The chivalrous quest of robotics and AI

Author: George Mangion
Published on Business Today 9th May 2019

One may be intrigued by the incidence of the heightened tempo in party propaganda embracing the upcoming MEP and Local Councils elections by political parties.

The administration is in a race to announce new projects to please voters. The latest fad seems to be promising to build more social housing – and of course government has given the green light for the Gozo tunnel.

Party apologists find comfort and prosper in hailing the administration for promising so many ambitious projects. Definitely others equally made hay while the sun shine under the patronage of the pro-business attitude of the Planning Authority.

On to the subject of robotics and artificial intelligence (AI). This has become the flavour of the month and finds the wholehearted support of government which, for the second time, is sponsoring a mega blockchain and AI conference this month.

This is an initiative in the right direction and has led to other events which are being organised concurrently by the private sector.

PKF had put its shoulders to the wheel when, three years ago, it hosted an international event at the Microsoft Innovation Centre, Skyparks Gudja. The event styled “Blueprint for Innovation” saw an expert lineup of speakers. These included Gor Sargsyan, MD , Qbiticlogic  International Atlanta USA based in Silicon Valley, Stas Gayshan MD, CIC Boston US, Jeffrey Pullicino Orlando Chairman MCST, Joe Woods MD, Creolabs, Netrefer CEO, Kenneth Farrugia ,President FinanceMalta, Ing Joe Sammut CEO LifeSciences Park, top speakers from MCAST and University while the parliamentary secretary Silvio Schembri responsible for Innovation at OPM gave the opening speech.

Media comments were positive as all agreed that the island needs to do more to boost its contribution to R&D which based as a percentage of GDP is one of the lowest in the EU and in this context, the government in its 2019 budget is pledging to open the taps for more investment.

The good news is that for the MEP and local council elections all political parties are promising to increase investment in innovation and related Blockchain subjects.

Alas, we heard it so many times by the public sector that it plans to support an innovation and business accelerator centre of caliber. It seems that the spirit is willing but the body is weak yet the private sector is slowly moving to fill the gap.

It professes to be a true catalyst to anchor existing research within the diverse manufacturing community and to attract new ones.

There is so much at risk for our country in its quest to harness the best brains in the fields of digital research and AI.

The nonchalant attitude of maintaining the status quo – saying “if it is not broken then do not change it” – is deceptive.

The trajectory of new technologies can be enigmatic. They start off from an initial idea, which is often outlandish or somewhat crazy, going through a series of milestones in laboratories, and finally making the leap from laboratories to the real world.

One may ask-what are the potential new technologies being researched and studied locally and how would these be applied in to improve the competiveness of our manufacturing and services economy.

Three years ago, the author pioneered a familiarisation trip visiting Massachusetts Institute of Technology (MIT) in Boston, USA to explore links to promote Malta as a potential business accelerator and/or life sciences hub for innovators, inventors and entrepreneurs.

It is interesting to note that the Massachusetts Institute of Technology (MIT) is a private research university in Cambridge, Massachusetts founded in 1861 –  built in response to the increasing industrialisation of the United States.  The uniqueness of MIT is in its appetite for problem-solving – especially those intratable technical problems whose solutions make a tangible difference.

Be that as it may, while not taking giant steps yet within our limitations, one cannot but admire the world-class research ongoing in the Department of Physics at the University of Malta. A senior lecturer in quantum mechanics in the Department of Physics at the University of Malta is coordinating a pioneering project which involves group research.

The local team is concerned with developing the basis for a new kind of technology – machine learning which brings with it a substantial challenge.

What is machine learning and how does this science integrate with the latest craze of Artificial intelligence and its sister technology concerning driver-less cars?

Machine learning frequently involves solving problems of manipulating and classifying large numbers of vectors in high-dimensional spaces. Classical algorithms for solving such problems typically take time involving a number of vectors within the dimension of space.

Naturally with the advent of cheaper processors and huge data memory banks one can use super computers to manage data running at exponential speed. These so-called quantum computers are essential to manipulate high-dimensional vectors so common in clusters.

There are many applications which benefit from quantum learning using algorithms which lead to input-output relationships. This is important for tasks such as image and speech recognition or strategy optimisation, with growing applications in the IT industry and of course it is used to interpret real-time images relayed from multiple car sensors so prevalent in driver-less technology.

Ideas range from running computationally costly algorithms or their subroutines efficiently on a quantum computer to efficient translation of mathematical exercises involving various topics being researched.

Another application is in problem solving. Computers really took off only after it became possible to build not just single transistors but chips containing many of them, up to billions in the latest fast processors.

The limiting factor is their electricity consumption and heat generation so experimentation has started to use light as a source for running processors. This platform can be applied to improve devices across the board.

