Deep Dive: The Impact Of Malta's Greylisting

August 9, 2022
Back
The shock of Malta’s placement on the Financial Action Task Force (FATF) was followed by swift regulatory action leading to a tenfold rise in its regulatory impact according to VIXIO analysis. Its welcomed removal a year later highlights the challenge of strengthening regulation with rising compliance costs.

Body

The shock of Malta’s placement on the Financial Action Task Force (FATF) was followed by swift regulatory action leading to a tenfold rise in its regulatory impact according to VIXIO analysis. Its welcomed removal a year later highlights the challenge of strengthening regulation with rising compliance costs.

When the Financial Action Task Force (FATF) placed Malta on the List of jurisdictions under increased monitoring, known as the greylist, in June 2021 the initial reaction was one of shock both within Malta and the EU. Business and investor sentiment fell, particularly in the financial and igaming sectors.

Malta’s listing followed the July 2019 release of FATF’s Fifth Round Mutual Evaluation Report on Malta, which described serious deficiencies in the jurisdiction’s anti-money laundering (AML) measures.

Despite being in technical compliance with FATF’s recommendations, the report found numerous enforcement issues, including investigations and prosecutions for money laundering (ML) not being a priority, limited resources given to assessment teams and not being in a position to investigate cases related to financial, bribery and corruption offences.

Analysis from VIXIO in 2021 shows that Maltese authorities were already implementing FATF’s recommendations in an attempt to stave off potential membership to the notorious greylist, showing that even the implicit threat can make authorities act. As we know, however, this last minute effort failed.

Initial reaction

Initial sentiment to Malta’s greylisting was mostly negative, with investors and employers wary of the short- and long-term consequences.

A survey of Maltese firms, carried out by the Maltese Employers’ Association (MEA), showed that businesses were pessimistic about the impact of greylisting on them, with 65 percent of respondents believing it would have a strong impact on their business and 89 percent of financial services and online gambling firms “anticipating strong repercussions” from the greylisting, suggesting that, at least in Malta’s case, these sectors felt particularly vulnerable to the greylist.

Businesses were also “concerned about rising compliance costs”, with some companies having “resorted to employing additional personnel to deal with the bureaucracy of added compliance”.

Analysis from VIXIO GamblingCompliance also found that firms operating in Malta were finding it more challenging to raise capital, particularly from foreign investors. This was in part from the “deep reputational damage” Malta appeared to be suffering, which was hitting both large and small companies alike.

As well as being added to FATF’s greylist in Q2 2021, Malta was added to the UK’s list of high-risk third countries, known as the red list. According to Regulation 33b(1) of the Money Laundering Regulations (MLRs), this requires the UK regulated sector to apply enhanced customer due diligence and enhanced ongoing monitoring to a client in Malta or parties connected to a transaction which are established in Malta. In July 2022, Malta was also removed from the red list.

No longer attractive

According to a 2021 EY report on Malta’s economic attractiveness, which surveyed firms in the weeks after the greylist, a significant percentage of investors (46 percent) said that “Malta is currently unattractive for FDI”. This was a sharp change from the year before when 62 percent of firms believed Malta was an attractive place to invest in, showing that the greylisting resulted in, at least in the short term, a pendulum shift in investor sentiment in terms of attractiveness.

EY Report stats

Source: EY report

Reputation was also a strong focal point for respondents, with 84 percent believing the greylist would lead to reputational damage for Malta as a place to do business and more than half believing it would make doing business in Malta more difficult.

This comes on top of an already poor opinion of Malta’s legal framework, with 64 percent saying the country’s stability and transparency of its regulatory environment was not attractive. And for the second year running, firms ranked regulatory stability as the most unattractive part of doing business in Malta.

In the same survey, two of the top three priorities that respondents thought Malta needed to focus on to remain globally competitive were regulatory-based: rebuilding Malta’s brand and reputation; and strengthening enforcement and monitoring of institutions.

Investors were also less sure about the future, believing it was “too early to judge the FATF’s impact” and “hopeful that a swift turnaround is possible with the right and timely action”. This could be a reason that the report found “eight out of 10 investors would like to remain (in Malta) here for the long-term”.

