commission reports

Author: George Mangion
Published on Business Today 11th April 2019

A dark cloud floats over the island. One may blame climate change and hope it will pass away to let in the sunshine. Realistically, we know that living in hope is a chancy habit so let us collectively take the bull by the horns and start analysing the above-mentioned reports issued by international institutions.

Why did they hit us this year as if the administration does not merit some reprieve given that the economy has manifested an exemplary performance? For some time, since the Pilatus bank saga, one reads about critics pointing to a reform of FIAU and MFSA.

It is true that EU countries have not escaped the incidence of financial scandals such as the Russian monies laundered through Danske bank with a number of branches in Estonia, yet in Malta practitioners pride themselves that the regulatory net has always been effective to keep out the bad wolf.

Recent reports such as Greco, Moneyval (still in the interim stages) the IMF and the Venice Commission have tightened the noose on the administration to stem the leaks. While as a country our demeanours are spotted and sometimes over-amplified in Brussels, yet one must admit that the closure of three local banks last year has taken its toll on public opinion.

Practitioners are still feeling the cold blast of negative publicity. Moving on, femme fatale was the passport scheme. This was criticised at European level where media sources reported on the adverse comments by the Chairman of the PANA Committee who claimed that the IIP should be stopped.

Last year, the European Commission was reported stating that passport buyers must have a clear and permanent link to host countries. But the prime minister, showered positive comments on the IIP scheme whenever he was addressing delegates at various global events organised by the sole concessionaire – Henley & Partners.

He proudly announced the due diligence structure as administered by the government to classify as the gold standard. More comfort was showered by the General Counsel for Thomson Reuters attesting that the scheme is a textbook example of how to conduct effective and reliable due diligence.

Today, there are approximately a hundred countries offering investment migration programmes. Quoting Bruno Lecuyer chief executive of Investment Migration Council, he reminds critics of investment migration schemes that IMC has been diligent in establishing a code of ethics and professional standards for its members.

An initiative was launched four years ago to create a culture of professional excellence and some governments (Malta included) are also taking it onboard. Yet the excitement for the finance minister does not stop here since the recent publication of the IMF report has tinged some raw nerves. The report goes to recommend a number of steps to help ensure a sustained future growth.

Among such recommendations, one finds the standard advice urging government to improve support to start-ups. These are finding access to credit being hindered by red tape and the perennial demand by banks for tangible collateral. Equally important, is the need to improve training of the labour force to be able to attract more international companies to Malta.

Perhaps, an ideal way to improve the quality of the local talent is by setting up an innovation hub of international repute supported by venture capital. One cannot omit to caution against the breakneck speed that gripped the imagination of construction and property developers with an unprecedented increase of 24% in property prices.

Top estate agents never had it so good with some employing over 400 full-time property negotiators on generous commission basis. Naturally, when a property mismatch occurs this always leads to a bust – and without exception politicians rushed cap in hand to IMF. To mitigate this potential calamity happening in Malta, the IMF report notes that while local banks are adequately capitalised yet it calls for more prudence in lending and a programmed reduction in non-performing loans.

Again, it recommends an extra effort by government agencies to cut red tape and effectively support start-ups. The culture concerning the adulation of mega business appears grand on the political bandwagon yet it pays to create a culture that small can also be beautiful. Another topic, in the IMF report is the need for more social housing. There is a waiting list of 3,500 families seeking decent habitation.

This human malady is partly caused by the onset of gentrification which forces house prices to escalate. It is no surprise, that low-income workers cannot afford the rents on offer. For vulnerable households, the IMF recommends more rent subsidies granted by the State to deserving families and the acceleration of investment in affordable accommodation by Housing Authority.

Sadly, it does not rain, it pours and last week saw the publication of the Council of Europe’s Group of States against Corruption (GRECO). This is an evaluation based on an expert assessment of local institutions and the measurement of their effectiveness concluded last October 2018. Some comments are not entirely salubrious. While progress was made on a reform of a number of institutions yet the experts did not mince words saying inter alia that Malta “clearly lacks an overall strategy and coherent risk-based approach when it comes to integrity standards for government officials”.

Furthermore, the Greco report stated that “a system of sanctions is also clearly lacking” adding in their opinion that the criminal justice system was at risk of paralysis and that a redistribution of responsibilities between the Attorney General’s Office, the Police and the inquiring magistrates was required to avoid this situation.

