Joseph Muscat hugged Keith Schembri more tightly this week. We now know for a fact that, last year, the FIAU (the financial intelligence agency) filed a report with the police, urging that Schembri be investigated for money laundering. The police did nothing. Now, Muscat has doubled down in defence of his chief of staff.

True, Muscat has declared that if a criminal investigation is opened, then Schembri would have to go. But that’s no recognition of the gravity of the situation. It’s turning a blind eye to it.

It looks away from the fact that the police did not act on a formal request by the FIAU. Here in Malta that failure is being called ‘inaction’. But the internationally read Australian financial journalist, Neil Chenoweth, called it a ‘cover-up’.

Apparently, in Chenoweth’s part of the world, ‘cover-up’ is the word used when the police chief sits on a file, compiled by an intelligence agency, that says there’s a reasonable suspicion a crime was committed by the person closest to the prime minister.

Meanwhile, The Guardian newspaper has given prominence to a report of the reaction in Brussels to the news about Schembri and how Muscat is defending him. The Guardian speaks of “a growing rebellion”, with MEPs “openly calling for his departure”.

You have to wonder what they’ll say when they hear of the claims that there were two other FIAU reports filed with the police against Schembri – each treating of an entirely separate case where the intelligence agency found reasonable suspicion of money laundering.

Meanwhile, Molly Scott Cato, a Green member of the Panama Committee, told The Guardian: “The latest allegations and developments place at stake the credibility of the EU.”

Note that she speaks of allegations. She’s not taking it as given that Schembri is guilty. But she is still aghast that Muscat has not taken political action to address the allegations swiftly.

In any serious part of the financial world, that would mean Schembri resigning – so as to be able to clear his own name and, even more swiftly, enable Malta to clear its own name within the industry.

Let’s not forget Europe’s name. The uproar in Brussels is about the scale of the damage. It reaches beyond Malta itself. Imagine what it is doing to Malta.

Actually, we don’t need to imagine that. I have had several conversations with senior practitioners in financial services and banking. Off the record they speak of Malta’s reputation as deteriorating. Here’s one:

“Most financial services practitioners have had experiences over the recent months where clients have turned away from investment in Malta due to its increasingly shady reputation. These companies want to set up in a jurisdiction which is sound and respected by other countries/regulators.”

In addition: “Banks are already finding it hard to retain correspondentbanks. This is going to become increasingly difficult.”

Why don’t these practitioners speak out openly? Because the situation is so precarious that they are afraid to trigger the very thing they want to avoid: the collapse of Malta’s reputation. (A columnist’s opinion is one thing; a dire warning from a senior financial representative is another.)

Muscat’s low bar – Schembri goes only if he’s under criminal investigation – is a problem in itself. It is so much lower than the required standard that it qualifies as a shady standard. It reinforces the deterioration of Malta’s reputation.

Despite his disavowals, Muscat has reacted by making defence of Schembri part of Labour’s electoral campaign. His website calls the accusations part of a smear campaign that ignores the “reasonable explanation.

And an e-mail shot this week all but called it fake news: “Unfortunately the media believe that ‘sleaze sells’, so they’d rather run with that than let you know about what we are achieving together.”

Yes, The Guardian really needs a story on Malta to sell itself. And Chenoweth, the man who couldn’t be bought off by Rupert Murdoch, is in the pocket of Simon Busuttil.

They, too – The Guardian and Chenoweth and leading lights of the International Consortium of Investigative Journalists – are aware of what Muscat’s spin doctors call a “reasonable explanation”.

That is, that the money transferred to Schembri from Brian Tonna, his accountant, was a simple return of a loan. Not kickbacks on the sale of Maltese passports.

But they’re also aware that the FIAU considered and rejected this explanation in its police report. Besides, there is another problem.

The ethics handbook for professional accountants explicitly considers the question of loans from a client (as long as not a commercial bank) to his audit team. If it’s a significant loan, it’s deemed ‘unacceptable’ because it corrupts the accountant’s independence.

Here’s the thing. Schembri and Tonna have justified the loan by saying the latter needed it (given his circumstances during marital separation proceedings).

In other words, they have described the loan as ‘significant’ to Tonna. (It’s the critics who doubt whether Tonna really needed a loan and who therefore throw doubt on whether the money passed to Schembri really was just a repayment).

But doesn’t that mean that they are all but admitting breaking the professional accountant’s code of ethics (especially 290.120 of the 2016 edition)?

To any investor scrutinising Malta, the “reasonable explanation” therefore raises questions all of its own.

Observers might ask: a prime minister’s chief of staff doesn’t mind admitting to being party to a serious ethics violation. Is it because the alternative is worse?

Just as with Muscat’s own low standard, the “reasonable explanation” – even if it’s true – itself reinforces our increasingly shady reputation. But we are expected to turn a blind eye to all of this.

Meanwhile, JPMorgan Chase and Co. plans, following Brexit, to move hundreds of London-based bankers to our rival jurisdictions – Dublin, Frankfurt and Luxembourg. But not, apparently, to Malta.

Only a very young child believes that, if he closes his eyes, other people can’t see him. Yet, here we are, being urged to believe that, if we turn a blind eye, the world will stop looking at us.

On the contrary. It has already begun to scrutinise us closely. At first, incredulously; now, already more coldly. We provoke its damning judgement at our economic peril.

ranierfsadni@europe.com