In the future, it will create a means for computers to work directly with light, which will run systems that are more efficient and use less power. One foreseen application is to create motion sensors so accurate that they could help us navigate underground, for example in digging long tunnels or underwater, where GPS signals are unavailable.

These technologies, which could disrupt markets and generate economic growth are merely the tip of the iceberg.

Understanding the inherent complexity of the quantum world, the ramifications how the laws of physics can disrupt information and its ability to adapt mathematical norms developed in quantum theory can place the island in a competitive stance where researchers are appreciated as creators of a bright future.

 

George Mangion

Author: George Mangion
Published on Business Today 9th May 2019
Get in touch: info@pkfmalta.com | +356 21 493 041

Our algorithmic venture into AI

Author: George Mangion
Published on Business Today 18th April 2019

It was Prime Minister Joseph Muscat, at a speech he gave last year at the Delta summit, who talked about a vision to regulate Artificial Intelligence (AI), the internet of things (IOT) in an all-encompassing regulatory framework.

In his mind set, Malta just about climbed the slippery slopes of blockchain, and is now in an adventurous mode to tackle the next mountain of AI.

Undoubtedly, a technology that USA tech giants pour billions of dollars annually into for research and development purposes.

It is an open secret that government is keen to be seen helping innovation and would like to see Malta becoming a jurisdiction that attracts talent from all over the world.

Artificial intelligence and robotics are two ‘overnight successes’ in advanced economies that have been decades in the making, and their intersection will soon change a multitude of industries.

The evolution of smarter AI and more versatile robotics has helped both technologies to push past repetitive tasks to take on adaptive and more intelligent applications. In the coming years, the result will be nothing short of a revolutionary paradigm shift.

AI technologies will continue disrupting beyond 2019 and become even more widely available due to affordable cloud computing and big data explosion.

The gargantuan task was taken on board by Silvio Schembri, Malta’s junior minister for the digital economy and innovation.

At a recent press conference in Singapore, he revealed the country’s plans for the government’s new task force in an ambitious mission to become one of the world’s leading AI nations.

How can Malta gain from the wave of popularity that is gripping the ubiquitous sector of robotics?

The answer is found in the impending age of smarter robotics. These will certainly have a profound impact on traditional manufacturing; for instance, our health sector will soon make use of robotics to allocate medicines to patients and assist in useful operations taking place in the operating theatre.

AI thrives best by combining large amounts of data sets with fast, iterative processing and intelligent algorithms. This allows the AI software to learn automatically from patterns or features in that vast data set.

It is trendy to read on latest AI topics in the mainstream news. It is no exaggeration that AI has become a catch-all media term that refers to any computer programme that automatically does something.

Many people make referrals to AI without actually knowing what it really means. There is often a public debate on whether it is an evil or a panacea for humanity. Put simply, one may explain that in Malta this technology will in the near future spearhead novelties in the manufacturing sectors and create interesting scenarios in areas of productivity, safety, service, transportation, land registration and police records.

More will be revealed in the near future, when driver-less cars will become fully functional and slowly enter into the mainstream.

Autonomously driven cars and drones are both forms of advanced robotics, and they will pave the way for more specialised services that will speed productivity. They will impact every area of our lives.

As was the case of the internet revolution, some of the originalities will happen in a gradual, evolutionary way; albeit some will happen in a sudden, revolutionary manner.

To delve deeper into the subject matter, one may mention that apart from AI there is its cousin – Machine Learning (ML), and its sibling – Deep Learning (DL).  One may actually think they are all of the same stable but in fact they are different.

AI and the Internet of Things (IOT) are inextricably intertwined, with several technological advances all converging at once to set the foundation for an AI and IoT paroxysm. AI involves machines that can perform tasks that are characteristic of human intelligence. Typically, it includes things like planning, understanding language, recognising objects and sounds, learning, and problem solving. It goes without saying that the learning process involves feeding huge amounts of data to the algorithm and allowing the algorithm to adjust itself and improve.

To give a simple example, machine learning has been used to make drastic improvements to computer vision (the ability of a machine to recognise an object in an image or video).  In order to achieve this, the process may involve gathering hundreds of thousands or even millions of pictures and then have humans tag them.

For example, the humans might tag pictures that have a cat in them versus those that do not. Then, the algorithm tries to build a model that can accurately tag a picture as containing a cat or not as well as a human. In its simplicity, one may then conclude that once the accuracy level is high enough, the machine has now “learned” what a cat looks like.

Deep learning processes are one of many approaches to machine learning. It was originally inspired by the structure and function of the brain, namely the interconnecting of many neurons.

PKF Malta has taken the initiative to launch a training lab called the The Bit-Pod concept. This is a meeting place for informal discussions among practitioners, engineers and IT enthusiasts to network where they can informally discuss topics on the cosmic subject of this technology.

