Impact Analysis: How FATF’s Greylisting Will Affect Malta and PSPs

This analysis looks into the details of the Financial Action Task Force’s (FATF) decision to add Malta to its list of jurisdictions under increased monitoring (greylist), the reasons for it happening, the conditions FATF has set Malta for being delisted and the short- and long-term impact of the country being greylisted. The analysis will also look at how this will affect payment service providers (PSPs) headquartered and operating in Malta.

Why Malta was greylisted

In July 2019, FATF released its Fifth Round Mutual Evaluation Report on Malta, describing serious deficiencies in the jurisdiction’s anti-money laundering and counter-terrorism financing (AML/CTF) regime. The findings differed from an earlier MONEYVAL technical evaluation, that looked only at legislative implementation and found Malta to be a compliant jurisdiction. Almost two years later in June 2021, Malta, along with Haiti, the Philippines and South Sudan, were put on FATF’s list of Jurisdictions Under Increased Monitoring, colloquially known as the “greylist”.

Although the mutual evaluation report found some evidence of anti-money laundering enforcement, such as AML-based convictions and a framework for international cooperation in Malta, the report found numerous issues that cast uncertainty on overall effectiveness of enforcement. This is because, unlike MONEYVAL, FATF examines both implementation and effectiveness of Malta’s AML/CTF framework. Specifically:

• Investigations and prosecutions of money laundering (ML) in the strict sense appeared not to be a priority for the Maltese authorities.
• Limited human and financial resources allocated to investigations and prosecutions hampered the authority’s capability to fight ML.
• The assessment team were unconvinced the authorities were able to effectively investigate and prosecute high-level and complex ML cases related to financial, bribery and corruption offences.
• Cases of standalone ML were very rare and no recent case was presented in relation to financial sector professionals.
• The Financial Intelligence Analysis Unit (FIAU), the main AML regulator, was primarily focused on tax collection, rather than ML convictions.
• A risk-based approach to monitor the voluntary organisations sector had not yet been developed and implemented.

Moreover, due to the nature of Malta’s economy with a large international financial centre that is bank-centric and cash-intensive, FATF considers Malta’s financial sector to be highly vulnerable to ML. The mutual evaluation report, therefore, found ML investigations and prosecutions did not appear to be in line with the jurisdiction’s risk profile and the growing size and complexity of its financial sector.

This last point is significant as it shows that FATF does not evaluate jurisdictions according to the same level of ML risk but rather according to the expected risk of ML that jurisdiction is likely to expect. This means FATF requires a country such as Malta to reach a higher standard than a jurisdiction with a lower overall ML risk exposure/risk level, such as a country with a small shadow economy, low government corruption and a small financial sector.

Fulfilling FATF’s recommendations

Inclusion on the greylist is not time-specified and FATF has not provided a date as to when Malta would be removed from the greylist. Malta will, therefore, need to fulfil the following conditions, set by FATF, to be delisted.

Firstly, the jurisdiction must agree to cooperate in improving its AML capabilities, which Malta made a high-level political commitment to do in June 2021, shortly after the greylist announcement. Agreement to this condition means it is very unlikely for Malta to move to the blacklist, which recommends enhanced due diligence and counter measures such as sanctions and travel rules in some circumstances. Secondly, the jurisdiction must agree to implement FATF’s recommendations. For Malta, this means:

• Demonstrating that beneficial ownership information is accurate.
• That the appropriate sanctions are applied to persons if information provided is inaccurate.
• That gatekeepers which do not obtain accurate and up-to-date beneficial ownership information are also appropriately sanctioned.
• Enhancing the use of financial intelligence to support authorities pursuing criminal tax and related money laundering cases, including by clarifying the roles and responsibilities of the Commissioner for Revenue and the FIAU.
• Increasing the focus of the FIAU’s analysis on the above offences, to produce intelligence that helps Maltese law enforcement detect and investigate cases in line with Malta’s identified ML risks related to tax evasion.

