Grey matter: can Malta bounce back from its FATF greylisting?

The news towards the end of June that Malta had been greylisted by the Financial Action Task Force (FATF), the inter-governmental anti-money laundering (AML) body, certainly came as a blow to the country and its government. In a nutshell, the Paris-based dirty money watchdog was saying there are weaknesses in Malta’s AML and funding of terrorism frameworks. This was the first time an EU member state has suffered the ignominy of being bestowed such a dubious honour and it meant the Mediterranean island joined the likes of Syria, Panama and Zimbabwe on the grey list currently comprising of 18 nations. Two countries are on the FATF’s blacklist: Iran and North Korea.

Malta’s Prime Minister, Robert Abela, described the decision as “unfair” and “unjust”, adding that the country would continue to engage in dialogue with the FATF. There had been some surprise in government circles regarding Malta’s inclusion seeing as the Council of Europe’s AML body, Moneyval, identified substantial progress in technical compliance relating to past shortcomings and that the country was no longer “non-compliant” with its recommendations.

Others were less shocked by the greylisting, though. “Surprised isn’t the word – a few of us saw this coming in many ways,” says Julian Buhagiar, co-founder of RB Capital. “It is something that is self-inflicted and even could have been averted. Surprised? No. Disappointed? Yes. A bit angry as well because we are starting to feel the pain.”

The FATF pinpointed three AML issues that must be addressed before the country can be considered for removal from the list. These are showing that ownership information for companies based in Malta are accurate, the enhanced use of financial intelligence to fight money laundering, and that government agency the Financial Intelligence Analysis Unit focuses on criminal tax offences to gather intelligence to aid Maltese law enforcement.

While we can debate the merits of whether Malta should have wound up in the FATF’s crosshairs, the country has courted its fair share of international scrutiny and negative headlines in recent years. In January 2020, Joseph Muscat resigned as Prime Minister in the wake of allegations of government corruption. It was alleged that he had protected those linked to the 2017 assassination of investigative journalist Daphne Caruana Galizia in a car bomb.

Galizia, who led a Panama Papers investigation into corruption in Malta, had been a fierce critic of its ‘citizenship for sale’ programme in which foreign nationals can obtain a Maltese passport, and therefore EU citizenship, in return for investment in the country. These so-called ‘golden passports’ have drawn the ire of the EU since the scheme began in 2014, although Malta isn’t the only EU member to offer such a scheme (Cyprus and Bulgaria do too). This wasn’t singled out by the FATF, yet it does little for Malta’s reputation.

For online gaming consultant Jeremy Fall, who has lived in Malta for six years, there are “politics at play” with the greylisting. “Malta being Malta, with its special tax rates and all those little special things it does to attract business to the island, upsets a lot of other countries.”

One of the special tax rates is the 5% corporation tax that the country was able to maintain when it joined the EU in 2004. But it seems the writing is on the wall for this appealing inducement as 130 countries, representing 90% of global GDP, back plans for a minimum 15% corporation tax, according to the Organisation for Economic Cooperation and Development.

This was also an issue addressed at the G7 summit in early June. Leaders agreed to a minimum global tax rate of 15% to crack down on tax evasion and stop countries offering lower rates in a bid to woo multinationals. Although local businesses pay 35% on profits, Malta’s 5% tax for international corporations is the lowest in Europe. The average corporation tax across the continent is 19.35%.

“The reality is, even before the greylisting 5% had to be uplifted,” says Buhagiar. “There was no way, given tax harmonisation and what happened recently with the G7, that it was going to remain. Greylisting or not, the 5% was living on borrowed time. I would hope that the large corporations have already factored this in.”

Service, please

Being just 17 miles long and nine miles wide, Malta has long relied upon its 300-odd days of sunshine a year to help drive tourism as one of the main contributors to GDP. Yet a shortage of natural resources and a population of just half a million meant the country turned to the services sector, particularly financial services and online gaming, to diversify its economy away from relying on holidaymakers. In fact, the igaming industry alone accounts for more than 13% of Malta’s annual GDP, while almost 300 licensees employ more than 6,500 people on the island.

The likes of Kindred, LeoVegas, Betsson, Kambi and Evolution are all headquartered in Malta, and most leading European operators have offices and staff there. Malta has also become a hotbed for companies and start-ups involved in the crypto and blockchain space, hence it earning the moniker the ‘Blockchain Island’. One of the world’s largest cryptocurrency exchanges, Binance, operates out of Malta, as does sports fan token start-up Socios, launched by Alexandre Dreyfus, the co-founder of Winamax.

“Malta has been very successful in attracting igaming companies, companies active in the cryptocurrency field and hedge funds,” says Mikael Pawlo, who resided in Malta for five years when he was CEO and co-founder of Mr Green, now owned by William Hill.