The long term

Lack of economic change

Although there was much anticipation from businesses, investors and regulators that the greylist would have a measurable impact on Malta’s economy and overall attractiveness, in practice, there has been little discernible economic impact from the greylisting.

GDP growth saw only a slight dip in the months leading up to the greylisting, followed by a sharp rebound after. However, this significant upturn is likely to have more to do with the easing of COVID-19 restrictions, which had a much greater impact on the Maltese economy in the year prior, due to the island’s dependence on foreign tourism.

Similarly, despite apprehensions early on during the greylisting from investors, net inflows of foreign direct investment (FDI) bounced back in Q3 2021, having fallen somewhat in Q1 and Q2, which suggests that the hit to business and investor confidence was only temporary.

Additionally, although there were at least 45 financial firms that voluntarily gave up their licence during the greylisting, when questioned on this, the chairman of the Malta Financial Services Authority (MFSA) said this was not a major problem, saying that most of the large institutions had stayed. On top of this, the majority of the 45 firms that left the market were mostly outside the payments sector.

Regulatory surge

Although Malta has faced limited financial and economic pain from its time on the greylist, the main impact appears to be the dramatic change in Malta’s regulatory framework, propelled by more active and emboldened regulators.

VIXIO found that in the months after Malta joined the greylist, regulatory impact rose tenfold from a small fraction of the global average to several times the level of impact. This is by far the largest and most sudden change in regulatory impact VIXIO has come across and stems partly from Maltese regulators’ previously low activity, combined with the speed in which these regulators subsequently implemented all of FATF’s recommendations.

Regulatory Impact Index

It is possible that this will mostly be a one-off rise in regulatory activity, particularly as Malta is now one of the few countries which is compliant or largely compliant with all 40 FATF recommendations, meaning it is unlikely to fall foul of FATF for the time being.

However, evidence from the MFSA’s enforcement effectiveness dashboard suggests that this has had a semi-permanent, if not fully permanent, effect on the Maltese regulator, making it a more active regulator and enforcer of rules.

  • In 2021, there were 76 enforcement actions taken, an increase of 46 percent from 52 in 2020.
  • More than 50 percent more supervisory interactions from around 400 to 600.
  • Administrative penalties amounting to €907,518 in 2021, compared with €1.2m for 2017-19.
  • A 44 percent increase in suspicious activity reports from around 5,000 in 2020 to 7,218 in 2021 and an 86 percent increase in intelligence reports from 4,539 in 2020 to 8,443 in 2021.

Although there was a sudden surge in regulatory activity when greylisting occurred, Malta continues to have above average regulatory activity well after the initial shock, with recent updates such as four regarding sanctions against Russia suggesting regulatory impact is likely to remain higher for the foreseeable future.

Overall, the effect of being greylisted has had a significant impact on Malta, with the country experiencing short-term declines in sentiment, combined with a dramatic increase in regulatory activity and impact.

Payments and gambling firms operating in recently greylisted countries, such as Gibraltar, or in jurisdictions with low FATF compliance could expect a similar experience to Malta’s, particularly for jurisdictions inside the European Union, with authorities acting fast to restore confidence, while trading off a more relaxed regulatory framework for a stricter one.

Methodology

Understanding VIXIO’s tools and trackers

By combining this information and giving it weighting according to its importance, per jurisdiction, our Regulatory Impact Index gives clients a holistic and global view of the key trends in regulatory change. These weightings are:

  • Informative - an update that gives clarity to regulation - weighting of 1.
  • Indicative - an indication of future regulatory change - weighting of 2.
  • Actionable - an update that changes the regulatory environment - weighting of 3.

The Regulatory Impact Index’s score has then been set so the average of 2019 is equal to 100, giving clients a relative understanding of how impactful regulatory changes have been compared to a pre-COVID-19 benchmark. A number above 100, therefore, represents regulatory impact greater than 2019, whereas a figure below 100 represents regulatory impact lesser than 2019. It does not necessarily mean de-regulation. In compiling our index score, the number of jurisdictions being monitored at the time is factored in, and at the time of writing was 59.

Our premium content is available to users of our services.

To view articles, please Log-in to your account, or sign up today for full access:

Opt in to hear about webinars, events, industry and product news

To find out more about Vixio, contact us today
No items found.