Issue link: https://maltatoday.uberflip.com/i/1482153
8 NEWS 20.10.2022 Are banks in Malta missing a bailout? George Mangion George Mangion is a senior partner at PKF, an audit and consultancy firm, and has over 25 years' experience in accounting, taxation, financial and consultancy services. His efforts have made PKF instrumental in establishing many companies in Malta and established PKF as a leading professional financial service provider on the Island B ailout is a general term for extending financial support to a bank or a country facing a potential bank- ruptcy threat. A bailout may or may not require reimbursement and is oen accompanied by greater state regulations. e government or the reg- ulating body places strict re- quirements such as restructur- ing of organisation, no dividend payment to shareholders, change of management and in some cases a cap on salaries of executives till a stipulated time period. Politicians have long sought to provide safety nets or stim- ulus to banks in bad times. But over the past 15 years, they have become far more willing to shore up vast swathes of the economy. When industries, companies or people get into trouble, fiscal help is never far away. Let us talk about events that have shaped the past decades. First is the global financial cri- sis of 2007-09. In this period, there were many crisis-related bail-outs, including capital in- fusions for banks and mortgage lenders (remember the Leh- man Brothers collapse). e justification for the interven- tions was that doing nothing would have proved far costlier. If the banking system had col- lapsed, so would the rest of the economy. In Malta, banks have escaped the rigours of a bailout as they all successfully passed stress tests. Naturally, other compa- nies suffered under the stress of lockdowns and the govern- ment designed new measures funded by Development Bank to assist them. is year started with the surge in energy pric- es and inflation in double digit reflecting shortages of essential goods such as cooking oil, ce- reals and grains following Rus- sia's war in Ukraine. Locally, there has been no talk of banks needing a bail- out however this financial resilience clouds a turbulent banking maelstrom which was partly triggered by revelations of the Panama Papers, the un- solved assassination of a jour- nalist and associated scandals which led to the resignation of a number of top ministers at Castille. Malta was temporar- ily placed on the Grey List by FAFT. Both MFSA and FIAU had a busy time waking up to banking investigations. Starting with Bank of Valletta, during recent years have seen the bank face various reputa- tional hits. e bank also be- came entangled in the Pilatus Bank scandal – the now-shut- tered lender that's been de- scribed as a money laundering machine – which used Bank of Valletta as its correspond- ent bank. In 2019, this saw the bank fined some €60,000 by the country's financial watchdog for breaches related to money laundering. e State owns the largest shareholding and BOV has been a political pawn passed between Malta's ruling par- ties for decades – and in 2013 when the Labour Party re- turned to power, the new Gov- ernment installed a number of sympathetic figures in the bank's hierarchy, including the financial auditor of the Labour Party, who served as the bank's chair for several years. BOV remains Malta's larg- est bank with total assets ex- ceeding €14 billion compared to €7.2 billion of HSBC, and in 2012/3 it faced an embar- rassing string of censures over its botched property fund. he case goes back to 2012, when the property fund - officially known as the La Valette Multi Manager Property Fund - was launched in 2005. To refresh memories of readers - the La Valette fund was allegedly mis- sold to unsophisticated inves- tors who sadly lost their hold- ings. Many did not understand the volatility of their invest- ment yet it was no secret that Bank of Valletta (BOV)¸ acting as custodian of the botched fund¸ issued clean custodian certificates for three years in succession. It all started when promoters of the fund¸ par- ticularly at branches of Bank of Valletta¸ earned cool com- missions selling the vehicle as a low risk property fund, which eventually lost €50 million. Its brochure described it as a multi-manager property fund¸ which as the name implies has all the fortitude of a diversified and well-managed vehicle. It all started to go wrong when In- sight as the managers decided to place a sizeable chunk of the invested monies in Belgravia European Property fund - this collapsed. Bank of Valletta had decided to appeal against the decision taken against them by the fi- nancial arbiter, which awarded €3.4 million plus interest to 400 investors. Regulators pontif- icated that clients should not suffer a loss due to mismanage- ment. Two years later, BOV offered claimants €50 million in an attempt to settle the case. e offer was turned down and Finco Trust representing a number of investors put up a fight, first at a regulatory lev- el and ultimately judicially in front of the Arbiter for Finan- cial Services. e arbiter reminded BoV not only of its legal responsibility but also of its social responsi- bilities to so many hundreds of small investors who had trust- ed the Bank and relied on its advice and management skills, and this most often when they were of pensionable age in- vesting their life savings to supplement their pension. e wheels of justice grind slow- ly and MFSA following three long investigations fined BOV €200,000 for selling high-risk property fund shares to inex- perienced investors. Surely, a slap on the wrists compared to the unprecedented collapse of investor confidence shattered with a €50 million loss. Nobody resigned at the bank and no apologies issued cer- tainly not by politically ap- pointed stewards. Back to 2022, a court has or- dered nearly €97 million held in Bank of Valletta accounts linked to the late son of for- mer Libyan dictator Muammar Gaddafi should be passed on to the Libyan state. A bigger fly in the ointment was the Deiulemar trust story. Owners of the collapsed Dei- ulemar shipping giant were found guilty of fraud and sev- en members of the company's founders were jailed by an Ital- ian court in 2014. BOV had tak- en over a trust that held €363 million in the company's assets in 2009. When the company went bankrupt, bondholders whose savings were wiped out turned to BOV. e bank said it had filed an appeal in March, and subse- quently engaged with Deiule- mar curators to explore the possibility of a "mutually sat- isfactory resolution to the dis- pute out of court", and to mit- igate the further litigation risk on appeal. In its 2017 annual report, BOV declares it has "a strong legal position on these claims and, accordingly, no provisions are required". e bank's directors decid- ed not to take note of their li- ability by labelling the shares worthless following the bank- ruptcy of Deiulemar Group. e die was cast and an Italian court ordered Bank of Valletta to pay €370 million. In the 2017 judgement, the Italian Court stated that the Deiulemar Group had what is referred to as "un debito occulto", which is basically a hidden liability, of €753 million, and therefore a liability that was not recorded in the financial statements of the company. Finally, BOV reached an out of court settlement, without any admission of fault, agree- ing to pay a full and final set- tlement in the sum of €182.5m. Experts may agree that a bail- out is premature but a root and branch reform of top manage- ment may shed some light on a lacklustre performance which starved shareholders of divi- dends for almost four years.