“With the greylisting, financial institutions will look to de-risk. This will mean that it becomes harder to trade with Malta. This will not directly affect igaming companies but it will have secondary effects, with already tough local bank relations getting worse. For smaller companies this is a major risk, whilst bigger ones have prepared for a while and already have options.”

Pawlo adds: “For Malta, as the European hub for igaming and blockchain start-ups, it is a potential disaster, but we [will] see in the coming weeks and months how this will play out in practice.”

It had been rumoured that the igaming and blockchain industries would be singled out by the FATF, but this didn’t come to pass when the official announcement was made on 25 June. However, one fear is the FATF’s decision will cause further banking headaches for gambling operators on the island.

“The big problem is with banking and the FATF warning is likely to exacerbate this further,” Regulus Partners wrote in a note. Businesses involved in gambling find obtaining commercial bank accounts extremely difficult, until they get to a certain (very large) size or have a strong domestic retail presence, the analyst firm added. “These caveats describe fewer than 20% of Malta’s licensees, meaning that the rest are struggling to move money about.”

Then there are the optics of this greylisting. For instance, could regulators in the US now look unfavourably on licence applications from Malta-based businesses, or those with a Malta Gaming Authority licence? At the very least it is likely to lead to increased scrutiny and due diligence.

“I think it is going to affect everyone at some stage,” says Buhagiar. “The smaller start-ups and the cash-strapped ones will be affected quickest because of the momentum effect. It is easier for the start-ups to be questioned by the MFSA [Malta Financial Services Authority] or MGA about specific paperwork or necessary processes – that’s already happening. What will happen in the longer term is the Kambis or Betssons of this world will start to say, ‘Given where Malta is, and with more favourable jurisdictions like Portugal, how viable is it for us to remain here?’ It may well be that other jurisdictions take advantage of this greylisting by creating incentives.”

Whiter than white

Malta will now have to get its house in order and demonstrate to the 39 members of the FATF that it has got to grips with the failings highlighted. It is understood the majority of members actually opposed the greylisting, that is apart from the influential voices of Germany, the UK and the US.

Fitch Ratings, which said the greylisting had “no immediate impact” on Malta’s ratings or those of its domestic-rated banks, warned that the FATF move could cause reputational damage for the country, potentially leading to an erosion of investor and corporate confidence.

And even when Malta is whitelisted, it will take time for confidence to return. “You can’t just flick a switch. It’s a slow build,” suggests Buhagiar. Research recently published by think-tank Tabadlab suggested Pakistan’s inclusion on the grey list on three separate occasions since 2008 cost the country $38bn in lost GDP. Meanwhile, a report by the International Monetary Fund suggested that greylisted nations saw capital flowing into the country fall by an average of 7.6% of that country’s GDP. In Malta’s case, that would roughly equate to a hit of almost €1bn a year.

The hope is that Malta can repeat what Iceland managed by removing itself from the grey list in October 2020, almost exactly 12 months after the country was added. That was considered a rapid extrication. Fall says the quicker Malta can get off the list, the quicker it can restore trust and credibility, yet people need to be “realistic” about how soon this could be achieved.

“I think they are a bit keen to get it done by October, but early next year, in the April meeting, I think we have a really good chance of being taken off the list.” However, he cautions: “If we were to fail a second time, I think it would cause more stress, or make things a little bit harder, but I believe if we can get out of it in a year, it will have no effect.”

That’s the concern: the longer it takes to get off the grey list, the more damage it inflicts to Malta’s economy, its industries and its reputation. Investors could then lose confidence in Malta-based gambling companies. And if in the worst-case scenario it takes three or four years, that would have serious consequences for banking and trying to move money between Malta and other EU nations. Perhaps industries that serve the igaming industry – lawyers and accountancy firms – up sticks and leave.

“We are in uncharted territory as this has never happened before to an EU member state,” says Buhagiar. He adds: “People will start to question why it is so difficult to get a bank account over and above how difficult it was before the greylisting, why it is taking so long to get an MGA licence, and why all of a sudden have products and services gone up, because they will.”

This would seem likely to make the island less attractive for those considering applying for an MGA licence, or existing licence holders, who use it to, ironically, serve players in grey markets. There has already been a downward trend in entities seeking an MGA licence; applications plunged by more than a third from 89 in 2019 to just 58 in 2020. This marked a 72% decrease on 2018 when the MGA received 209 applications.

“There was already a slowdown before the greylisting – this is definitely not going to help or reverse that,” Buhagiar opines. For now, it is a case of waiting to see how this plays out and, as Buhagiar puts it, if Malta can manage to “do an Iceland”. Combine this uncertainty with an inevitable hefty hike in corporation tax and the outlook for Malta looks decidedly cloudy.