It is not a truth universally acknowledged but top accountants are strategists. They read a company’s books not merely to determine what you’ve done but also to tell you the possible futures – and how to attain them. Which is why this newspaper’s report on the event organised by the Institute for Financial Services Practitioners made such odd reading.
Naturally, one of the subjects was Malta’s current wobbly reputation in the field. If the report was accurate, one greatly respected figure in the profession attributed the problems to quibbling politicians, pesky journalists and financial practitioners. He agreed with a fellow big beast that solving the Daphne Caruana Galizia murder would go a long way to resolving the reputational crisis.
People don’t necessarily say what they really think, although you’d think they would at an event convened to put across what their industry plainly needs. If you take these industry leaders at their word, they put the bulk of the blame on a one-of-a-kind disaster, incompetence and misunderstandings.
I must have missed the quibbling politician making a mountain out of a molehill, having been distracted by Konrad Mizzi and Keith Schembri trying to make molehills out of their mountains. Journalists can only be blamed if they’re not reporting properly, not if they’re reporting facts you don’t like. Making the problems go away by bringing murderers to book only makes sense if you think that Malta’s reputational issues have to do with just one case, which happens to have nothing to do with financial services.
If you take this explanation seriously, you’re left with the idea that the international institutions that are looking beadily at Malta – the European Central Bank, correspondent banks, insurers, etc. – are a deeply impressionable lot. Professionally trained to weigh risks objectively, when it comes to Malta they’re somehow swayed unreasonably by non-industry journalists, bloggers, quibbles and an assassination which, however brutal, was a first of its kind.
Hence why it’s odd. Auditors are trained to tell the difference between bad weather and climate, situational difficulties and strategic ones. Of all people, they should be the ones able to see that Malta’s current reputational difficulties have to do with climate, not a passing storm; with strategic issues, not difficult situations.
Let’s take a step back from Malta and look at the general Euro-American climate. Like the economy, regulation passes through cycles and financial regulation is no exception. Currently, we’re at the tightening part of the cycle.
There are, broadly, four reasons for this. First, there is the aftermath of the last financial and economic crisis, brought about in great part by lax regulation at a time of the development of dubious financial products.
Second, you have the risks posed by international organised crime and money-laundering. Aiding and abetting criminal networks are third, rogue and failed states; and fourth, new industries offering products and services that are vulnerable to infiltration by organised crime (like cryptocurrencies and medical marijuana).
The risks posed by international crime and rogue states are not just to the economic system. It’s also to the political system, into which money can be flushed to back crooked politicians.
The entire Euro-American regulatory system is getting beady-eyed with everyone as a matter of principle. Its appetite for risk is small. The US has Russian meddling and Iranian mischief to contend with. Europe has populists, possibly financed by a disruptive Russia, on its mind, not to mention ascertained selective corruption by Azerbaijan.
The criteria of financial risk assessment are based on prudence, not proof that stands up in a court of law
As a result, banks and financial institutions operating in that system have to deal with harsh regulators, ready to deal a corporate death sentence if their carelessness leads to a contamination of the political and economic system.
Back to Malta. Forget national partisan politics. Try to look at contemporary Malta using the filters of an international financial institution with a low appetite for risk. You’ll see a country that sets off a red light for every major filter you have.
Anti-mafia authorities in Italy report on the huge Mafia sums passing through Malta. They are reported (by reputable Italian journalists) to complain that they do not have the kind of cooperation they’d like from the Maltese authorities (which the latter deny).
Then there is Pilatus Bank, linked to both Iran and Azerbaijan (with the added complication that the Iranian link could prove deeply irritating to the US, even just on purely political grounds). A considerable fuel-smuggling industry is linked to Libya.
Meanwhile, the government has made the strategic choice to be an early entrant into two new fields: cryptocurrency and medical marijuana. Of course it has the legitimate right to do so. But others also have a legitimate right to consider you more carefully.
To top it all, a journalist reporting on extensive money-laundering operations going right into the heart of government is brutally assassinated.
Even taking the police authorities at their word – that fuel smuggling is behind it – the trail still leads back to a Libyan connection.
In other words, at a time when the Euro-American world is tightening up its safeguards, Malta appears to have, to put it mildly, a larger appetite for risk. It looks like its security resources lag behind the resources of criminal networks.
Moreover, it’s behaving like a start-up country. So don’t be surprised if the more conservative institutions treat you like a start-up, as though you have to earn your reputation.
Normally, such institutions would seek reassurance by seeing if you share their view of the challenges. In this case, what they find is a carefree way of dealing with the local Panama Papers scandal.
The normal practice is for politicians to resign if caught with a Panama company. Even if they deny wrongdoing, they’re keen to show they realise their country’s decision-making system is above suspicion. If they don’t resign, they’re sacked – for the same reason.
In Malta, of course, Mizzi and Schembri neither resigned nor were they sacked. The non-sacking in itself makes every doubt anyone could have more acute. Like it or not, anywhere else it’s taken to be a sign of corruption.
In short, not only is political behaviour not reassuring. It raises more questions – rather more than satisfactorily closing the Caruana Galizia case, on its own, will resolve. Fixing Malta’s reputation will have to begin with fixing the damage caused by Mizzi and Schembri, and only sacking can do that.
Notice that none of this requires you to jump to any conclusions about actual corruption, cabals and who really commissioned the assassination. The criteria of financial risk assessment are based on prudence, not proof that stands up in a court of law.
Any financial practitioner will give you this background of regulatory climate. Which makes it surprising that none of the leading lights have publicly spelled it out. Just because their clients are wealthy, it doesn’t mean their arguments need to be rich.
This is a Times of Malta print opinion piece