Allegations of Mafia links with Maltese gaming companies have put fiduciary companies under the spotlight and raised a number of concerns but experts who spoke to Keith Micallef and Kurt Sansone warn against blowing the incident out of proportion.

The level of due diligence done by fiduciary companies has been one major concern raised, with many suggesting this was too lax, risking jeopardising Malta’s reputation in the financial services industry.

Alternattiva Demokratika even suggested ditching fiduciary services legislation, claiming it was a means through which foreign companies could evade tax or, worse, a stepping stone for an invasion by organised crime.

Last week, the name of former prime minister Lawrence Gonzi’s son, David, emerged in a money laundering probe by Italian investigators as part of a crackdown on the Calabrian Mafia, known as ’Ndrangheta.

Hard cash obtained through illegal means was allegedly recycled through ‘legitimate’ gaming outlets in Italy, Malta and other countries.

Dr Gonzi’s name surfaced as a result of his one-third shareholding and directorship in GVM Holdings, a company that provides fiduciary services.

It transpired that GVM Holdings is the sole shareholder in a number of companies that are, in turn, shareholders in key companies such as BetSolutions4U, which was implicated in the probe.

Dr Gonzi argued that his involvement was limited to holding shares on behalf of a third party that was disclosed to the authorities and providing legal services to one of the companies last year.

He insisted there was no indication something was wrong, adding that the transactions passing through GVM were very limited. He said the company had carried out its due diligence, including with the police in Malta and Italy, and all the people involved had been declared clean.

Nevertheless, following these developments, Dr Gonzi an-nounced that he had severed all ties with Betsolutions4U.

The case bears huge similarities with allegations that surfaced at the height of the oil procurement scandal in 2013.

Back then, Joe Cordina, who, at the time, was Labour’s financial administrator, was drawn into the scandal when the Nationalist Party noted that he was one of three directors of Intershore Fiduciary Ltd (IFL).

The company acted as shareholder and director of George Farrugia’s company, Aikon Ltd. Mr Farrugia was granted a presidential pardon to turn State witness in this scandal.

Mr Cordina co-owned IFL with lawyer Martin Fenech (a former PN candidate) and accountant Charles Scerri.

A 2011 investigative audit commissioned by John’s Group as part of a lawsuit, accused the directors of the fiduciary of being “accomplices” in Mr Farrugia’s fraud.

The directors of the fiduciary defended themselves saying Mr Farrugia had hid all evidence of tax fraud and corruption from them and, therefore, they could not be held responsible for his behaviour. When they learnt of his illegal activities, they severed all ties with him. Before that, they said they had carried out their duties to scrutinise the audited accounts and make Mr Farrugia go through a due diligence report and insisted there was never anything untoward.

Mr Farrugia had channelled certain transactions through a New York account, which was hidden from the auditor and the directors of the fiduciary. In court, the police said Mr Farrugia had admitted that the directors of the fiduciary company knew nothing of his illegal activity.

In both cases, questions were raised whether it was time to go back to the drawing board and revamp existing regulation on fiduciary services as it seemed not enough monitoring was in place.

Last week, Finance Minister Edward Scicluna told this newspaper that a review of the existing regulatory regime for Maltese-registered gaming and fiduciary companies was under way.

Malta Financial Services Authority chief Joe Bannister cautioned that any concerns had to be viewed in proportion to the number of companies offering fiduciary services and the high number of firms they serviced.

“I do not want to underplay the whole thing but these things happen everywhere. We must not go overboard and engage in self-mutilation but it is good that, from time to time, we review our processes,” he told this newspaper.

Prof. Bannister said that fiduciary companies, if not acting as directors, simply held shares on behalf of their clients and were not involved in the day-to-day running of the firms, unlike trustees, who may also be involved on the management side apart from being the legal owners of trust property.

“It is only employees who would know that fraud is being perpetrated,” he added.

“Only in court will the beneficial owners of the companies in which shares are being held on a fiduciary capacity be known.

Prof. Bannister said the implementation of the fourth anti-money- laundering directive, which was being discussed at EU level, would further increase levels of transparency and ensure beneficial owners were known to the regulator and other authorities.

We must not go overboard and engage in self-mutilation but it is good that, from time to time, we review our processes- MFSA chairman Joe Bannister

“Fiduciaries will always carry responsibilities and it does not mean that, by resigning or severing contracts, all connections are lost,” he pointed out.

