The Malta Independent 4 June 2020, Thursday

Financial services sector exposed to flows of funds from higher risk jurisdictions - MFSA

Wednesday, 6 November 2019, 14:16 Last update: about 8 months ago

Malta's financial services sector is exposed to flows of funds from higher risk jurisdictions and customers, the Malta Financial Services Authority (MFSA) has indicated in a report.

This is mainly due to the exposure to flows of funds from higher-risk jurisdictions and customers, Malta's economic policy, as well as the country's geographic location, it states. "Whilst links with higher-risk jurisdictions or clients do not imply the presence of money laundering or terrorist financing, we expect firms to have in place greater controls, to mitigate the risks associated with them."


The MFSA has laid down its supervisory expectations for licensed entities, supported by a number of best practices which these entities are expected to adhere to.  Through the publication of a document entitled "Supervision: Risks Identified, Weaknesses and Expected Controls - A Cross-Sectoral Analysis", the MFSA identifies the key risks that authorised entities operating in the financial services sector might pose to their clients and the market in general and  highlights the common weaknesses which the Authority has identified in the course of its supervisory work.

This document comprises of various Chapters.  The first bit includes a dedicated Anti-Money Laundering and the Counter Financing of Terrorism (AML/CFT) section and provides a list of cross-sectoral risks, weaknesses and expected controls.  Such risks, common weaknesses and expected controls apply to industry practitioners operating in the various sectors.  

The second part then includes four dedicated sections. It identifies sector-specific risks, weaknesses and expected controls, each relating to the Insurance and Pensions, Credit and Financial Institutions, Securities and Markets, and Trusts and Corporate Service Providers sectors. 

Anti-Money Laundering and Counter Financing of Terrorism weaknesses and issues

In light of the Results of the National Money Laundering and Terrorist Financing Risk Assessment, the Authority considers the following as being some of the key financial crime risks in the financial services sector in Malta.

Firstly is the complex corporate structures and business models.

 Secondly, the MFSA says that the exposure to flows of funds from higher-risk jurisdictions and customers, Malta's economic policy and geographic location mean that the sector is exposed to flows of funds from higher-risk jurisdictions and customers.

Thirdly, the authority mentioned specifically the exposure to the gaming sector.

Fourthly the authority highlighted the prevalence of cash and transferable cheques, in particular, in the real estate and luxury goods sectors.

Lastly, it mentioned the payment and e-money services.

The MFSA also identified a number of reoccurring weaknesses in the AML/CFT arrangements adopted by regulated firms. Such weaknesses include weak customer risk assessments and inadequate due diligence. 

"Firms often fail to demonstrate that they have, through due diligence, understood their clients, and the risks associated with their business. Decision-making rationales are also often lacking from client files, making it very challenging, if not impossible, to establish how a firm has come to determine whether a client is within its risk appetite," the MFSA said.

The MFSA also highlighted issues with the timing of due diligence assessments.

"Firms not infrequently onboard customers even prior to the due diligence process being satisfactorily completed. This is indicative of ultimate beneficial owners or other indirect controllers exercising undue pressure over firms' compliance structures. This is considered as a serious governance breach."

Another recurrent weakness involves inadequate transaction monitoring.

"Automated and comprehensive monitoring of transactions is key to the detection of financial crime activities. In particular, the MFSA is concerned by the widespread failure, by regulated entities, to have in place transaction monitoring systems that are capable of comprehensively scrutinising their transactional data for patterns indicative of money laundering and terrorist financing and of doing so in a timely manner. The Authority considers the prevalent approach to the documenting of the discounting rationale for alerts and red flags to be inadequate."

The MFSA highlights that it has often found firms to have no or inadequate levels of management information in relation to the levels of money laundering and terrorist financing risks that they face. "This is, in turn, indicative of extremely weak governance structures."

It also said that firms have often failed to demonstrate that staff at all levels understand the money laundering and terrorist financing risks to which they are exposed and the controls in place to mitigate them.

"Compliance and control functions are often found to be under-resourced or controlled by senior management or indirect controllers. The Authority is generally dissatisfied with the controls established by firms when outsourcing compliance and other control functions."

Specific sectors

When it comes to insurance and pensions, the ageing population was highlighted as a risk.

"With respect to the local context, the failure of any one of the local significant banks would have a major impact on the insurance undertaking interconnected with it, and a very significant impact on the stability of the life insurance industry in Malta."

In terms of credit and financial institutions, non-Financial corporate loans were highlighted as a risk.

Exposure towards residential real estate was said to be a weakness. "A number of credit institutions have significant exposure towards residential real estate in Malta. Although currently there seems to be no indication of any material over-valuation in residential real estate prices, the regulatory Authorities have introduced borrower-based measures to strengthen the resilience of lenders and borrowers against the potential build-up of vulnerabilities which could result in financial losses both to lenders and borrowers stemming from potential unfavourable economic developments."

Risks and weaknesses for the securities and markets sectors as well as the trustees and corporate service providers (CSP) were included in the report.

"Trustees and CSPs are deemed to pose a high level of AML/CFT risk in view of certain ML/FT threats faced by the trusts and corporate entities set up or serviced by trustees and CSPs.  That is, tax evasion, local criminal groups, drug trafficking, fraud and misappropriation, corruption and bribery, unlicensed financial services and terrorist financing.   Often Trustees and CSPs lack sufficient awareness of these risks and threats leading to the unwitting possible use of trusts and corporate vehicles for ML/FT purposes."

The MFSA, for all criteria, also included a list of controls it wanted to see the organisations and service providers include to counter the issues.

In conclusion, the MFSA said that the reoccurring weaknesses that the Authority has identified, and continues to encounter, as part of its ongoing supervisory work "are a matter of high concern."

"The MFSA's ability to protect the integrity of the Maltese financial services sector and consumers of financial services, rests on firms ability and commitment to comply with their fundamental obligations. The Authority is therefore communicating, to regulated firms, its views on the expected standards with respect to  core aspects of authorised business' operations."

"The authority is aiming to increase the scrutiny of regulated operators in the industry. In the light of the various reoccurring shortcomings mentioned and the indicative guidance of expected controls, firms are strongly advised to review their internal control systems and procedures, to undertake a thorough and meaningful assessment thereof, and to proceed to take any corrective action to address possible identified deficiencies." 

"As part of such a process, regulated firms are expected to fully undertake an assessment and self-identify any action that is required to comply with the letter and spirit and the  expectations as these emanate from this document. The MFSA will expect to see this on-going exercise as part of the onsite supervisory work that will be undertaken."

In line with the Authority's strategy of enhancing its supervisory engagement, the MFSA will, in the coming weeks, also be publishing a document setting out its Supervisory Priorities for 2020. This document will indicate how, through supervision, the MFSA will be addressing the weaknesses identified in the document being published today.

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