Joint ARQ Group and MBA Conference on AML and Financial Crime – 13th February 2020

MBA Chairman Marcel Cassar’s Keynote speech “The banks, as guardians against financial crime and of Malta’s reputation”.

“Honourable Minister, Distinguished Guests, Ladies and Gentlemen,

Good morning and, on behalf of the Malta Bankers’ Association, let me say how delighted I am to see such a large crowd here today to discuss a subject which has been for some time, and continues to be, on everyone’s mind and on everyone’s lips. The day is packed with excellent speakers and panellists and being one of the first speakers is a privilege but it also poses a responsibility to set the tone and also the tempo for the day.

While the central theme of this Conference is the action being taken following the publication of the recent MONEYVAL report, I liked in particular the sub-heading chosen in the promotion material for this event, which read: “The road to meaningful reform”. Because this Conference needs to evaluate not only the status of remediation post-MONEYVAL and what still is to be done, but must openly address the damage and future threats to Malta as a financial centre, and therefore to our reputation as a jurisdiction.

From a banker’s perspective, we certainly have a key role to play in preventing and tackling financial crime. No doubt about it. But although the banks may have resources, expertise and technologies to do that, there are other responsibilities to be carried. I will elaborate on this shortly. But let me introduce what I intend to cover over the course of my speech. First, I shall give some background to how the fight against financial crime has evolved in Malta, with particular reference to the banking sector. Then I shall come to the present, making reference to specific cross-border efforts under way to scale up safeguards against the misuse of the financial system by criminals. And to conclude I shall try to bring everything together and offer a few observations about how we can make the system more robust against the threat of those who wish to abuse it.

So let me start by taking you back 30 years to 1990, soon after Malta enacted its first international business legislation and created the Malta International Business Authority, which eventually was to transmute into today’s MFSA. It was also the year when the European Union was about to adopt the first anti-money laundering Directive: the Directive that required entities to apply customer due diligence requirements when entering into a business relationship, i.e. identifying and verifying the identity of clients, monitoring of transactions and reporting suspicious transactions. Since then we have had four revisions to that initial Directive, some quite radical, the most recent ones adopted in 2015 and 2018. But let’s keep in mind that Malta was not an EU member until 2004 after which it became subject to no less than the full rigour of AML/CFT legislation and regulation.

Malta first criminalised money laundering in 1994 by means of the Prevention of Money Laundering Act which also established the Financial Intelligence Analysis Unit (or FIAU). The Act was eventually extended to cover financing of terrorism and Regulations were published to be eventually supplemented by the Implementing Procedures issued by the FIAU. These Procedures provide an interpretation of the Regulations and their purpose is to guide and assist subject persons in understanding and fulfilling their obligations under the regulations, thus ensuring their effective implementation. The Implementing Procedures are binding on subject persons and failure to comply is subject to an administrative penalty. Specific Implementing Procedures for banks were issued in 2013.

But let’s go back for a moment to the first years of Malta’s project to develop an international financial services industry – the early 90s, when we were promoting ourselves as an offshore centre but without the safeguards against the risks which such centres were presenting. So how was life back then, in those barren years when we did not have any anti-money laundering legislation, when we were still learning modern financial supervision, when MONEYVAL was not yet in existence and the FATF was in its infancy? Did we have financial crime then and what were the risks to our financial system? Ironically, they were probably the safest years! The financial and banking system was less sophisticated. Malta was practically unknown in international finance, skills were basic, legislation and regulation were rudimentary and the early practitioners were mainly engaged in offering basic low tax structures in an ‘offshore space’. But above all, we still had exchange control. I can see quite a few puzzled faces in the audience … yes, Malta had exchange controls with all the red-tape, bureaucracy and paperwork they created. Any money launderer would run a mile from all that! In other words, the state of our ‘hybrid’ financial system offered some natural protection against the risk that it would be abused for crime.