It should be noted, however, that Malta has made significant progress in several areas that the mutual evaluation report recommended, mostly regarding supervision, investigations and sanctions. This includes:

• Strengthening the risk-based approach to supervision of financial and non-financial institutions.
• Improving the analytical process for producing financial intelligence.
• Resourcing the police and empowering prosecutors to investigate and charge complex money laundering in line with Malta’s risk profile.
• Introducing a national confiscation policy, as well as passing a non-conviction based confiscation law.
• Raising sanctions for terrorist financing (TF).
• Increasing the capability to investigate cross-border cash movements for potential TF activity.
• Increasing outreach and communications to reporting entities on targeted financial sanctions.

These changes were put in place during the time when FATF decided to pause work on identifying new countries with strategic AML/CTF deficiencies, due to COVID-19, which resumed in October 2020. This could be an indication that the Maltese authorities had reason to believe Malta could be greylisted if it did not implement at least some of FATF’s recommendations. It also suggests that the Maltese authorities are likely to implement the necessary changes to ensure the country is removed from the greylist.

Risks and mitigation measures for Malta

Overall, the FATF recommendations to Malta represent new requirements and a stricter, more burdensome, regulatory environment for PSPs operating in Malta. This means the jurisdiction could become a less attractive place for PSPs, either if it remains on the greylist with partial implementation or it successfully implements the rest of the FATF recommendations. And given the high risk of ML/TF that FATF considers Malta to have, the jurisdiction is likely to face a continued stricter regulatory environment and scrutiny.

To address this situation, the Maltese government may decide to deal with the parts of FATF’s concerns that do not significantly impact its economy negatively, such as taking steps to reduce corruption in government and business. The National Anti-Fraud and Corruption Strategy, published in May 2021, suggests that reducing corruption is a government priority. Additionally, the introduction of the Use of Cash (Restriction) Regulations in March 2021 will help to reduce the shadow economy and incentivise a move towards digital, cashless transactions.

More generally, the decision by FATF to greylist an EU country and, according to its self-defined risk profile, shows that, in theory, no country is immune to being greylisted themselves. The risk-based approach to FATF’s decision also highlights that just because a country does not qualify for the greylist now, does not mean that it will not be greylisted later, in part due to the relative success of their financial sector.

The macro effects of greylisting

Although FATF is an intergovernmental body of 39 members and cannot enforce its recommendations, in practice, the effect of greylisting is typically significant. This can be seen in a paper by the International Monetary Fund (IMF), which highlights significant detriments to being greylisted, as well as other outcomes.

The IMF estimates the negative impact on capital flows is large, on average -7.6 percent of GDP. This is possibly due to de-risking whereby financial institutions exit relationships with customers based in high-risk jurisdictions to reduce compliance costs, or by market enforcement, where resources are allocated in part based on the compliance risk of that jurisdiction.

Much of this effect is driven by capital outflows several quarters before a jurisdiction is greylisted, meaning domestic investors react in advance of what is likely to come and before international investors. Jurisdictions with a high proportion of companies with domestic investors are, therefore, likely to see the effects of greylisting before the fact, whereas jurisdictions with companies of mostly international investors, such as Malta, are likely to see the effects shortly after greylisting occurs.

The impact on payments is somewhat similar, with an examination of SWIFT monthly numbers of cross-border payments between 2004 and 2014 showing a 7–10 percent reduction in the number of payments sent to a greylisted country by the rest of the world. However, there is no consistent effect on the number of payments sent from a greylisted country and no evidence of a reduction in payment between greylisted jurisdictions. Additionally, the IMF found a V-shaped recovery in capital flows after an initial fall. This suggests greylisting creates a large degree of uncertainty, resulting in an overshoot before a correction.

Conclusion

Overall, Malta has taken the first steps towards implementation of the FATF recommendations for being taken off the greylist, although many more remain. It is, at present, unclear exactly when Malta will be delisted, although complete fulfilment is likely to be the main prerequisite. The future impact for PSPs is likely to be a greater future regulatory AML/CTF burden, both from monitoring and investigations and prosecutions by the authorities for ML/TF offences. Additionally, the Maltese government may decide to implement policies aimed at mitigating the risk of ML/TF in Malta, such as moving towards incentivising digital payments or taking steps to reduce corruption.