The fly in the ointment was the remark that “certain institutions have also turned out to have no real added value after 30 years of existence, such as the Permanent Commission against Corruption”.

On a positive note, it reported that for a country of Malta’s size, it had an “impressive arsenal of public institutions involved in checks and balance”. Another smart move was the appointment last year of Dr George Hyzler as a Commissioner responsible for Standards in Public Office. Party apologists point that most of the recommendations by GRECO are on the same lines of the Venice Commission’s opinion and that weaknesses are already being addressed.

This can be seen on the action taken by the Tax Compliance Unit since the publication of Panama Papers in 2016/7 to try recovering taxes on undeclared earnings in tax havens.

This exercise yielded a princely sum of €9 million involving the audit of 237 taxpayers.

In conclusion, not everything is doom and gloom and one must congratulate government for creating financial stability, a reduction in public debt, a remarkable 6.5% increase in GDP, jobs for all, a community where 80% are property owners and instilling a general feel-good factor.

George Mangion

Author: George Mangion
Published on Business Today 11th April 2019
Get in touch: info@pkfmalta.com | +356 21 493 041

Malta in a race to catch up on renewable energy

Author: George Mangion
Published on Business Today 4th April 2019

Can we be sure that the constant barrage in the media to combat climate change is not another hoax like the millennium bug?

Tree huggers tell us climate change is a process which may be caused by a number of factors including natural, but it can include geologic, oceanographic and atmospheric events.

It does not exclude human-induced factors. One can generalise that a common cause for high emission of greenhouse gases results through human processes such as burning of fossil fuels.

There exists an undeniable fact pointing to the increase in carbon dioxide concentrations and other greenhouse gases, such as methane and nitrous oxide caused by daily activities – mainly due to the explosion in car ownership, more travel by sea and air, not to forget emissions from heavy industry.

Reliable sources tell us there is undeniable evidence pointing to the fact that carbon dioxide is on the increase during the past two decades.

Readers may expect this is another article extolling the benefits of clean air resulting from the ideal solution costing millions of efficient plants generating Green energy.

The truth is not many governments shed tears for the lack of success in reducing national carbon footprint which undoubtedly is contributing to climate change. Between 1990 and 2007, we have seen greenhouse gas emissions increase by almost 50%.

It’s time to start reducing such emissions in order to mitigate the effect of climate change but it is unreasonable to expect that governments get focused in this quest and dig deep into their pockets to reduce the impact of climate change.

There have been various conferences and press releases by the EU extolling the benefits of renewable energy systems and directives were proposed by committees in Brussels to propose ambitious goals for Member States to step up their investment in Green energy.

The original holy grail was that by 2020, the EU would seek to obtain 20% of its total energy consumption requirements with renewable energy sources.

As a definition renewable energy includes wind, solar, hydro-electric and tidal power as well as geothermal energy and biomass and from studies published by the EU one notes that Germany leads the pack as a country which has invested the highest amount in this sector claiming to be the world’s first major renewable energy economy (in 2010, investments total 26 billion euros).

According to official figures, some 370,000 people in Germany were employed in the renewable energy sector in 2010, and it is no surprise to discover that most companies benefiting from this sector are small and medium sized companies. Certainly, concentrations of carbon dioxide in the Mediterranean have increased along with the atmospheric distortion which is giving us colder winters and higher humidity in summers.

Evidence shows that the increase in carbon dioxide concentrations is human induced and is predominantly a result of fossil fuel burning. It is a fact that greenhouse gases when controlled can serve a useful purpose that is to absorb infrared radiation from the Sun and re-emit it in all directions.

This natural greenhouse effect, resulting in creation of water vapour and carbon dioxide functions like a shield to protect the Earth surface from harmful sun rays. Pierce the shield and the surface temperature would be intolerable.

There’s also the problem of a gradual rise in sea levels.  It is estimated that over this century, we will encounter sea-level rise of between 0.18 and 0.69m. In the case of Malta, this is of some concern due to the east coast which will be particularly hit, especially low areas such as Sliema, Gżira and Msida, among others.  It goes without saying that a sudden sea-level rise will particularly impact our economy. The plus side of climate change is our geographical location.

Malta enjoys good exposure to rays of the sun yet it has not succeeded to increase production of electricity from use of photovoltaic panels to the 10% EU threshold. One may observe that awareness in Malta of the benefits of using such technology has improved since the arrival of the Shanghai Electric with its substantial investment in Enemalta.  It converted the BWSC plant to run on LNG. The foreign investment in Electrogas generating plant now running on LNG is also a blessing.