Is that to say that proceeds of financial crime did not make their way into our banks then or before? Most certainly they did – for one thing, we Maltese always had an affection for cash with its favourable characteristics for laundering. But crime was on a lower scale than today, far less sophisticated, not as much a cross-border phenomenon as it is today and in any case there was little awareness, fewer controls and practically no training to detect laundering. Yet as our international financial services centre project was taking off we had a well-publicised incident, involving the layering carried out through an Australian rep office of one of Malta’s main banks and booked at its offshore banking subsidiary in Malta. It was a fairly minor episode by any standard but, coupled by other incidents involving offshore trading and holding companies registered in Malta, it drove the authorities then to draw a line and resolve: that Malta was to develop as an international financial centre on the back of policies promoting the highest standards of prudence and conduct. Meaning that we would allow only institutions of standing and repute and run by fit and proper controllers to be authorised for business.

That was the policy we saw being observed in the 90s by the then Malta Financial Services Centre – which became the MFSA — into the first years of the new millennium, as Malta steered clear from licensing start-up banks. On the other hand we saw jurisdictions like Cyprus growing on the back of strong capital flows from the former Soviet Union, earning it the reputation as ‘the place to go’ if you don’t succeed in getting a banking licence from Malta. I recall criticism being made at the time that Malta was losing out on opportunities and I’m sure that some would have lost on opportunities – but I’m equally convinced that as a jurisdiction it was the right policy to follow.

Unfortunately over the space of a decade or so, as we saw AML and CFT regulation tightening – suffice to say that we had three AML directives being promulgated in the space of twelve years – we saw licensing standards and enforcement change in Malta. Banks and bank controllers were approved and issued with authorisation to operate when the policies which, we thought, were still applicable – not to mention good sense, of course – should have suggested otherwise. The incidents involving these banks – they were members of our Association at the time – have been highly profiled, are outside the scope of this speech and it is anyway not my brief to pass judgment or otherwise. But they are examples of what can happen if banks and their controllers, as gatekeepers, do not take their responsibilities of Know the Customer, Know the Business and, I would add, Know the Consequences, seriously. Of course the responsibilities do not stop with them. I will come back to that shortly.

Let me now speak about a particular area where international efforts are under way to strengthen safeguards against the infiltration of financial crime into the banking system. In 2014 the Basle Committee on Banking Supervision published guidelines, which were then updated in 2017, on the ‘Sound management of risks related to Money Laundering and financing of terrorism’.  The guidelines described how banks should include money laundering and financing of terrorism risks within their overall risk management and how supervisors should consider these risks. They also complemented, and were consistent with, the goals and objectives of the FATF standards and principles and guidelines published by the Basle Committee. Now a new initiative is taking place to foster interaction and cooperation between prudential and AML/CFT supervision. The initiative is aimed at recommending an effective cooperation system and introducing detailed guidelines on when and how prudential and AML/CFT supervisory functions could exchange information and cooperate with each other. For this purpose a Consultative Document was issued by the Basle Committee last November 2019 and the consultation period ended last week.

Effective cooperation and exchange of information among prudential supervisors and AML/CFT supervisors is essential to reduce Money Laundering and Terrorist Financing risk, to maintain the integrity of the banking system and to ensure the prudential soundness and stability of banks. This cooperation may take place within a national authority undertaking multiple functions, between different national authorities responsible for different functions and also between different authorities in a cross-border context. This cooperation must not negatively impact the independence of either supervisory function in fulfilling its mandate. AML/CFT supervision in the banking sector aims to ensure compliance by banks with requirements for combating financial crime risks and to assess their processes and internal control systems in order to mitigate those risks.

Money Laundering and Terrorist Financing risks could impact the soundness of the business model, the operational risk level and also the liquidity risk of a bank. Where an AML programme is assessed to be less than satisfactory it may also affect a bank’s ability to expand, merge or acquire. Needless to say that deficiencies in banks’ AML/CFT systems could have prudential consequences. Weaknesses or breaches in a bank’s compliance with AML/CFT requirements could have significant legal, regulatory, criminal and financial impacts, leading to reputational damage affecting the bank’s operations such as depositor outflows, loss of counterparties or loss of market access. Additionally, serious AML/CFT failings may lead to the revocation of a banking licence or termination of deposit insurance in some jurisdictions. And it must be furthermore kept in mind that such deficiencies might not be isolated to a particular occurrence but could be caused by, or indicative of, a bank’s wider, overall failures in governance, organisational structure, risk management and compliance.