This is a non-profit organisation, intended to help connect entrepreneurs (mainly start-ups) to people, programming engineers, and other enthusiasts across the AI, blockchain and robotic fields. Whether you are looking to connect, learn, share, or work, Bit-Pod offers a selection of opportunities to network with other start-ups helping you scale the slippery slopes of early stage development.

It is undoubtedly true, that in other countries such initiatives are automatically sponsored by government agencies. The champion is Israel, which habitually offers financial and logistical help to nurture growth among start-ups. Regardless, the private sector in Malta is ready to give its share to develop this ambitious niche that will place Malta among the front runners in technical innovation.

Mastering this objective helps Malta to fulfil its mission to establish a national artificial intelligence stratagem.  Do not miss booking your place at the tech crowd converging in Malta for the Innovation Summit to be held next month.

George Mangion

Author: George Mangion
Published on Business Today 18th April 2019
Get in touch: info@pkfmalta.com | +356 21 493 041

AI invasion – is Malta ready?

Author: George Mangion
Published on The Malta Independent 21st March 2019

No article this week can fail to mention the current uncertainty that is facing the British economy due to the complex political manoeuvring on an agreed deal on how best to exit the EU. Be that as it may, the Western world is also going through other major changes in the political, economic and administrative fields. The advent of Artificial Intelligence (AI) is entering the economic stage through the backdoor but many feel that it is so powerful that we can only ignore its influence at our own peril. It is no minnow. Experts predict that it in 10 years’ time it will underpin $15.7 trillion of global economic growth.

Some fear it will wreck job opportunities and create mass unemployment in certain sectors yet others are less sanguine and think that it will simply transform current jobs and create new ones. The McKinsey Global Institute reckons that by 2030 up to 375 million people, or 14 per cent of the global workforce, could have their jobs automated away. Employers will have to decide whether they are prepared to offer and pay for retraining, and whether they will give time off for it. Many companies are sympathetic to the need for workers to develop new skills, but mass education is the remit of national governments and should not come at the employer’s expense.

This is debatable because less advanced countries do not have the resources to train workers to reach the higher technical skills required once the AI revolution becomes mainstream. Technological change always causes disruption, but AI is likely to have a bigger impact than anything else since the advent of computers, and its consequences could be far more disruptive. Being both powerful and relatively cheap, it will spread faster than computers did and influence many sectors.

Another important question is how to protect privacy as AI spreads. The internet has already made it possible to track people’s digital behaviour in minute detail. There is little doubt that in the coming years, AI will offer even smarter tools for businesses to monitor consumers’ behaviours, both online and in the physical world. This could become a threat to privacy.

A corollary of AI is machine learning. One can explain this as autonomous learning capacity which empowers a machine to learn on its own without being explicitly programmed. It is a subset of AI that provides the underlying system with the ability to automatically learn and improve from experience. Today, many US firms are competing to provide AI-enhanced tools to companies.

As can be expected, millions are invested to develop new technologies and companies that achieve a major breakthrough in artificial intelligence could easily race ahead of rivals and toughen global competition. More likely, in the years ahead, is that AI might contribute to the rise of monopolies in industries outside the tech sector where there used to be dynamic markets, eventually stifling innovation and consumer choice. The fear is that smart computer programs will eliminate millions of jobs, condemning a generation to minimum wage drudgery or enforced idleness.

Never mind the robots, fear the software as real-life experience has shown otherwise. For example, the arrival of automated teller machines (ATMs) spared bank employees the job of handing out cash and freed them to offer financial advice to customers. Obviously, some jobs could be made a lot easier by AI. One example is taxi drivers. Some fear that taxi drivers will be replaced by autonomous vehicles. But in future taxis will still be manned particularly when needed in town to manoeuvre around busy streets which are far harder to drive through than driving long distances down a motorway. Interesting advances powered by AI are happening in many medical areas in hospitals.

Other potential uses of AI is to detect cyberattacks, or coordinate fleets of drones, and it is useful for mass surveillance where many people congregate as there is facial recognition. Furthermore, increased automation gives more physical control to digital systems, which in turn makes cyberattacks even more dangerous. Regulation is needed to ensure that AI engineers are employing best practices in fighting cybersecurity and limiting the intrusion of cyber thieves especially in banks and sensitive data centres.

The fusion of AI and Blockchain systems will further enlarge the arsenal with tools for fighting cybercrime and make DLT databases tamper-proof. For example, when any transaction is recorded on blockchain that transaction is made known throughout the chain connecting users to each other. Therefore, it is not possible to tamper with a blockchain, which is why trust is built into the system rather than guaranteed by a ‘central owner’ of the data.