Sadly, Malta has so far been a laggard in solar energy generation, albeit positive steps have been taken to subsidize PV installations for home use.

Why is PV technology so effective? The answer is because a solar cell is the elementary building block of the photovoltaic technology. Recently, research in PV technology has been making giant steps by testing new prototypes made of semiconductor materials, such as silicon which due to their properties makes them highly conductive and in turn scientists are discovering ingenious ways how to capture the energy of the sun and convert it in electricity through an inverter.

Simply fitting more panels on rooftops looks easy but the demographic and geographic characteristics of the island create issues of spatial planning, given that space is limited and it is densely populated. But, it is not all doom and gloom.

Having started from zero in 1995 there has been a huge leap in the number of rooftop installations to date. Official statistics indicate that PV has grown at an average yearly rate of 35% from 1995 to 2005 (1,8 kW to 40 kW) and of 63% between 2005 and 2010. Ask any architect and he will point out that spatial planning is hindered by the limitation to open areas where to fit extensive renewable energy systems (RES).

These often clash with other planning needs and for this reason large-scale RES installations are not practical in Malta.
In conclusion, can the environment minister succeed to catch up for lost time, in the race for renewable energy – and succeed to win the coveted trophy.

To achieve this, we must produce 20% of total energy sourced from non-fossil fuels by next year – one can compare this to the quest of Joshua in ancient biblical times.

It was impossible for Joshua to penetrate the fortified walls of Jericho without the help of troops shouting and loud blowing of their horns.

George Mangion

Author: George Mangion
Published on Business Today 4th April 2019
Get in touch: info@pkfmalta.com | +356 21 493 041

Online gaming in Germany – a legal minefield

Author: George Mangion
Published on Business Today 1st April 2019

One thing I can tell readers is that online gambling is popular in Germany. More importantly, not a single German has ever got in trouble by placing a bet over the internet.

Having said that, Germany is one of those places where it’s definitely illegal to host a gaming site, but the legality of just placing bets online is uncl ear. Legal battles in Germany mostly revolve around the right of operators to offer their services to the public.

The difficulty in discussing the German market is that the laws have experienced a great deal of turbulence in recent times. Adding to the confusion is the ability of each state to regulate gambling how it sees fit. Many will tell you that Germany has a mix of wide-reaching national laws regulated by more limited state laws.

Up until 2008, online gambling was unregulated in Germany. As can be expected, the laws previous to 2008, didn’t address the internet in any way. Things changed when the Interstate Treaty on Gambling was passed in 2008. This effectively banned all forms of online gambling other than sports betting and horse racing offered by state-owned monopolies.

As can be seen in this article, some forms of betting are allowed in some states while most others are banned. It was more than six years ago that I travelled to the German state of Schleswig-Holstein where at an impromptu organised conference, I enjoyed listening to a debate by experts on the topic of online licenses that were planned to be issued on an exclusive basis in this northern state.

Looking back with nostalgia, one lauds the legislative adventure pioneered by Schleswig-Holstein which led to the issue of a limited number of gaming licenses. These licenses are still valid but they are limited in scope to the territory of Schleswig-Holstein and were due to expire in 2018.

From January 2012 until February 2013, the state of Schleswig-Holstein pursued its own gambling policy, which included granting online casino and sports betting licences at the same time, omitting to join the complete ban instituted by the other 15 states in the Interstate Treaty. No doubt, this unilateral move created an anomaly and it was in March 2017 when there was a collective drive by all leaders of Germany’s 16 Bundesländer to regularise the situation.

They voted to approve a new Interstate Treaty on Gambling. This had to take effect on 1st January 2018. In essence, the Interstate Treaty generally prohibits the operation and brokerage of online games of chance. The only exceptions concern sports betting, horse race betting and state lotteries.

Online casinos therefore are not currently licensable. Such restrictions were challenged under the EU law and test cases have instituted more pressure on Germany to relax its online prohibition. Slowly, this led to reforms that were initiated by the 16 Lander at the end of 2016. Unfortunately, these are referred to as minimalist reforms since they only concern sports betting.

But an over-arching condition of the Interstate legislation required the unanimous approval of each state’s legislature. The fly in the ointment was that legislators in Schleswig-Holstein voted to opt out of the treaty. In a curious twist of legislative history, Schleswig-Holstein had announced its intention to team with the state governments in North Rhine-Westphalia, Rhineland-Palatinate and Hesse on a new regulatory scheme based on its own original licensing regime. It hoped the rest of the states would eventually join.

