The MFSA has announced the welcome new financial crime compliance plan. It is essential that the rules of doing business in the global financial system are not only well written but also robustly enforced. The financial sector grew from a modest size in 1994 to a reputable centre of international business. The latest International Monetary Fund report, which was requested by the government, gives a very penetrating analysis of the factors which attributed to the recent rally in economy. On the negative side, it has called for "urgent action" to address shortcomings in banking supervision by the Malta Financial Services Authority. The report stated that "to strengthen bank supervision, the MFSA should take timelier supervisory actions, increase the frequency of onsite inspections, make more use of monetary fines as part of the sanctioning regime, and ensure supervisory action is not delayed through judicial appeal".

Furthermore, the IMF said that containing financial integrity risks is critical to financial stability, saying that a multi-prong approach was needed to address anti-money laundering and combat the financing of terrorism (AML/CFT) deficiencies. It comes as no surprise that in the wake of the disgraced Pilatus Bank one expects the IMF to be vigilant and not ignore aspects of alleged money laundering transactions at that bank. Pilatus Bank has been the centre of political controversy ever since a series of leaked financial intelligence reports flagged evidence of money-laundering and serious compliance shortcomings two years ago. It has also been alleged that the bank was used as a conduit for Azerbaijani millions making their way into Europe. The IMF team in an effort to sugar the pill, says: "Malta's openness to financial flows makes it vulnerable to ML/TF risks. Increasing inflows, including from countries generally considered to pose greater ML/TF risks, may exploit vulnerabilities in the banking sector, real estate, remote gaming, virtual assets, and the IIP."

Can the storm be ignored as a bad dream - will it fade away when we wake up or are we braced for casualties that may tarnish our name in the international markets. Another report is expected from the Moneyval team which came to Malta last November. This will deal with an assessment of compliance controls in local financial institutions. One hopes that its recommendations (if any) will not be ignored. Last week, the CEO of HSBC admitted that the domicile has suffered reputational damage when he announced that the bank posted a 23 per cent drop in annual profits before tax for 2018. The storm has not subsidized and the recent reform put in place by the MFSA does not come a moment too soon. The authorities made an encouraging move last year to put into place a new legislative AML/CFT framework but according to the opinion of the European Commission (July 2018), the transposition of the EU's Fourth AML Directive is not complete.

However, one cannot say it is all doom and gloom. The root of the problem can be partly attributed to the unprecedented rate of economic growth which inevitably generated more compliance duties. This extra workload led to the grim realization that the MFSA had a shortage of human resources, especially experienced ones. To compound the issue, a cyberattack at BOV paralysed its foreign transactions department for a day - some observers fear this may be a harbinger of friability resulting from attacks by hackers.

Needless to say, the MFSA needs to focus on its strengths and strive to enhance them, not try to offer everything to everyone. Ideally, it must invest more in recruitment of foreign experts (until locals can be trained). One notes that progress in registering of new funds, asset management, pensions, banking and insurance sectors has slowed albeit Brexit has created new opportunities, which are gaining ground in terms of potential UK business relocations. Perhaps now is the ideal time to seriously question the single regulator model by introducing a more intrusive approach to assess banks' risk-management processes that will include asset recovery, related-party transactions, forbearance measures, and collateral valuation. Another suggestion is to split the Authority into two agencies mirroring a Twin Peaks structure. This model evolved spontaneously over a period of time and is a recognisable feature in most parts of the financial world. The two peaks refer to the two faces of regulation having the first part comprising prudential regulation - the financial sustainability of financial institutions. The second - market conduct regulation - is a more recent development which started emerging in the mid-1980s. Market conduct is characterised by phrases such as "Treating Customers Fairly (TCF)". Therefore, from this angle, market conduct regulates the relationship between financial institutions and the customers. One is tempted to ask why, with all the regular site inspections of banks/funds by MFSA, yet in past six years, there was a precipitous collapse of regulated entities. The list is not exhaustive but one can mention La Vallette Multi Manager Property Fund, Malta Cross Financial Services firm, Swedish Pension fund debacle, collapse of Sata and Nemea Internet banks, Setanta insurance (among others). Some may recall the La Valette funds scheme operating as a subsidiary of Bank of Valletta (BOV) where the latter invested part of its funds in high-risk sub property that went mysteriously up the creek leaving a black hole of about €50 million. At the time, BOV acted as its custodian and issued a clean bill of health during its four-year tenure. All this begs the question - is the consumer adequately protected? It had to be the legal protest fielded by unit holders of La Valette fund led by Finco Trust that pushed the regulator into action. Following a barrage of criticism in the media, MFSA appointed Mazars (a local audit firm) to grade the list of claimants and identify any misselling to unit holders classified as inexperienced. The latter were further compensated capping the total refund at €1 each unit. This was a case of locking the barn after the horse has bolted. In conclusion, it is clear that keeping the status quo on banking supervision is not an option, but one must not understate the positive remarks on a buoyant economy emerging from the IMF report.

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Mr Mangion is a partner at PKF, an audit and business advisory firm.