This powerful technology is silently ushering in the fourth industrial revolution. It will allow individuals to regain control of their own data, such as medical health or education records, and use it in ways that would not have been possible in the past. Blockchain and DLT technology will improve the tracking of intellectual property rights, as well as strengthen the concept of ownership in the digital sphere. Having discussed briefly the uses of AI, how can tiny Malta ever play a part in this success story? It so happens that Prime Minister Joseph Muscat has called for a global framework for regulating research into, and the development of, artificial intelligence technologies when he addressed a top conference in Shanghai China last year. AI, the internet of things and a best-in-class regulatory framework are now high on the government’s agenda, following the successful introduction of the world’s first comprehensive set of blockchain laws last year. Castille is smelling the coffee and the penny has dropped to lay the foundations for a digital innovation hub. The fly in the ointment is having superlative technical facilities to train a workforce with the right skills. It is a tall order, since millions are needed to train a workforce proficient in AI but it is never too late to start. The government recently announced the funding of a scholarship bourse for postgraduate degrees, as well as a lab to encourage the exploration of emerging technologies. One looks forward with courage to the next Delta Summit this year sponsored by the government with the hope that it will attract tech-evangelists and AI engineers to help us build a local ecosystem. One hopes this fulfils the vision of the prime minister and hallmarks his legacy at a time when he is rumoured to be contemplating his exit from the political stage.

George Mangion

Author: George Mangion
Published on The Malta Independent 21st March 2019
Get in touch: info@pkfmalta.com | +356 21 493 041

Artificial Intelligence: ignore at your own risk

Author: George Mangion
Published on Malta Today 21st March 2019

The advent of Artificial Intelligence is entering the economic stage through the back-door but many feel that it is so powerful that we can only ignore its influence at our own peril. It is no minnow.

Experts predict that it in ten years it will underpin $15.7 trillion of global economic growth. Some fear it will wreck job opportunities and create mass unemployment in certain sectors yet others are less sanguine and think that it simply transforms current jobs and create new ones.

The McKinsey Global Institute reckons that by 2030 up to 375m people, or 14% of the global workforce, could have their jobs automated away. Bosses will need to decide whether they are prepared to offer and pay for retraining, and whether they will give time off for it. Many companies feel sympathetic towards the need for workers to develop new skills, but mass education is the remit of national governments and should not come about at the employer’s expense.

This is debateable, since less advanced countries do not have the resources to train workers to reach the higher technical skills required once the AI revolution becomes mainstream. Technological change always causes disruption, but AI is likely to have a bigger impact than anything since the advent of computers, and its consequences could be far more disruptive. Being both powerful and relatively cheap, it will spread faster than computers did and influence many sectors.

Another important question is how to protect privacy as AI spreads. The internet has already made it possible to track people’s digital behaviour in minute detail. There is little doubt that in the coming years, AI will offer even smarter tools for businesses to monitor consumers behaviours, both online and in the physical world.

This may become a threat to privacy. A corollary of AI is machine learning. One can explain this as autonomous learning capacity which empowers a machine to learn by its own without being explicitly programmed. It is a subset of AI, that provides the underlying system with the ability to automatically learn and improve from experience.

Today, many US firms are competing to provide AI-enhanced tools to companies. As can be expected, millions are invested to develop new technologies and companies that achieve a major breakthrough in artificial intelligence could easily race ahead of rivals and toughen global competition.

More likely, in the years ahead AI might contribute to the rise of monopolies in industries outside the tech sector where there used to be dynamic markets, eventually stifling innovation and consumer choice. The fear is that smart computer programs will eliminate millions of

jobs, condemning a generation to minimum-wage drudgery or enforced idleness. Never mind the robots, fear the software.

But real-life experience has shown otherwise. For example, the arrival of automated teller machines (ATMs) spared bank employees the job of handling out cash and freed them to offer financial advice to customers.

Obviously, some jobs could be made a lot easier by AI. One example is taxi drivers. Some fear that taxi drivers will be replaced by autonomous vehicles. But in future taxis will still be manned particularly when needed in town to manoeuvre around busy streets which is far harder than driving long distances down the motorway. Interesting advances powered by AI are happening across many medical areas.

Other potential uses of AI, is to detect cyberattacks, or coordinate fleets of drones, in hospitals and where many people congregate it is useful for mass surveillance through facial recognition. Furthermore, increased automation gives more physical control to digital systems, which in turn makes cyberattacks even more dangerous.

Regulation is needed to ensure that AI engineers are employing best practices in fighting cybersecurity and limiting the intrusion of cyber thieves especially in banks and sensitive data centres.

The fusion of AI and Blockchain systems will further enlarge the arsenal with tools for fighting cybercrime and make DLT databases tamper proof. To give an example, when any, say transaction, is recorded on blockchain, that transaction is made known throughout the chain connecting users’ to each other.