Sadly, the horse was taken to the water but refused to drink. All this in a country with the largest economy in the EU family and it is not a surprise how online prohibition has consistently led to the industry’s growing impatience with the country’s 16 states in their failure to put together a cohesive strategy.

In fact, only three years ago, the EU ruled that Germany cannot continue to penalise or restrict unlicensed foreign operators, because it made it impossible for them to acquire licenses. The only exemption was Schleswig-Holstein, which as stated above, has challenged the rest and allowed for online casino licences to be issued.

The good news for gaming operators that went through the trouble of getting licensed in 2012/3, this empowered them to operate under a six-year license. These included real money casino games and poker to players within the state of Schleswig-Holstein until end 2018.
As things stand now, online gambling is largely outlawed across Germany with the exception of the two dozen or so operators who signed licenses to operate in Schleswig-Holstein. There are no other legal gaming sites in the 15 Bundesländer and there’s no way to obtain a valid license to offer games.

Recently talks started to pave the way for an interim solution. This agreement opens the way for the state of Hesse to start accepting applications for sports betting licences. The state of Schleswig-Holstein which had previously broken away from the inter-state treaty to set up its own online gambling licensing system which expired last year, will grant a short extension to its 23 licence holders till June 2021.

Quoting Steinkrauss (managing director of Merkur Sportwetten): “A new licensing process will take place with permits beginning in 2020 without a limit on the number, but would only be valid until June 2021, which is a quite unreasonably short time-frame.” He said that the agreement was no more than “an interim plaster rather than a long-term solution”.

The unhappy situation for foreign operators is that the status quo will prevail in Germany for the foreseeable future. Does this mean German-facing sports betting operators holding licenses in other European Union jurisdictions can continue to serve their German punters provided they pay attention to anti-money laundering responsibilities and don’t violate advertising restrictions.

One cannot but mention the deleterious effect in the media by the publishing of the so-called “Panama Papers” in November 2017. Newspapers commented on the role of various large German banks which were involved in payment transactions for private gambling operators.

The pay-out of winnings arising from supposedly unlawful gambling could be regarded as money laundry resulting out of aiding and abetting the illegal organisation of gambling. This has added more pressure on state regulators to tighten the screws on casino operators especially where AML rules are concerned.

No doubt, it will further strengthen their resolve to maintain the status quo on the uncertain licensing regime prevailing in Germany.

George Mangion

Author: George Mangion
Published on Business Today 1st April 2019
Get in touch: info@pkfmalta.com | +356 21 493 041

Moneyval – big brother is watching

Author: George Mangion
Published on MaltaToday 27 September 2018

The challenges to our regulatory authorities are ongoing and in particular one cannot ignore the added scrutiny placed by an inspection this year to be carried out by Moneyval – an EU mechanism with powers to conduct ad hoc inspections. It represents a Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) which was established in 1997, and now serves as an independent monitoring mechanism within the Council of Europe.

It is an FATF Style Regional Body (FSRB) whose main aim is to ensure that member states have effective systems to counter money laundering and the funding of terrorism in place, and that they comply with the relevant international standards. As an institution, it 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 anti-money laundering standards, including the FATF Recommendations, the EU’s Fourth Money Laundering Directive, as well as the 1998 UN and 1990 Council of Europe conventions. Malta fared well in the latest inspection in 2012 with a follow-up having taken place in 2015.

Since 2015 and following the PANA reports together with the Pilatus Bank closure one may expect a deeper look by Moneyval experts who are to arrive next November. In its previous inspection, Moneyval had noted that the number of on-site visits by the regulator was low.

In addition, the absence of a national risk assessment to identify risky areas for ML/FT gave rise to concerns with regard to the effective implementation of risk-based supervisory activity. Due to such observations and other factors – these led to instigate reform at the MFSA starting with a consultation exercise among practitioners and industry at large which was carried out last year. According to the Minister of Finance this Moneyval visit is a regular one and there should not be undue speculation in the press about it.

He placated the press saying the Committee has been carrying out such evaluations locally on a regular basis over a number of years. Naturally the alleged anti-money laundering transactions at Pilatus – an Iranian bank combined with the revelations arising out of a number of leaked FIAU reports on the same bank – these have triggered an inquiry by the European Banking Authority (EBA) based on a request by the European Commission and a report from the European Parliament.

