We have unfortunately been reading statements in the media and by political commentators relating to fiduciary companies, and even about private trusts, which demonstrate a very superficial level of understanding about the concepts and their utility within the development of the financial services sector in Malta.
The fact that all legal rules and institutes can be used badly, dishonestly, abusively and incorrectly is obvious in all countries, societies and legal systems. This does not mean that we eliminate contracts, wills, property or rights and obligations, which are all the tools used by ordinary people and unfortunately by criminals to achieve their ends.
Therefore to suggest that licensing of fiduciary companies should be abolished is a weak suggestion, one without much thought or strategic reasoning. Also to suggest that private trusts are there to hide or evade is likewise flawed.
These two concepts can be abused, but their importance and utility in our legal system must be understood to appreciate why their absence would be much more detrimental to Malta and its legal system than their regulated existence – which is what we have in Malta and Maltese Law.
A professional colleague recently suggested they should be prohibited in the gaming sector, as they are indeed, in practice, barred from the regulated financial services sector. I say, in practice, as there is no law prohibiting this, only a regulatory practice seeking greater transparency, but although this is good, this too has its limitations.
These kind of broad statements in the media are naturally causing concern. Everyone should be concerned with any abuse taking place and it is good to see media efforts to expose and fight corruption and abuse. However, the media statements are also causing concern because they appear to be unjustifiably attributing fault to players in our legal system, the fiduciary companies and the regulators. This then starts impacting negatively on the reputation of the country.
The truth is that abuse will take place even if we did not have these features in our system and even if we block them in certain areas or make them even stronger than they already are. The fact that we have introduced these features and have regulated them in a very careful and detailed manner makes our system much stronger, not weaker. This point has been missed and needs to be addressed to ensure we continue to be proud rather than ashamed of the way we handle things.
A bit of history: until 1988, the concept of nominees and trustees was not dealt with in any significant manner in our law, but then we did not have any international business to speak about except in shipping, where we learned a few of our own deficiencies – and risks. In 1988, when the Government sought to launch Malta as an offshore centre, we were one of the first countries in the world which sought to ensure that information about foreign shareholders and ultimate beneficial owners, and the activities of companies they set up, would be known to local professional operators who obtained regulatory approval.
Who could best protect our Island’s and industry’s reputation if not authorised operators who are then supervised by the State? That is where the nominee company, eventually the fiduciary company, emerged. The alternative leaving it all to the State which we all know has its limitations. We saw how weakly different governments supported and continue to support the economic crimes unit of the Police.
Without local solutions to hold shares with controlled privacy the other alternative of no fiduciary companies in our legal system was foreign promoters using tax haven companies, mired in secrecy (this was the situation in the 1990’s), with no chance of ever knowing who was behind them or what they did.
Today this risk is dramatically reduced, even if tax haven companies are used, as the duty to establish beneficial ownership of structures cuts through to the ultimate beneficial owners of any holding entity, trust or foundation, where ever they are set up.
In 1993, the system was radically overhauled and made more transparent and in 2004 secrecy was practically eliminated. We adopted a confidentiality regime which was allowed to operate for legitimate purposes under specific controls and subject to access by regulators, often in advance of more developed legal systems in other countries. This naturally came at a great cost and burden to us all – operators, regulators and society in general.
Therefore the introduction of fiduciary companies and their retention was a defensive mechanism to ensure that someone in Malta is keeping an inside view of what is happening in the companies and trusts being set up in Malta. State regulation is not meant to, nor can it ever hope to achieve relevant flows of information in a very fast moving and changing world. So Maltese law placed the operator in between. It was only in later years that the detailed laws on prevention of money laundering started being introduced across the world.
Our law, and after that the prevention of money laundering laws, had the horrific feature (especially for a lawyer) of imposing a duty to report a client should one develop a suspicion of illegality in operations. The other set of duties are arduous but our professionals (lawyers, accountants, notaries, tax advisors, fiduciaries and corporate services providers) have taken up the challenge, regularly receive training and generally comply as best they can with collecting information and identification documents on all persons as required by the law involved in all trusts, foundations and companies. There are rules and most professionals do their best to follow them to the letter, as the consequences of not doing so are very serious.
Of course, you can have negligent or dishonest professionals who do not do their job and act as fronts for equally dishonest clients but these are exceptional situations, especially after passing through a regulatory process and within our small community of professionals. We have now widened the catchment by regulating corporate service providers as well.
Like most clients, most professionals are serious, honest, diligent and committed to long term careers. It is these who are concerned with misunderstandings on the way things work and their duties on a day to day basis, which in turn increases the already high risk by making them scapegoats when something goes wrong – as it invariably will because there are criminals out there seeking to circumvent the system!
Professionals could, of course, choose not to be involved in this business under such conditions. The laws were never intended to make the professional, following the rules, the target. The rules are meant to engage the professional in the combat of criminality at his particular level of engagement with the client. If professionals doing their duty under the laws start being treated as the target – a temptation the media and some over enthusiastic regulators sometimes fall for – serious and honest people will simply back off. This, thankfully, has not happened… yet! Malta, as a financial and business centre, would have been a dead duck had professionals decided to do so!
Why is all this being done?