Therefore, it is not possible to tamper with a blockchain, which is why trust is built into the system rather than guaranteed by a ‘central owner’ of the data. Thus, this powerful technology is silently ushering the fourth industrial revolution. It will allow individuals to regain control of their own data, such as medical health or education

records, and use it in ways that would not have been possible in the past. Blockchain and DLT technology will improve the tracking of intellectual property rights, as well as strengthen the concept of ownership in the digital sphere.

Having discussed briefly the uses of AI, one may ask if and how can tiny Malta ever partake of this success story. The answer is blowing in the wind as it so happens that Prime Minister Joseph Muscat has called for a global framework for regulating research into, and the development of, artificial intelligence technologies when last year he addressed a top conference in Shanghai China.

AI, the internet of things and a best-in-class regulatory framework are now high on the government’s agenda, following the successful introduction of the world’s first comprehensive set of blockchain laws last year.

Castille is smelling the coffee and the penny has dropped to lay the foundations for a digital innovation hub. The fly in the ointment is having superlative technical facilities to train a workforce with the right skills. It is a tall order, since millions are needed to train a workforce proficient in AI.

But it is never too late to start. Government recently announced the funding of a scholarship bourse for post-graduate degrees, as well as hosting a lab to encourage the exploration of emerging technologies.

One looks forward with courage to the next Delta Summit this year sponsored by the government with the hope that it will attract tech-evangelists and AI engineers to help us build a local ecosystem. One augurs this fulfils the vision of the prime minister and hallmarks his legacy at a time when he is rumoured to be contemplating his exit from the political stage.

George Mangion

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

PKF launches The BITPOD-an Innovation marvel.

Author: Dr. Marilyn Formosa
Published on: The Commercial Courier

 

The BITPOD, which will function as a quasi-lab, will comprise a live project dedicated to fuelling research and development with a special accent on the emerging fusion between technology and the financial world as we know it.

It goes without saying that distributed ledger technology and virtual financial assets will play an important role in the experiment which promises a publication by the end of the year to be made available to the public in a compilation of the findings, observations, conclusions and results.

Complimentary to the BITPOD will be the BITBLOCK Sessions which will present a series of ad hoc working sessions in a casual format, once again aimed at provoking thought, ideas and novel discussion with local as well as international patronage.

The importance of honing and harvesting research and development locally, and attracting the same from the international forum, cannot be stressed enough, especially in light of our national ambition to service a centre of excellence, within the advancing realms of robotics, AI and all forms of revolutionary living.

As a nation we certainly have the intention and now we are also armed with the legislation, but we still have a long way to go before we can confidently say that we have secured the coveted working ecosystem.

We commend the good work and investment being done by Government and encourage the private sector, to like ourselves, follow suit on this remarkable journey that promises to make its mark an indelible one.

Dr Marilyn Formosa
Head of Legal – PKF Malta
marilyn.formosa@pkfmalta.com

BitPod Centre
35, Mannarino Road, Birkirkara, BKR 9080
+356 2148 4373 I 2149 3041 I info@pkfmalta.com

The Cashless Banking Revolution

Author: James Camilleri
Junior Legal Assistant, PKF Malta
Published on Malta Chamber on Wednesday 03rd October 2018

Anyone employed in a banking environment will know how time-consuming the physical handling of money is, and what a considerable part of the banking process it constitutes. Besides the manual process being laborious, there are security concern principles that need to be in place at all times, more so during the handling and transportation of physical currency.

Armed robberies which may even result in murder are not only scenes of a movie, but to this day present a tragic threat to a banking institution. For the movement of physical money, it is common to resort to the engagement of specialised personnel and armoured vehicles – this, clearly, is an added expense to the banking industry.

In order to be certain of the exact amount of money present within the purview of the bank, employees need to be assigned with the task of counting the money being circulated within their responsibility accurately. Money can be counted by hand as well as by the use of specific machines. However, though the adoption of such machines is less labour-intensive, it cannot be said to relieve the bank of the chore of requiring the knowledge of the exact total currency that is or should be present. Over-and-above the maladies of physically handling money is the strain of having to lift large bundles of money that can give rise to work-related injuries, which in turn costs the bank in terms of sick-leave entitlement claims and, possibly, even lawsuits.

As it were, electronic credits do not have a physical presence and their movement is through the networks of information and communication technology (ICT). The need to count money manually or by machine is removed, as the computer software adopted is inbuilt with all the necessary functionality. Compare, if you will, the movement of physical money by means of bulletproof vans with the electronic equivalent available at the push of a button.

