The Malta Independent 11 December 2019, Wednesday

TMID Editorial: Correspondence banking - (Bank of) Valletta, we have a problem

Wednesday, 19 June 2019, 10:06 Last update: about 7 months ago

The chickens are coming home to roost.  All the turmoil within our financial services sector, mostly brought on by the government’s dereliction, has left Bank of Valletta, which is of fundamental systemic importance to the country, high and dry without anyone to process its US dollar transactions.

The government may sugar coat the development, paint it any colour it likes or apply as many layers of foundation to the ugly affair as it likes, but the simple fact of the matter is that no amount of cosmetics will cover up the fact that trust on the country’s financial services sector has been decimated to the point that the big banks on the global stage do not want to do business with it.

The truth of the matter may have less to do with Bank of Valletta’s credentials and more to do with the country’s lost credentials as a serious financial services centre, which had been carefully crafted up until 2013 and which, since then, has been brought into no significant amount of disrepute.

The clearance of US dollar transactions through BOV was being handled by Dutch bank ING but the bank, after being slapped with a €775 million fine for money laundering violations is looking to sever ties with smaller jurisdictions that it considers too risky for its appetite.

Two years ago, Deutsche Bank had stopped its US dollar service with BOV.

BOV is now looking for someone else to clear its US dollar transactions but the search for a reputable partner will be a tough one.

In a statement acknowledging the concerning development, BOV has said that the bank is currently undergoing a transformation programme aimed at lowering its risk profile and at strengthening its anti-financial crimes structures, systems and policies.

And there we have it, from the horse’s mouth.

But the fact of the matter is that this has been a long time coming and the writing on the wall has been there in plain sight for a long time now.

One of the world’s leading credit rating agencies, Standard and Poor’s recently, and quite uncharacteristically, slammed the situation in Malta, reporting that allegations of money laundering at Pilatus Bank, the arrest of its chairman in the United States, where he is facing up to 25 years in jail for money laundering and sanctions busting, as well as the perception of poor transparency at some banks, have increased reputational and operational risks for the Maltese banking sector as a whole.

Those risks, according to the agency, and increased its overall risk rating for the entire sector from a four to a six-out-of-10.

The fact that a credit ratings agency of the likes of Standard and Poor’s said so bluntly that an entire nation’s banking sector ‘could be at risk’ was not to be taken lightly at all.  This constituted a dire warning and the reputational damage to the country was enormous, and the damage the country is still accruing is entirely unsustainable – as evidenced by what has happened to BOV.

Also quite uncharacteristically, the Central Bank of Malta reacted to the rating, insisting that the sector as a whole is ‘sound, resilient and profitable’ and that, as far as systemic risks are concerned, insisted that the quality of core domestic banks was not a matter of concern and that ‘small international banks like Pilatus Bank posed no systemic risk to domestic financial stability’.

As far as reputational risk is concerned, it pointed to a ‘rigorous de-risking process’ already underway would continue and mitigate any ‘perceived reputational risk’.

Perhaps the people with whom BOV does its US dollar correspondence banking didn’t get the memo.

Even the Malta Financial Services Authority issued an uncharacteristic statement at the time to the effect that ‘major reforms are underway in its organisational infrastructure including investment in top tier supervisory technology, increase in human Resources and technical capacity in order to enhance the efficacy and governance of the sector but also to address current and future challenges particularly in the RegTech and FinTech space’.

The MFSA and Central Bank sure did not ignore the alarm bell.  But the government, as usual, pasted over the cracks and made as if there was no issue at all. 

But, seen by BOV’s current dilemma, there was one major issue, coupled with many other risks and unsavoury elements within our economy: the tax-avoiding letterbox companies the country hosts, its citizenship-selling scheme, its hosting of so many iGaming companies, cryptocurrencies, FinTech, the EU’s questions about our rule of laws in the area and, lest we forget, the very long shadow that the Panama Papers continues to cast over the country.

The Prime Minister has put it down to the jealousy of other countries.  Now we could be wrong, but we are pretty certain that ING’s and Deutsche Bank’s decisions to pull out its correspondence banking relationships with BOV had very little to do with jealousy but more to do with hard-nosed financial sense in that the returns from doing business with BOV somehow do not offset the risks of doing business with BOV and, by default, with Malta.

This reputational damage needed to be nipped in the bud but since it wasn’t, the government had better start coming up with ways to address it lest more sections of the economy begin to feel the brunt.

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