How to fail as a State

It is easy to trip up over the details of Grand Theft Europe – this website’s probe (as part of a network of 35 European media partners) into massive cross-border tax fraud in which Malta plays a recurring role. But underlying everything is a simple point. The criminals involved don’t take Malta seriously.

The details are intricate because they involve 300,000 pages of previously unseen documents, and a probe involving media organisations in every European country. But three overarching points are evident.

First, several named Maltese companies are vital links in a fraudulent trading chain where enormous amounts of VAT are racked up, never paid, and then nonetheless claimed as refund. The profits are raked in by criminals but sometimes, according to the European Commission, the money is used to fund terrorism or mafia organisations.

Second, on a European-wide scale the sums involved – €50 billion of taxpayers’ money lost in fraud every year – dwarf Malta’s annual budget. This point needs to be made because it doesn’t just show the scale of the enterprise. It also shows that Malta is treading in very deep waters.

Finally, some of the scams go back many years – almost a decade in certain instances. Being targeted for this kind of criminal activity is an occupational hazard for financial services jurisdictions like Malta, irrespective of who’s in government.

It’s important not to confuse this fraud with the tax avoidance that Malta’s financial services routinely facilitate, and for which they are criticised in some quarters. The fraud is a crime, whereas tax avoidance is based on exploiting legal loopholes. The fairness and morality of facilitating tax avoidance are up for debate. There’s no debate about tax fraud. It’s theft.

Arguably, tax avoidance pits the national Maltese interest against that of European taxpayers elsewhere. But with massive VAT fraud, there is no such conflict of national interests. Maltese taxpayers are being cheated as well.

They’re cheated in multiple ways. What companies don’t pay, ordinary taxpayers need to make up for. Lower tax revenues restrict economic growth; slower growth for some ends up slowing growth for everyone. It undermines the internal market by using its exemptions for criminal ends.

And criminal infiltration of the economy is never good. It increases the economic and political clout of those who have no interest in supporting democracy or fair rules. They will play a dangerous game even with their legal investments. It’s the country’s security, in all its dimensions, that will be undermined.

What’s remarkable about the documents is that they reveal these criminals consider Malta a soft touch. It is openly discussed in these terms. Thanks to ill-equipped, understaffed authorities, and a desire to be ‘business-friendly’, Malta’s softness is considered a routine feature, not an occasional aberration.

Three conclusions follow. First, as long as this story remains news carried by one website, it’s a sign that we have collectively not grasped its gravity. The practices revealed by this story jeopardise not just the credibility of our financial supervision and services; the health of our political system is at stake.

Second, if we are to fix things, accusations of bad faith need to be put to one side. No one who takes the story seriously does so to undermine the financial sector or the country’s interests. On the contrary, it’s in the country’s interest that proportionate action is taken.

Third, proportionate action means investing heavily in the monitoring authorities. It’s evident that criminal infiltration cannot be entirely eliminated. But the staffing and equipment levels of the monitors and enforcers must be in the same league as the volume of activity they’re supposed to keep under their watchful eye.

The State’s first duty is providing security and protection against criminality. Countries with dangerous neighbours either get themselves a well-equipped, disciplined army or else they risk becoming a failed or failing State. We have chosen to enter an economic sector that is itself legitimate but which attracts the attentions of dangerous people. The duty of the State here, in defending the boundaries of legitimate economic activity, is no less serious than the duty to protect the legitimate boundaries of the geographical border.

If we don’t, or can’t, defend against systemic infiltration by organised crime; if we are considered a soft touch; if we can’t react robustly when such infiltration is detected… then we are failing as a State. There are no two ways about it. We’d be a failing State.

Read the Grand Theft Europe investigation:

#1: Malta’s role in a scam worth €50 billion annually

#2: Fraud by companies in Malta exposed