Sweden is a fine example of cashless banking. Riksbank, the Swedish central bank, concords that more people have access to payment cards than they do to cash. Besides, it points out 85 per cent of the population has an online banking facility. The circulation of physical currency has been diminishing year in year out, and the tendency is to seek digital forms of payment; that is, payment cards but also next-generation technology like e-wallets and mobile payment apps. Cash transactions now constitute a lowly 2 per cent of the Swedish economy’s gross domestic product. The implications of this are that the payments industry will have to be reviewed, as less providers would be needed given one of the benefits of cashless transactions is to automate processes previously requiring human intervention.

The incumbent Governor of Sveriges Riksbank, Stefan Nils Magnus Ingves, points out, however, that due to a perpetual fear of a hypothetical financial crisis occurring, there is, as things stand, an indelible need for the presence of physical cash to remain available. Another important factor is that certain people accustomed to the conventional methods of payment will remain hostile to the digital revolution. The Riksbank Act says that ‘[b]anknotes and coins issued by the Riksbank are legal tender’, yet retailers are under no obligation to offer the option to customers for paying in physical cash.

The trend in Sweden is presently driven by Swish, an instant payment app developed by the seven most prominent banks in the country. The central bank is further considering the introduction of a government-backed virtual currency called the e-krona. Having said that, it is still in the early stages of development and the technical details have not been indicated. Besides, the central bank hasn’t given its full support for the e-krona project, being cautious of the drawbacks of cryptocurrencies, for example, their lack of stability.

It can be said that several markets have made progress in the cashless journey by investing in technology-enabling advancements. Besides Sweden, Australia too is trying to go full-circle. Brazil has been slow to reap the benefits of putting the basics in place, while China and Kenya have combined the cashless-enabling technology with cash reduction incentives to speed up the process.

Finally, the German and Japanese markets have expanded before gradually reaching a standstill, notwithstanding their government’s efforts of having the proper infrastructure in place.

Author: James Camilleri
Junior Legal Assistant, PKF Malta
Published on Malta Chamber on Wednesday 03rd October 2018

 

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

Innovation hub – not another Alice in Wonderland

Author: George Mangion 
Published on Malta Today 19th October 2017

With so much ado about innovation and blockchain technology in the air, one may believe that having a research and business innovation hub in Malta complementary to Silicon Valley is not a fantasy dream similar to when Alice was caught staring at the Looking Glass in Lewis Carroll’s novel. It can prove to be a true catalyst to anchor existing manufacturing community and attract new ones. Skeptics disagree, saying Malta will never attract the bonanza that enriched the Bay area. They lament this dream is an ambitious one as governments in Europe are in competition to attract blue-chip companies and start-ups particularly in biosciences, fintech and blockchain technologies.

But did La Vallette not resist the attack of the mighty Ottoman fleet in 1565? So hope springs eternal and an excellent effort was made last week when Netrefer and government agencies supported the Innovation Summit opened by Silvio Schembri – the parliamentary secretary for Digital Economy, Financial Services & Innovation. Opening the summit, Schembri said that next year the government is budgeting €2.2 million for research and innovation. Such funds will be dedicated to assisting researchers, startups and consortiums in research and innovation projects.

The event had the unique pleasure and privilege to regale delegates by the presence of Edward De Bono, Malta’s pioneer in Brain Training. Both the Education Minister and the minister responsible for Economy, Investment and SMEs gave their contributions and waxed lyrical about the need to attract and retain new talent.

This prestigious event was a sequitur to another successful event organized and funded by the Malta Communications Authority, which organized a two-day international innovation event called Zest.

The 2018 budget makes a token gesture by giving two-year tax breaks to PhD students of whom a mere 30 qualify annually. Ideally more doctorates are attracted to populate our research centres in spheres such as oncology, nanotechnology and quantum learning. The budget (now with a surplus) created a stir among political observers as the prime minister started on a high saying it was not an accountant’s or a politician’s budget, but a budget drawn up with an economic rationale. Equally worth mentioning was the event styled “Blueprint for Innovation” organized and sponsored exclusively by PKF at Microsoft Centre Skyparks last June.

PKF introduced Stas Gayshan as a keynote speaker.  He is the MD of Boston-based Cambridge Innovation Centre and a parallel organization to MIT university. The event saw an extended morning session and showcased an expert lineup of speakers.  These included Gor Sargsyan, president, Qbitlogic International, Silicon Valley USA, Joe Woods Director, Creolabs, Kenneth Farrugia, chairman FinanceMalta, and Ing Joe Sammut CEO LifeSciences Park. Speakers from MCAST and University physics department were invited while Prime Minister Dr Joseph Muscat could not attend.

Gor Sargsyan is the president of Qbitlogic International, Atlanta (USA) which is a US based company specialising in building multi-purpose approaches and tools that synergize the power of artificial intelligence and quantum computing to help humans build and protect software systems across various industries. Many multinational companies have opened their base in Silicon Valley where companies scout for the best talent.