EBA was asked to verify whether it is fully equipped and free from conflicts of interest to perform its supervisory duties. It was also asked to establish whether the MFSA had fulfilled its obligations as a national supervisory authority in extending the licence to Pilatus bank. EBA concluded its investigation and recently announced that there were no infringements but MFSA needs to tighten its AML arsenal and employ more resources.

Therefore, a recent announcement by the parliamentary secretary responsible for financial services that MFSA is to undergo a legislative revamp is most welcome. This revamp started by conducting a public consultation process launched last year. In the meantime, this article is advocating that the ideal reform will result in splitting the MFSA into two authorities – one harnessing the prudential regulatory function and another entity having separate management to oversee the financial conduct of regulated bodies.

As they say – having a super-regulator is like having all the eggs in one basket. Just consider the onerous responsibility the MFSA carries for the direct supervision of all regulated firms (including banks, funds, trusts, 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 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 so-called “twin peaks” model which creates two new supervisors for regulated business has its merits if it is adopted by MFSA.

Certainly, one may appreciate that MFSA struggles to find expert staff even though it regularly trains them in various technical areas. Experienced staff may be tempted to resign to join more lucrative jobs with top law/audit firms and are difficult to replace in the short term.

As can be expected, MFSA will continue to face challenges in new areas such as IT, Blockchain and Fintech. The onset of three new VLT laws and use of guidelines in virtual currency domain has become the latest mountain to climb. It is an open secret that of late the island has faced competition from established EU centres when it comes to attract both regulated funds and insurance sectors.

It faced challenges regarding relocation of new business which moved to established EU centres in the process of seeking EU shelters to passport services due to Brexit. But not everything is doom and gloom. Observers recognise that our national AML/CFT framework is satisfactory but can be fine-tuned to become more water tight.

By the way, 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.

This NRA highlights seven initiatives, broken down into approximately 50 action points, to be implemented over the next three years. MFSA as the sole regulatory body for regulated business faces pressures to guide Corporate service providers making sure they comply with a number of directives such as the fourth and fifth AML and many others such as MIFID 2 and BEPS. In conclusion, the country needs a fair and efficient regulator to be able to maintain its competitive edge as a leading financial services centre.

It is with the combined use of pragmatic regulation, creative innovation and service diversification that can eventually lead us to surpass competition in the marketplace. On their part, practitioners pride themselves that they have upheld the highest probity standards in their quest to attract FDI. Experience teaches us how building and maintaining a good reputation can be likened to a fragile plant of slow growth.


George Mangion

Author: George Mangion
Published on MaltaToday 27 September 2018
Get in touch: info@pkfmalta.com | +356 21 493 041

Reflections on a cryptic ‘Malta Files’ story

Author: George Mangion 
Published on Malta Today 8th June 2017

PKF Malta is of the opinion that the entire Malta Files accusations on our tax transparency need to be fought and any innuendos fiercely rebutted in a non-partisan fashion.  Malta, like other EU states, supports the fight against harmful tax competition, and insists on full transparency and exchange of information. But it retains its sovereign rights over domestic tax rules.

This in the past was a non-partisan battle fought collectively in a solidarity approach by Maltese politicians. Then finance minister Edward Scicluna has told European counterparts to focus on “blatant cases of tax evasion and not interfere with domestic issues with little or no effect on BEPS”, but even he fears that Base Erosion and Profit Shifting (BEPS) will go beyond what is necessary to prevent abuse.

Looking back it was three years ago when the OECD embarked on intensive work which recently culminated in 13 reports laying down new or reinforced international standards as well as concrete measures to help countries tackle BEPS.  Both OECD/G20 members are committed to this comprehensive package and pledge to have it fully implemented.

This is no breaking news as practitioners have long grasped the shocking revelations of the Swiss Leaks concerning HSBC branch and later on Luxleaks involving secret tax rulings awarded to multinationals signed by the finance ministry in Luxembourg.  Other shocks came with the cosy tax shelters afforded for 15 years in Brussels in a scheme attracting holding companies of multinational companies, saving the lot about €750 million in taxes. Naturally the hacking of 11.5 million documents of Mossack Fonteca, a law firm based in Panama, has fanned the fire against secret dealings by various international business owners (including 42 local yet not revealed account owners).

