In the immediate wake of the Panama Papers leak in April last year, I wrote an article (‘Keeping a Sense of Proportion’) in which I warned:

“There is a danger, as always in Malta, of losing our sense of proportion and leaping to conclusions before having the hard evidence on which to base a judgement…. Both the leader of the Opposition and the Prime Minister should consider the impact of their actions in the much wider context of what the Panama Papers have exposed about tax havens and how these might affect Malta’s vital financial services industry.

“Scoring political points is one thing. Undermining an industry which accounts for about 20 per cent of Malta’s GDP and hundreds of jobs in law and accountancy firms and financial services is quite another.

“This is not just about Panama, yachts, errant ministers and senior officials, or even tax-dodging, but about the very shape of the global financial system. The efforts to overhaul it, now under way, led by the Big Five in Europe (Germany, Britain, France, Spain and Italy), who will seek a new global standard through sharing company ownership information and an effective crackdown on tax avoiders, may radically affect Malta’s financial services and thus its economy.

“Maturity, balance, prudence and a proper sense of proportion are demanded of our leaders, or they risk throwing out the financial services baby with the bath water.”

The events of the last 15 months have confirmed my worst forebodings. Malta’s name internationally has been avoidably dragged through the mud. Reputational damage to the financial services industry has been done through a combination of political misjudgement and short-sighted attempts to achieve political gain. This has been a self-inflicted wound perpetrated by both main political parties.

In the global scheme of things, did the leak of Panama Papers prove wrongdoing, as opposed to suspicion of wrongdoing? The bottom line is that most of the services offered by the offshore industry – including, of course, Malta’s – are legal. The onus is on the client to report their affairs properly to the relevant tax authorities.

However, the Panama files proved that banks and law firms often failed to carry out proper checks of their clients to ensure that they are not involved in criminal enterprises, tax-dodging or political corruption.

Tax havens are used for legitimate as well as nefarious reasons, leaving regulators in a tricky position. Havens offer nil or nominal taxes, along with a neutral legal system. This attracts multinationals, which can use accounting tricks to register substantial profits while avoiding tax. Tight secrecy laws and low taxes have attracted more than 350,000 international companies to Panama, the third largest in the world after Hong Kong and the British Virgin Islands.

What has been the worldwide impact of Panamagate? The skeletons that tumbled out of Panamanian closets have struck fear into the hearts of politicians and their cronies across the world. There has been embarrassment to those exposed and, except in Malta, political resignations. But for the most part the revelations have done no more than to confirm the suspicion about the relationship between power and greed.

In essence, the Panama Papers have shed light on the very foundations of the international financial system. Most big international companies sit at the apex of a complex pyramid of financial structures designed to reduce tax bills and circumvent regulations. Tax havens are a symptom of a far deeper issue: a global financial system that encourages those who can afford it – not just rich individuals, but also big international companies – to shift money overseas.

However, in the face of an international public backlash, the tectonic plates are shifting. Today, as we have seen, it is far easier for investigators and astute journalists to discover whether corrupt Fifa officials, or Brazilian or Russian and Maltese politicians and businessmen (Maltese businessmen as yet unnamed) are hiding money in Swiss bank accounts, or tax havens like Panama or the British Virgin Islands.

It is inescapable that tax havens and their high walls shelter corrupt elites. Like it or not, the Western consumer (including Malta with its offshore tax arrangements) brushes daily with the world of tax avoidance.

The Panama Papers leak has increased pressure on world leaders to tackle offshore tax evasion. The truth is that there is a growing understanding of aggressive tax evasion as a serious crime which makes the world poorer and less equal and defrauds honest taxpayers everywhere. Enforcing stricter standards for tax havens is part of a campaign, not so much against privacy as in favour of good governance.

Malta’s first priority following a bruising, deeply polarising electoral campaign, during which one of the mainstays of its economy, its financial services industry, was dragged through the mud internationally, is to rebuild its tarnished reputation.

Prime Minister Joseph Muscat, supported by one of the most able finance ministers in Malta’s 50-year history, must start by ensuring that the regulation of the institutions that underpin our financial services industry – such as the Malta Financial Services Authority and the much buffeted Financial Intelligence Analysis Unit – are beyond reproach.

Although tax has been an untouchable area in the EU, with the power to set rates being reserved for member states, a plan is underway to harmonise taxes. The first step is to make the tax rules the same in every EU country through the so-called Common Consolidated Tax Base with the tax codes of all 27 countries being replaced by a single code.

Then will come harmonised tax rates, an area in which President Macron is leading the charge. He wants convergence of EU corporate taxation, singling out Ireland for causing market bias with its 12.5 per cent rate. But Malta, Luxembourg and Cyprus must also be in the crosshairs of the big EU countries’ sights for similar reasons. If the EU seizes tax rights, it gains an iron grip over member states.

In the face of this push by the major EU countries to curb tax evasion, it is crucial that Malta is in a position to justify its defence of fiscal sovereignty by showing that the mud thrown around in the last few months, both domestically and internationally, was unjustified and will not stick.

This can only be achieved by demonstrating clearly that our financial regulatory institutions are robust, accountable, effective and, within the inevitable constraints of commercial sensitivity, transparent and fully compliant with EU directives.

There is now only one sensible way forward. The Prime Minister should urgently ensure that Malta’s financial services are fully ready for the tax harmonisation steps ahead. In parallel, it is vital he launches a professional and well-targeted international public relations, diplomatic and lobbying blitz in Brussels, Strasbourg and in financial capitals elsewhere in Europe to allay any lingering doubts about Malta’s reputation and to safeguard its financial services.