The Compass Global Startup Ecosystem Ranking of 2015 found Silicon Valley to be the world’s leading innovation region incorporating venture capital investment, start-up company exit valuations, talent pool and entrepreneurial supports and networks.  This is called an active ecosystem and basically is what glues together the fabric of innovation and design talents to create high value-added products.  It is precisely what Malta lacks.

Innovation is slowly becoming the new buzzword because both political parties promised in their election manifesto to substantially increase investment in innovation. We promised the EU to increase by up to four times the mere 0.7% of GDP annual contribution, albeit the 2018 budget makes no extra allocation. PKF thinks that its efforts to attract a world class organization in his field does not come a moment too soon although regrettably its altruistic attempts to fan our feeble flame of innovation was met with unenthusiastic support from government agencies branding it as another sound bite.

Conversely the head of the National Social fund highly acclaimed the initiative to attract a top US business accelerator but felt that at this stage of economic development it was premature to support it. It is like putting the cart in front of the horse. Strangely, resistance to creating an ecosystem is ingrained such that some State agencies label it as spurious and proclaim that of its own it does not generate wealth or jobs.

Extra millions so crucial on research makes policy makers ululate. Another drawback is venture capital. Even though we just read that banks increased customer deposits by 12% and this contributes to more liquidity yet venture capital never took ground.  It is a given fact that the best start-ups look for VCs that can plug them into broader ecosystems to provide additional leverage and extend their vision.

This brings us to the focal topic of this article. It starts with a recount of a pioneering trip last year by a delegation from PKF which together with Malta Enterprise visited Massachusetts Institute of Technology (MIT) in Boston, USA to explore links to promote Malta as a potential business accelerator and/or Life Sciences hub for innovators, start-ups and entrepreneurs. It is no stranger to accolades – rated as the world’s best university in chemistry; economics; linguistics; materials sciences; nanotechnology and astronomy. Another interesting landmark is the Boston-based Cambridge Innovation Center (CIC) which opened new branches in St Louis, Missouri, Miami, Rotterdam, Warsaw and Sydney.

Additionally, Android co-founder Rich Miner built his unique Google Android software in CIC. It also has a non-profit sister, the Venture Cafe Foundation (this provides a Forum for venture capitalists to scout and help fund new talent). What is so special about CIC?  The answer is that as an innovation hub it succeeded to attract world class start-ups which proved very supportive for the US economy through the generation of premium jobs and its high value-added inventions.

Now that the economy is on the mend and a modest surplus enthuses us on the horizon, we need to seriously plough back some of the fruits of our harvest into a proper ecosystem. In the near future, such an undertaking will be reinforced by the output of talent from Barts Medical school, MCAST, University, AUM and other colleges all acting in unison to baptize us as the birthplace of a nexus of superior minds in the Med.

It is not an easy journey as many countries want to emulate the commercial success of Boston, New York, Singapore, Tel Aviv and Silicon Valley. An innovation centre partnered with CIC (among others) will shine a light to guide us along the shadowy tunnel at the end of which we can underpin GDP growth and improve our competitiveness level. Only thus can Alice ever discover the White Rabbit wearing a waistcoat and pocket watch that points to our island-graced with smiles and a cornucopia of riches.

 

George Mangion

Author: George Mangion 
Published on Malta Today 19th October 2017
Get in touch: info@pkfmalta.com | +356 21 493 041

Innovation – taking a quantum leap

Author: George Mangion
Published on Malta Today 23rd February 2017

This article shows how fragile our industralisation policy is which since Independence has not been based on attracting cutting edge technology and transfer of intellectual talent but took the easy option of giving tax perks, including 10-year tax holidays and various incentives so long as the investor guarantees creation of jobs.

This policy attracted various cycles of investors since the sixties and apart from building a tourist infrastructure, we welcomed investors in the ‘cut-make-and-trim’ textile operations lured to the island because of our comparatively low labour cost. Such a nascent textile industry was not properly capitalised and excluded any R&D or innovation/design units. Such unique intellectual capital was not transferred by the foreign investor.

The obvious consequence of this weak industrialisation policy was that once wages increased beyond a certain level there was a mass exodus and the industrial estates became a ghost city.  Replacement of the textile industry was followed by attracting other manufacturing units, which included (but was not limited to) pharmaceuticals, microchip, printing and Playmobil investors. All these have a common denominator – they do not carry out any R&D studies in Malta.

This is a policy which cries out for reform as competition from other Eastern European countries is intensifying and we risk being exposed to another exodus as wages are gradually revised upwards. Having attracted foreign manufacturing companies in our industrial estates, not conducting our own R&D is a risky scenario.