Why did I bring up this topic?

Because, in my view, inadequate supervision of banks’ ability to prevent, detect and report financial crime has been a major area of failure identified in the MONEYVAL Report which could have been avoided. This is not a new discussion and I sincerely hope that no-one is surprised.  Financial crime prevention has long been a priority not only at the bank micro level, but also at a national and supranational authority as well as at a political level. It’s unlikely to go away anytime soon, actually it is now increasingly encompassing technology and cyber crime, so much that the European Central Bank’s Single Supervisory Board has again made it one of its main priorities for 2020. Not to mention that one of the European Banking Authority’s main strategic priorities for 2020 is <<to make AML a real priority for the EU>>.

It is positive to see concrete steps being taken in this direction as part of MFSA’s restructuring process, with financial crime compliance being flagged also as one of the MFSA’s supervisory priorities for 2020. It is to be further noted that the MFSA’s AML/CFT Strategy Document issued last summer signifies its articulated commitment to fulfil its supervisory obligations towards combating the risks of Money Laundering and Terrorist Financing within the context of the key initiatives of the National AML/CFT Strategy and in conjunction with the enforcement authorities, the FIAU and the Central Bank of Malta. Noteworthy too is the Prevention of Money Laundering and Financing of Terrorism Committee being established within the structures of the MFSA, reporting to the Chief of Supervision and presumably therefore having a supervisory mandate. Interesting also to see the Director of the FIAU now being appointed to the Board of Governors of the MFSA. Very important first steps …. but more needs to be done.

Let me therefore convey a few observations as my concluding thoughts.

First, we must return to promoting Malta’s financial services sector on the back of attributes and catchphrases like high entry standards, serious regulation and sound prudential supervision.

Second, and continuing on my first point, political, regulatory and industry players should consistently present Malta as a jurisdiction that upholds the highest standards of conduct, without compromises.

Third, when selling new industries and areas of economic activity we must understand, and be mindful of, the risks that they carry, their attraction to financial crime and money laundering. When banks do not show appetite there are probably good reasons – they are mindful of potential consequences.

Fourth, and speaking of consequences, we must be open and clear about what these are. Loss of correspondent banking connectivity, especially in the USD space, is no longer a threat, it is a reality. Although not unique to Malta, the loss of key correspondents can have far-reaching implications especially for our financial services industry.

Fifth, seeing the efforts taking place to strengthen prudential and AML/CFT supervision, the independence of the regulatory and supervisory authorities must now be better protected. They must be left free of all kinds of pressure, whether that is coming from politicians, civil servants, board members or, if not worse, from practitioners!

Sixth, the MONEYVAL Report emphasised that the financial sector’s appreciation of financial crime compliance and related risks varies, with some segments and professions showing serious deficiencies. The banks generally scored the best in this regard, but this is a very serious matter and some professions should acknowledge the improvements they need to urgently make in the conduct and execution of their responsibilities.

And lastly, linking from this, the banks must continue to do their part, diligently, prudently, even when they are criticised for being difficult in accepting business. Let me make it clear: we are in business and our licences carry with them both the privilege as well as the duty to support business activity. But with that comes the obligation to exercise the highest duty of care in safeguarding the integrity of our financial system from the risk of crime – because by doing so we are also safeguarding Malta’s reputation.”

MBA Secretary General Karol Gabarretta facilitating a panel discussion during the AML and Financial Crime conference, on correspondent banking relationships and the role of banks within the current challenges. The panel was composed of Enrico Bradamante, Fabio Axisa, Jane Estey, Rick Hunkin and Dr Anthony Abela Medici (left to right in photo).

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