Things can go wrong because a small percentage of people are criminal and dishonest, and some try to use Malta – and many are rejected even on very flimsy grounds in some cases – but no one can stop that happening absolutely for the simple reason that criminal minds have become very adept at avoiding detection systems laid out by most countries, including our own. Therefore through fiduciary companies, if and when something goes wrong, the authorities would have a new source of information about the activity and when they need to investigate any leads from any source and they will have as much corroborative information as possible about the persons involved.
Information about beneficial owners and transactions is accessible to the authorities in Malta and overseas. Even the courts are regularly issuing freezing orders on assets and the system works in relation to authorized intermediaries because they are known, available to be communicated with and are organized and regulated. The system would just not work if there were no system in place as suggested by some media commentators.
Let no one run away with the idea that just because the legal system does not address and regulate – or even prohibits – fiduciaries, they do not feature in the system. A review of the judgments of our courts shows that nomineeship was widespread in our society at least until 1988, but even after (we call it “prestanome”).
Since 1988, Malta has been one of the few countries in the world which actually prohibits and makes it a crime to act as a fiduciary without being authorized (there are rational exceptions), and even imposes on foreign fiduciaries dealing in Maltese immovable property or shares the duty to engage a local authorized fiduciary to supervise their compliance duties. These are just small details of a very intricate system in place which many are not aware of.
What will happen if you prohibit the use of nominees to hold shares in Malta? The persons wanting privacy will be invited to use nominees overseas; and when they cannot do that they will use corporate structures to hold shares in Maltese structure – or actually use non Maltese EU structures, as we are prohibited from discriminating against EU applicants by imposing Maltese companies or structures as a condition of operating in Malta. That is where our law reaches its limits, as we cannot control what is happening overseas.
Our rules therefore require that we cut through the structures and obtain information and documentations on the ultimate beneficial owners but this is still not transparent in a public sense. It is only recently that ideas in that direction are developing.
When foreign nominees are used, some systems like ours show them up in their name; but when someone specifically wishes to “beat the system” they will not use licenced nominee companies, licenced trustees or authorized financial institutions. They will use very ordinary people with very ordinary lives and histories – let’s call him Joe Blogs – who will pass as rigorous a test of due diligence as one can imagine – for professionals and for regulators.
How would barring fiduciary companies authorized in Malta from holding shares in Malta companies stop that happening? The truth is that it will not do anything positive and will only shift the information and law breaker outside our jurisdiction. When Joe Blogs breaks Maltese law by holding shares in a Maltese structure as a nominee for a criminal, and no one can catch him as nothing shows up, he will be breaching Maltese law, but where does that leave us?
The secrecy and evasion which takes place in the illegal sphere of unauthorized nominees, who operate outside the fiduciary or corporate services regime, are under the radar and very difficult to catch. It’s only when these dishonest people defraud the client, who eventually might file a lawsuit, that these cases emerge. If on the other hand we offer professional authorized fiduciary services to those who wish to enjoy privacy, we have all the information and documentation, with full detail and history, organised on a plate. Which would you choose?
Of course there are things we can criticise and make better – industry and authorities are doing this all the time on issues of detail too specific for the media to bother about – and of course the Courts can be more effective when we come across cases of abuse of trust and abusive uses of trusts – they do have the powers – but now we seem to have reached a low point, also because of the serious risk that even local authorities, not in the know, start acting on perceptions when things do go wrong, just to show they are doing something to get the media off their back! Now we have Dr. Herrera planning changes to meet media agendas and I only hope he is able to inspire the local industry to work with him to fine tune the system and close loopholes rather than give up and jump ship.
The current situation. is very dangerous for an operator who carries out his duties faithfully and acts as best possible to collate all information. What was intended to be a system to strengthen our acceptance of business policies and our monitoring processes to deter – and catch – criminals, now risks being skewed to become an automatic presumption of fault on the professional.
The whole idea is to make sure the information is available when needed. When a professional does all that is required by law and just happens to be the victim of subterfuge by dishonest or criminal persons, the last thing one should expect is to find one accused of being in cahoots with the very criminals who expertly managed to pass your tests and those of various state authorities – in Malta and overseas – as well. The professional should be assessed for his own performance and compliance – and if he is in breach there are penalties under his own regulatory law for those breaches – but nothing more, barring evidence to the contrary of course.
We need to develop enough confidence to recognise that things can go wrong, as in other countries, and as long as we have systems which are designed to work in the context of when that happens and such systems meet international standards, as they do!, then we should just go about doing our duty to collaborate with the police, our partners in the prevention of crime, and ensure that the full benefit of the law is actually brought to bear in the prevention and prosecution of the same crime – which we do!
The increase in resources at the Economic Crimes Unit has been a crying need for years, and let’s hope that is really addressed soon. When things go wrong let’s analyze the causes and learn from experience for the betterment of our system as a whole and all its constituent parts.
If what we want from operators is a guarantee that things will never go wrong, we might as well start winding down our third sector services laws and systems and let other countries in Europe – where they see this obvious fact and responsibly live with it – play the game alone.
We have the quality and capacity to do things well, we have proven we can do so, we can collaborate on equal terms with our partner countries in the EU and elsewhere to introduce best standards and we should continue playing in the game with all the opportunities – and responsibilities – which it brings with it.
We need to work together to exact always higher standards from all sectors, including the fiduciary sector. The fight against crime will never end and let us all seriously, constructively and consistently play our part in that as well.