Issue link: https://maltatoday.uberflip.com/i/1411841
Andy Ellul is a Labour Party candidate Andy Ellul 12 maltatoday | SUNDAY • 19 SEPTEMBER 2021 OPINION THE issues highlighted by the FATF that led to Malta's grey- listing clearly indicate that the fight against financial crime needs to extend beyond the re- mit of the regulated sector. The onus to ensure compli- ance with anti-money launder- ing laws and regulations has to date been placed predomi- nantly on the financial servic- es sector. Subject persons in the financial services sector, gaming, real estate agents and professionals such as corpo- rate service providers, lawyers, notaries and accountants have been inspected by regulators and some have been adminis- tered hefty fines due to compli- ance breaches. Significant pen- alties and naming the offenders are tools used by regulators to send a strong message to the sector that the jurisdiction does not tolerate lax controls that could lead to grave reputa- tional damage. Subject persons are handed the responsibility to fill the role of gatekeepers and help maintain a robust fi- nancial system. A more in-depth analysis and understanding of the issues identified by FATF leads to a question on whether the juris- diction needs to look beyond the regulated sector to ensure that Malta is truly protected against financial crime. A simple definition of money laundering would be "the pro- cess by which criminals dis- guise the original ownership and control of the proceeds of crime by making such proceeds appear to have derived from a legitimate source". The defi- nition clearly indicates that fo- cusing on the regulated sector and placing responsibility pre- dominantly on this sector to act as the gatekeepers for pro- tecting the jurisdiction from financial crime is not enough. One must consider the fact that a lot of criminals will not try to clean their dirty money through the financial system, which entails a highly rigorous process – including answer- ing numerous uncomforta- ble questions and providing a mountain of documentation. This is very much the case with one of the main points high- lighted by the FATF, namely, tax crimes. Tax evasion crimes are a re- sult of undeclared income with the objective of not paying the tax due on that income. Tax evasion has been a headache for Governments globally and a challenge for authorities to properly identify and control. Tax evasion had been identi- fied as a high-risk threat for the money laundering of domestic proceeds of crime in the latest National Risk Assessment car- ried out in 2018. The jurisdiction is cognizant that tax evasion is a vulnera- bility that poses the highest threat for money laundering. The government has been ac- tively addressing this challenge and is in advanced stages of transposing new legislation – such as the newly enacted Proceeds of Crime Act, which facilitates the identification, tracing, freezing and confisca- tion of proceeds of crime. Dr Bernard Grech, the person who presents himself as an al- ternative Prime Minister, had failed to pay his tax dues until the eve of throwing his candi- dature to lead the party in op- position. Surreal, almost. However, a major challenge for Malta to combat tax-relat- ed crimes is its cash-intensive culture, which poses the high- est risk and major obstacle in identifying tax evasion. Cash is deemed high-risk for money laundering mainly due to a lack of 'audit trail', making it in- creasingly challenging to trace the source of funding. Identifying and verifying the source of funding in a trans- action is key to understanding whether the origin of the funds is coming from a legal source, for example, employment, sale of shares, inheritance etc. This explanation brings me back to the argument that tax crimes extend much beyond the regu- lated sector. A cash-intensive culture – such as that preva- lent in Malta – is a legacy issue which is a bit challenging to overcome as it requires a cul- ture shift which cannot occur overnight. The government has, how- ever, challenged this cultural prevalence by introducing reg- ulations which impose a cap- ping of €10,000 on the use of cash for the acquisition of val- uable items including property, jewellery, vehicles and artwork. The imposition of this regula- tion clearly shows that govern- ment is prioritising combating financial crime over populism – a stark difference from the Nationalist opposition which during a 25-year span in gov- ernment never addressed this overwhelming issue but; on the contrary, it fuelled it. Moreover, during recent years one can only admire the increase in the scrutiny during border controls which led to huge amounts of undeclared cash being confiscated. Another vulnerability that could possibly lead to tax crimes is the creation of com- plex corporate structures that obscure the trail of funds and the true ownership of the com- pany, set up specifically with the intent to evade tax. The use of nominee shareholders and other such instruments – very popular in the nineties and be- yond – can further conceal the true ownership of a company. As a result, any profits earned by these companies might re- main under the control of the ultimate beneficial owner but might not be declared to au- thorities and subsequently taxed. This issue links with the other point highlighted by the FATF relating to the lack of transpar- ency in ownership structures. The Malta Business Registry has been actively addressing this issue by carrying out due diligence and onsite inspec- tions on companies and taking action where companies either do not provide the necessary information on the beneficial ownership or provide inaccu- rate information. The CEO of the MBR has not- ed that Malta is one of the few jurisdictions to carry out onsite inspections on companies to verify the Beneficial Owners, and that as of July 2021, around 10,000 companies were struck off following an extensive due diligence process. Reducing tax crimes requires educating the country to fur- ther understand that what is paid in taxes will be re-injected in the economy, and ultimate- ly used to improve basic and essential services such as edu- cation, health, and road infra- structure, benefitting us all. In the last eight years, Labour has invested heavily in the peo- ple and made sure that no mi- nority was left behind. Combatting tax crime is an overarching challenge