Malta toughens up regulations to appease European investors

Malta Financial Services Authority gets serious in preparation for EU membership. Brendan Malkin reports

Malta has spent the last decade trying to prepare itself for accession to the EU, introducing a raft of laws designed to shake off its image as a stereotypical offshore tax haven. But it now stands uniquely in an economic no man's land.

Behind it are the shackles of offshore notoriety, so attractive to the likes of the Russian investors in nearby Cyprus, while in front lies the challenge of the increased regulation necessary to attract European investment. The likes of HSBC, Fidelity, Commercial Union and Rothschilds have already been wooed, but more are needed.

Now, following Ireland's 'yes' vote to European enlargement on 20 October, the path has been cleared for Malta's accession in 2004; but will the necessary regulatory and financial services framework be in place and will the legal community be ready?

A senior employee at the Malta Financial Services Authority (MFSA), which like its UK equivalent recently widened its regulatory remit to encompass banking, insurance, investment services, company compliance and its stock exchange, pointed out that it will not be an easy ride for a small island to set up a regulatory and compliance regime that is on a par with Western Europe's.

Nevertheless, the country has made significant headway, introducing EU-compliant legislation for the prevention of money laundering and strong financial services legislation. The MFSA turned to City firms that included Dechert and Freshfields Bruckhaus Deringer to help draw up the new rules.

One of the country's leading local firms is Ganado & Associates, a small family firm that continues to eschew the partnership structure now being adopted by many of its peers. Indeed, the firm has played a pivotal role in Malta's transformation. Max Ganado, its most senior lawyer (the firm does not have a managing partner) has the task of revising old trust laws that currently do not require beneficiaries of trusts represented by nominees to disclose their identities.

The Organisation for Economic Cooperation and Development (OECD), of which Malta is a member, considers such laws to be a vestige of Malta's dark, pre-1994, unregulated years. The OECD has never assigned Malta to its blacklist of non-transparent tax havens, and Malta is committed by 2005 to cooperate further with the OECD through an effective exchange of information.

Technically, Malta does remain an offshore jurisdiction. Some 200 companies retain offshore status against some 30,000 that do not, and legislation dealing with offshore business will remain in force until 2004. Its offshore status, however, is on its last legs. Companies and trusts are now fairly well regulated, and international entities setting up on Malta are subject to 35 per cent tax – although having paid this they can then recoup around 85 per cent of it.

Ganado's considerable international experience makes him a vital asset for the small island which is trying to introduce the equivalent of the UK's Financial Services & Markets Act and advanced securitisation and insolvency laws (the latter two are also being drawn up by Ganado). Good regulation is essential for business, which is also being bolstered in Malta through a succession of double taxation treaties, something that most offshore jurisdictions do not have.

Yet in Malta, like every other jurisdiction in the world, there is room for improvement. Malta has already spent some £35,000, a figure that is expected to double, on PricewaterhouseCoopers' forensic accountants as part of an investigation into an alleged money laundering case involving two lawyers. Neither has yet been charged, but they are being investigated for their alleged role in a smuggling operation involving Northern Ireland. Anton Bartolo, director of the MFSA's compliance unit, also complains that he is “not happy with the feedback from the [Maltese] police. The police are closed on their investigations.”

But Malta cannot be accused of ignoring the problem of laundering and, its Attorney General – an overworked individual with a particularly nasty case of corruption involving a number of his judges on his hands – says one of the island's five prosecutors is now dealing solely with laundering cases. The marked increase in the number of suspicious transaction reports (STRs), up from nine in 1998 to 43 in 2002, also indicates Malta's determination to crack down. In addition, a financial investigation unit to analyse STRs and refer them to the police for investigation has, albeit belatedly, been established.

In some areas there are those who even believe that Malta can teach the EU a few lessons. Ganado and the Malta Maritime Law Association are lobbying the EU to rethink its plans for Europe's shipping industry, which they claim will lead to shipowners and the bulk of registries shifting away from Europe. This is bad news for Maltese law firms, especially when half of the work of even Ganado's firm, which is heavily involved in commercial and privatisation work, is shipping-related.

Ganado argues that this will happen if the EU places shipping on a level playing field with other parts of the commercial sector. He refers to possible EU requirements for disclosure of auditors' accounts – “this is a problem for shipowners because it means providing information which they do not want to give” – as well as changes to traditional maritime disclosure rules that allow for the identification of a shipmanager rather than its owner.

Other areas of concern relate to bureaucracy, increasing the cost of registering and requirements for the nationality of crews. He made clear, however, that “EU maritime safety standards cannot be compromised”.

European accession is certainly crucial to the future growth of Maltese law firms. They welcome formal tie-ups with City firms, which they rely on heavily for referrals, particularly in relation to Maltese arms of international cases. Galea Salomone & Associates, for example, recently joined the Ernst & Young Law Alliance.

Regulation of the local Maltese legal community is also changing, although firms continue to be structured in a way more akin to English barristers' chambers than partnerships. Recently, firms were allowed to advertise in law journals and directories, provided it was done carefully and in good taste. There have been complaints about firms mentioning clients on their website, which they are barred from doing, although Maltese lawyers' representative body the Chamber of Advocates is reportedly poor at clamping down on this.

A backlog in cases has led to the recent introduction of the Small Claims Tribunal, and Ganado, as chairman of the Malta Arbitration Centre, is drafting new arbitration rules. The MSFC, in the wake of its recently bolstered authority since it took on the regulatory powers of the Central Bank of Malta, has also negotiated for London's Institute of Advanced Legal Studies to provide financial services training.

While MFSA chairman Joe Bannister bemoans the likes of Switzerland and Luxembourg for decrying Malta as a poorly-regulated jurisdiction, great strides have clearly been made. Malta's success will be gauged by the amount of foreign investment it can now attract. The problem that persists for the local legal community is that the majority still lack the requisite experience to attract international work. A steep learning curve beckons.