While the financial services sector in Malta continues to deal with the economic fallout caused by COVID-19, ever-changing regulations and the effects of reputational damage, Dr Malcolm Mifsud, Founding Partner at Mifsud & Mifsud Advocates, sheds light on the role of the Financial Intelligence Analysis Unit (FIAU), and how the national regulator is also subject to checks and balance.
In 2020, the financial services industry in Malta, which accounts for 12 per cent of our GDP, is experiencing stress, the kind of which it has certainly never faced before. Like the rest of the world, and other sectors, the sector has experienced new challenges. COVID-19 is resulting in less disposable income, new working practices at the office and from home, and employment shrinkage.
In addition, Malta has been hit by reputational issues, which practitioners in the industry have found difficult to downplay. Inquisitive and prospective clients do question whether they can boast to their competitors that they have invested in and set up vehicles in a reputable jurisdiction such as Malta. These two issues on their own have tested the financial services industry’s endurance. The stability that the industry has enjoyed cannot be taken for granted anymore.
There is another issue concerning the industry currently, and this is the enforcement of Anti-Money Laundering (AML) legislation. In essence, this should be a good thing. A reputable jurisdiction very much depends on the capability of weeding out the bad apples and making sure that everyone is observing the same rules. AML rules are complex and labour intensive. However, this year, the impression is that many subject persons are being inspected, investigated, or fined, more so than in previous years.
This is indicated as such on the FIAU’s website. In 2015, the FIAU published that two subject persons were awarded administrative penalties. In 2016, this increased to four, then, in 2017, there was only one. In 2018, the number went up to two, while in 2019, it is claimed that the FIAU awarded an administrative penalty to one financial institution. However, in 2020 and as at the time of writing, the Unit’s website claims that 26 entities have, so far, received an administrative penalty.
There are certainly many more that do not require publication. The media reported that some received substantial penalties that may be crippling. The legislation on penalties makes it easy for penalties to add up for a single organisation, therefore, a certain amount of alarm may not be unjustified.
The aim of this article is not to delve into why the FIAU and other regulators have taken these steps now. Nor am I going to judge whether the FIAU enjoys the moral authority to impose these fines. The aim of this article is to dispel the common belief that these administrative penalties cannot be challenged.
It is important to point out that the FIAU is an important component in the battle against Money Laundering and the Funding of Terrorism (ML/FT). It is the FIAU’s main task to pinpoint weaknesses in the systems that it inspects and make sure that loopholes are closed. The FIAU is important to identify any illegal activity and assist in the prosecution of any person who is responsible for ML/FT. However, in any democratic society, any regulator should be subject to checks and balances, and one of these is that decisions taken should be challenged. Therefore, the answer to the title of this article, of whether the FIAU can be challenged, is yes. Now the question is how.
The Prevention of Money Laundry Act, 1994 provides for criminal prosecutions and administrative sanctions. I will be dealing with the latter. According to Article 13 of the Prevention of Money Laundry Act (the Act), the Minister may legislate for administrative penalties and impose a maximum penalty of €5 million; or, alternatively, twice the amount of the benefit derived from the contravention, breach or failure to comply, where this can be determined; or else 10 per cent of the total annual turnover according to the latest approved available financial statements.
The Minister, in fact, has legislated on penalties to be imposed and this is found in Article 21 of the Prevention of Money Laundering and Funding of Terrorism Regulations, Subsidiary Legislation 373.01. To list a few, the FIAU may impose an administrative penalty of between €1,000 and €46,500 for every separate failure to comply with a lawful requirement, order or directive, and for every separate contravention.
Many have questioned sub article 3 in the Prevention of Money Laundering and Funding of Terrorism Regulations (PMLFTR), because it states that the FIAU can impose these fines “without recourse to a court hearing”. This is normal practice in administrative law, thus allowing an administrative body to impose a penalty without first going to court. This does not mean that after administrative penalties are imposed, the Courts may not review the decisions taken.
The same regulations allow the FIAU to impose a penalty of not less than €250 for minor contraventions. However, when these are serious, repeated or systematic, then the administrative penalties may add up to €1 million or not more than twice the amount of the benefit, in those cases where the subject person is carrying out relevant activities. When the subject person carries out relevant financial business, the administrative penalties take an even more serious turn and the administrative penalty may be of a maximum of €5 million or 10 per cent of the total annual turnover according to the latest available approved annual financial statements.
To my mind, and in my opinion, administrative bodies should adopt the least of the maximums provided by law. For example, if the 10 per cent of the total annual turnover is less than €5 million, then the lesser maximum amount should be adopted.
Administrative penalties may be applied to individuals who are directors of the company in contravention, or officers or persons responsible for the overseeing of the AML operations. The administrative penalties range from €1,000 to €250,000.
These penalties may be challenged before the Court of Appeal. This is now regulated by the Prevention of Money Laundering Act. Appeals may be lodged if the administrative penalties are beyond €5,000. Does this mean that penalties under this amount cannot be appealed? I believe that they may. Although one cannot make use of the provisions found in the Act, the ordinary Civil Courts may be competent to review the administrative penalty. The court and legal costs may be an issue, if one wants to pursue such an avenue.
Recent amendments to the Act impose a time limit on the Court of Appeal to six months. On the face of it, this may be a good thing, because both the appellant and the FIAU will have a decision within a short time. But in reality, it is not. As a litigation lawyer, I see that the legal issues in dispute are complex and generally the evidence may be voluminous. A speedy process may result in a rushed process, which is more in the FIAU’s favour than the party appealing. This time limit may be extended with the consent of both parties, meaning that if there is no consent of one the parties, then there is no extension.
One would be justified in asking whether this is the only remedy. To my mind, the provisions of judicial review under the Code of Organisation and Civil Procedure still apply. There may be circumstances where any administrative authority, including the FIAU, may step out of line and act beyond their powers, what we lawyers call ultra vires. Then, if these circumstances exist, one may have to choose between the appeal mentioned above or a judicial review action in the Civil Courts.
The new amendments to legislation and the importance being given to the enforcement of AML rules and procedures has now made this part of the law fascinating and intriguing to any litigation lawyer.
Dr Malcolm Mifsud
Founding Partner
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