Readers may ask – what is the solution?  The answer is not simple as the reform involves not only a sea change in the direction of Malta Enterprise but also a cultural and educational revolution that ensures that our young entrepreneurs are nurtured to explore innovation while the country invests more in attracting overseas talent. The target set by the government to reach 2% of GDP in R&D by 2020 is far higher than our current level of around 0.7%, reaching a mere €60 million. Other European countries have been keen to attract innovation to their shores and even give tax incentives fully approved by the Commission.

This year saw the inaugural launch of new “Innovation Box” tax rules in Netherlands, which was fully approved by the Commission after the OECD put some pressure on the Netherlands to change the old scheme which has been successfully running since 2007. The old scheme has been providential to attract many R& D companies to set up base in the Netherlands and claim tax exemptions, reducing the rate of corporate tax to a preferential rate. This means that instead of taxing the full amount of such profits at the general corporate income tax rate of 25 per cent, only one-fifth of such profits may be taxed at that rate.

This means charging an effective tax rate of five per cent. Of course, this year there are new rules to prevent any misuse of the scheme but the lower rates are still available. The incentive applies to self-developed (meaning in-house) technology and creation of other intangible assets, such as the know-how for a new product or for a new production process. The new scheme which has been styled “the nexus approach” – this allocates development expenditures into qualifying expenditures and non-qualifying expenditures. It is opportune to explain what are qualifying expenditures. These are expenditures exclusively incurred for the development of the intangible fixed asset, with the exception of costs incurred for the outsourcing of R&D to group companies and indirect costs such as accommodation and financing costs.

Expenses for contract R&D activities performed by third parties are considered qualifying expenses since a company is expected to only outsource ‘non-fundamental’ R&D activities to third parties. Another bonus in this Innovation Box scheme (which was never introduced in our tax code) is the treatment of losses in the start-up period.  In my opinion, this is a clever way to attract multinational companies to set up R&D centres in our country to support a dynamic economy buttressed by cutting-edge technology. Simply put, the Innovation Box allows losses to be generally tax deductible at the general tax rate of 25 per cent (ours at 35%), not at the reduced effective tax rate of five per cent.  The cherry on the cake is that initial losses incurred before business operations have been started are also deductible at a 25 per cent tax rate.

At this stage, readers may ask, what has this genius piece of tax legislation got to do with us, a small island on the periphery of Europe?  It is only a part of the complex structure which constitutes an effective ecosystem that supports a culture of successful entrepreneurship. The grass roots of a successful industrialisation policy start with nurturing of start-ups (both local and those attracted to migrate here). For this purpose we need a paradigm shift in our mentality to attract FDI that is sustainable and is anchored on fundamental research conducted through business accelerators. But simply throwing money at the national start-up scene will not automatically create more members of that Billion Euro Club, whose members are known as “unicorns”.  These start-ups don’t exist in isolation.  It is true that many of them fail to create success. Sometimes the causes of such failure are the lack of careful nurturing in an ecosystem, which comprises a mosaic between venture capital, angel investors, mentors and the bricks and mortar where the start-ups create their magic.

Since many a year we run incubators – which are more about providing bricks and mortar and a place to work and not so successful as they still have the connotation of ‘life support’ rather than inculcating the ambition to innovate and do something bigger and better. The alternative which proved successful in the USA was the accelerator business model, whose origins are most often attributed to a vibrant start-up scene.

These form part of the much desired ecosystem that fostered Airbnb & Uber (so called Unicorns now worth billions).  Why is it so hard for Malta to start enjoying the success registered at other innovation centres run by universities such as MIT, Stanford, Oxford, Leiden and others?  Now that we are hosting two new educational institutions such as Barts medical school and AUM, we may take heart and try to attract more universities to create a nucleus of talent. Naturally the future output of graduates from these institutions can either result in a brain drain or ideally, they stay to populate innovation/research centres of international repute. These are non-existent locally and as stated earlier there is no impetus to sustain cohorts of talented graduates who simultaneously receive seed money, office space and mentoring in exchange for a percentage of equity.

What do such centres do?  Broadly speaking, they help ventures define and build their initial products, identify promising customer segments, and secure resources, including capital and employees. More specifically, we need accelerator programmes – these are usually of limited-duration, lasting about three to eight months, that help cohorts of start-ups with the new venture process. They also offer a plethora of networking opportunities, with both peer ventures and mentors, who might be successful entrepreneurs, programme graduates, venture capitalists, angel investors, or even corporate executives.

To conclude, this essential innovation reform may sound like a dream. Those enjoying the status quo criticise visionaries saying they are armchair critics lamenting that reality is somewhat different given limitations of our own size and geographical location away from the mainland. Surely, we have come a long way since the time when our island was a colony and we are a cohort of talented and resourceful people. It is a pity that our dreams cannot become reality unless somebody decides to pierce the proverbial glass ceiling.


Author: George Mangion
Published on Malta Today 23rd February 2017
Get in touch: info@pkfmalta.com | +356 21 493 041