All this has strengthened the resolve of the G20 and the OECD as well as protestations from the European Parliament, several Member States, businesses and civil society, and certain international partners to implement a stronger and more coherent approach against corporate tax abuse.  No smoke without a fire yet such practices have been going on unhindered for decades and there is a lucrative legal consultancy industry which advises its clients in tax avoidance – they are constantly on the look-out for loopholes.

Feet on the ground – no one expects offshore havens to disappear anytime soon. The industry is massive, starting with Swiss banks that according to Gabriel Zucman, an economics professor at the University of California at Berkeley, hold about $1.9 trillion in assets not reported by account holders in their home countries. One similar location which provides secrecy is Reno, Nevada in the United States of America.

It may come as a surprise to readers that the US is one of the few places left where advisers are actively promoting accounts that will remain secret from overseas authorities. Typically, one reads how a wealthy Turkish family is using Rothschild’s trust company in Reno to move assets from the Bahamas to the US, while a family from Asia, is moving assets from Bermuda to Nevada.

The argument goes that there is nothing illegal about banks like Rothschild luring foreigners to place money in the US with promises of confidentiality as long as they are not intentionally helping to evade taxes abroad. The Rothschild trust company was set up in 2013 to cater for international families, particularly those with a mix of assets and relatives in the US and abroad.

The sales pitch adds that it caters for customers attracted to the “stable, regulated environment” of the US. That may not be so easy if the bank is found to be helping its clients to evade tax. In 2007, UBS Group AG banker Bradley Birkenfeld in Switzerland, blew the whistle on his firm helping US clients evade taxes with undeclared accounts offshore. Swiss bank Rothschild Bank AG entered into a non-prosecution agreement with the US Department of Justice. The bank admitted helping US clients hide income offshore from the Internal Revenue Service and agreed to pay an $11.5 million penalty and shut down nearly 300 accounts belonging to US taxpayers, totalling $794 million in assets.

In 2010, this led to the promulgation of FATCA (Foreign Account Tax Compliance Act) that requires financial firms to disclose foreign accounts held by US citizens and report them to the IRS or face steep penalties. Furthermore, in other parts of the world there is no rush for tax havens to give up their secrecy and scare away the goose that lays the golden egg. Even in biblical times we read in the New Testament how wealthy Jews were always spartan in their wealth declaration in order to save paying high tributes to Caesar in Rome.

In modern times, the classic approach is for taxpayers to reduce their tax bill by moving their tax residence and/or assets to a low-tax jurisdiction. The mandarins in Brussels object to this, claiming that such practices distort the market because they erode the tax base of the State of departure and shift future profits to be subject to tax in the low-tax jurisdiction of destination. Naturally, given the lack of corporate tax harmonization in the Union one cannot blame consultants to study ways how their rich clients move their tax residence out of a high tax Member State.

But the noose is tightening for tax evaders. A recent EU directive calls for tighter controls. This directive, the Anti-Tax Avoidance Directive versions one and two, lays down rules against tax avoidance practices that directly affect the functioning of the internal market.  It is one of the constituent parts of the Commission’s Anti-Tax Avoidance Package, which addresses a number of important new developments and political priorities in corporate taxation (such as hybrid schemes).

The concept includes mandatory use of country by country tax reporting (CBCR).  This initiative requires disclosure of CBCR information to tax authorities only with the aim to ensure further compliance of multinational enterprises (MNE) with national tax laws.

This reporting will be mandatory to be prepared by all EU and non-EU MNEs with activities in the EU having a consolidated turnover above €750 million. The information should be broken down by EU Member States and aggregated for the rest of the world. The type of information to be disclosed would include income tax paid and accrued as well as other contextual information: the nature of the activities, turnover, number of employees, profit before tax. The measure targets only MNEs that are the best equipped to engage in tax planning activities, that is enterprises whose consolidated turnover exceeds €750 million.

In conclusion, Opposition MP Claudio Grech (currently touted to replace Simon Busuttil as PN leader) told an inter-parliamentary committee convened by the Committee on Economic and Monetary Affairs at the European Parliament that Malta wants to retain its fiscal sovereignty. We all agree that now that the election fever has subsided and the perpetrators of the critical Malta Files are slowly retreating into the woodwork, both political parties need to forget their partisan views and pull the same rope to buttress the financial services industry, which has fallen victim to a barrage of an unsympathetic press in Brussels. Unfortunately the spirit is willing but the political body is weak. As can be expected the landslide victory by Labour will leave its heavy toll on the Opposition’s ego and this takes time to heal.


George MangionAuthor: George Mangion 
Published on Malta Today 8th June 2017
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