This newspaper also sought the views of Max Ganado, an expert in this field who has been heavily involved in drafting the legislation for the development of Malta as a financial centre, including revising the law relating to trusts. Dr Ganado is also a senior partner in Ganado Advocates, which, among others, specialises in fiduciary services.

“To suggest abolishing fiduciary companies is a silly proposition without much thought or strategic reasoning. Likewise, suggesting that private trusts are there to hide things is also flawed,” he said. Dr Ganado said their absence would be much more detrimental to Malta and its legal system than the existing regulatory framework. He argued that having fiduciary companies regulated as they were within the system made the system stronger, not weaker.

“The perception that trusts give tax advantages is wrong. If anyone offers a trust because it is secret or helps avoid tax that is bad advice,” Dr Ganado said.

He said removing fiduciary companies from the system would only serve to make things worse because it would leave the whole area open to unauthorised nominees who often got greedy and abused their “client”.

The perception that trusts give tax advantages is wrong. If anyone offers a trust because it is secret or helps avoid tax that is bad advice- Max Ganado

“It’s only when these dishonest people defraud the client, who eventually files a lawsuit, that these cases emerge. With authorised fiduciaries you have all the information and documentation, with full detail and history, presented on a plate when a problem arises. Which would you choose?”

“Let us not throw away the whole fiduciary system just because it is sometimes breached, just as we do not throw away so many of our laws just because people continually violate them,” Dr Ganado warned.

Financial services expert Max Ganado shares his views on a number of concerns recently raised about fiduciary services

What procedure applies when a company accepts providing fiduciary services? Is it just filling in a form? And what sort of scrutiny or due diligence process applies?

Acting as a fiduciary means you are lending your name to a client for him to obtain privacy in his affairs. Privacy is not secrecy and it is not illegitimate but, of course, can be abused.

You only do that when you have verified who the client is and obtained all the necessary information about him and his affairs, references and other information.

You also ask him to sign agreements and declarations which record what is happening and lay out how you should deal with the shares you have agreed to hold.

Sometimes, this is for purely administrative purposes, such as to make up two shareholders in a company as required by our company law, while, at other times, the fiduciary can hold a larger number of shares and even a controlling interest. Each situation provokes its own issues and level of information.

The law requires the collection of different levels of information based on holdings and who the person is. If it’s a politically exposed person there is a massive amount you require. If it’s a licensed or authorised or listed entity it’s very low as information is already publicly available. If it is a controlling interest it is high, and if it’s a small holding it is low. But to think it’s just filling in a form demonstrates a very low understanding of our law.

What kind of auditing is carried out to prevent criminal organisations from infiltrating this system once the services are being offered?

The service is to hold the shares, not to run the company, so you must be careful what to expect.

The fiduciary holds the shares and administers on instructions. Of course, he has to be satisfied that the instructions on voting, transferring or pledging the shares are legitimate in the context of the situation but a fiduciary is not a director of a company running the business.

If he suspects something wrong is happening then he must report the matter and this happens regularly. It does not mean wrong things are actually happening but this is an early warning system, which helps avoid crime. This is a part of the legal infrastructure, which works consistently with others to prevent crime but it is not the only one.

Is it true that firms offering such services simply read audited accounts once a year and just go through them?

It depends on the context. In shipping companies we have a totally different situation from regulated and non-regulated trading companies so this statement cannot be supported.

Is it true that corporate service providers (CSPs) have mushroomed over the past few years and are handling as many as 300 to 400 clients each?

Possibly. If you consider that in the majority of cases a fiduciary company only passively holds shares – plus the relative information according to law – then your surprise at the high number of engagements based on assuming management of the company affairs will appear overstated. A company may have 10 shareholders and nothing may happen throughout the years, as it will simply be the top holding company in a group.

How are they meant to keep track of what a company does if they have so many companies to look after?

It is rare that a fiduciary would have to keep track of the company activities in detail as there are the directors for that.

Of course, fiduciary companies offering director services are carrying out a different service and the issues there are completely different. This is a very detailed issue to address with such superficiality but basic distinctions need to be made.

The critical contribution of fiduciary companies is that they are holders of inside information which can be retrieved when something goes wrong. When people act as shareholders in their own name this added facility is not available. It is wrong to turn on fiduciary companies that do their work diligently and quietly support our national system in defending itself when something goes wrong.

Without them, the authorities would be much weaker in their fight against crime.