MFSA annual report suggests panic ahead of impending Moneyval audit

The MFSA underwent a frantic year in 2020 attempting to get its house in order and mollify international critics at Moneyval and the FATF, the MFSA’s annual report for the year suggests.

The number of inspections the authority carried out jumped and overall income rose by €1 million, while the surplus for the year rocketed almost four-fold on dramatically increased income from fines, the document shows.

The MFSA carried out 419 inspections in 2020, up by 84% on 2019 numbers and by 149% on those in 2018. This is evidence of “a super effort” to catch up on previously lax standards and “may be exclusively attributed to then approaching Moneyval test,” an industry source familiar with the authority told The Shift.

The Council of Europe’s anti-money laundering monitoring body Moneyval carried out an audit of Malta’s financial services jurisdiction in early 2021, after the island failed a similar test in 2019.

Although Malta satisfied the audit, which evaluated the reforms introduced since 2019, the international Financial Action Task Force last week moved Malta onto its so-called grey list, citing lack of enforcement, poor transparency and weak financial intelligence on tax crimes as the main “serious strategic deficiencies” of the jurisdiction.

The fact that the financial services watchdog took in so much more cash from penalties in 2020, which increased to €975,462 in 2020 as against €1.2 million in the previous three years combined, is a strong signal that it had been “lax in its enforcement” until the looming Moneyval test forced it into action, the source said. The authority carried out 52 enforcement actions in 2020, it said in its report.

The increased income from fines boosted the surplus registered for the year, which jumped to €2.7 million in 2020 compared to €749,000 the year before. This despite the fact that the government’s contribution dropped by almost €3 million to €21,558 million from €24,764 million in 2019 while operating expenses shrank by nearly €4 million.

The government’s subvention, or contribution, poses a problem in itself, because it “prevents the Authority from acting independently of government, and this is the reason why this institution can never apply enforcement/governance with equity and without political interference,” a veteran auditor told The Shift.

The report also shows that while the MFSA sought in 2019 to shed staff through a voluntary severance scheme (for which it paid €681,585), it then went on to hire 60 new employees, bringing the full complement to 382 in 2020 versus 322 in 2019. This swelled employee costs to €18.1 million in 2020 from €15.5 million in 2019.

The fact that the authority offered a severance scheme to get rid of staff one year, only to increase its staff complement by another 60 employees the following year, raises a number of questions.

The MFSA also reported a tenfold increase in the number of registered beneficial owners of trusts in 2020, with 3,000 declarations being made last year. This implies that the Malta jurisdiction was being chosen specifically because of the secrecy it offered to the owners behind trusts set up in Malta.

“This, in my opinion, is absolute confirmation that Malta was being preferred as a jurisdiction because of its advantage of secrecy of the ultimate beneficial owners of trusts and companies owned by the trusts,” and is one of the main reasons the FATF failed Malta on issues of transparency, experts who spoke to The Shift agreed.