Money Laundering States Part 2: Prophetic Laws, Passports For Sale, And Unqualified CEOs In Malta

Note: This is the second article in a series. Be sure to read part one here.

Three New Acts 

The three bills that were passed into law in June are The Virtual Financial Assets Act (VFA), the Malta Digital Innovation Authority Act (MDIA), and the Innovative Technology Arrangements and Services Act (TAS).

The VFA Act will regulate the notorious ICO market and require companies intending to raise funds in this way to publish in-depth whitepapers and make their financial history public. The MDIA Act lays out stringent regulatory procedures for the cryptocurrency and blockchain industry. It also establishes the Malta Digital Innovation Authority which will function as a regulatory authority for the industry and will be headed by a board of governors and a CEO. The TAS Act outlines the requirements for the registration and certification of entities that provide services to the industry. With a particular focus on the registration of exchanges, it is clear that this bill, above the others, was created to make Malta the most desirable jurisdiction for businesses operating in these sectors.

While these bills may seem great on paper, there are some unanswered questions. Why did so many industry leaders such as Binance, BitBay, and OKEx announce their relocation to Malta before such a regulatory framework was confirmed? We should also consider the fact that many blockchain-related businesses reportedly had a very difficult time opening bank accounts in Malta yet Binance, which has a history of questionable business practices, did so successfully.

Crypto, Crime, and Passports

In February, director of Europol Rob Wainwright estimated that of the more than $132 billion in illicit funds circulating in Europe, $5.5 billion has been laundered using cryptocurrencies like bitcoin.

You will recall from Part 1 of this series, that Malta allowed the setup, licensing, and running of a bank implicated in an FBI investigation into money laundering. You will also recall the numerous ties that senior officials in the government have with the Azerbaijani ruling family, allegations of bribes to senior members of the government, and an Iranian banker facing two lifetimes in jail. Couple this with the widespread failure of its applicable authorities to act on reports of money laundering, suspicious transactions, and illicit behavior, and you have a disaster waiting to happen.

Malta offers a “citizenship by investment” program that allows very wealthy individuals and families to gain EU citizenship if they meet a set of legal, financial, property, and health qualifications. However, there seems to be some wiggle room on the legal standards.

Some newly approved Maltese citizens may include the majority shareholder of Azerbaijan’s largest private bank, an accused party to an insider trading scam, the co-founder of an alleged state-sponsored Russian cybersecurity firm, Saudi investors, Armenian betting magnates, and many of the world’s richest people.

Sven Giegold, a member of the European Parliament, told Reuters:

“Malta has sold its sovereignty to dirty money. The European Commission should take a more active role in investigating the condition of rule of law in Malta.” 

The passport scheme has consistently been linked to money laundering issues and the country has failed in terms of registering reports of suspect transactions. The country also has a notably low number of reported “suspect transactions,” despite having a disproportionately large financial sector comprised of banks, casinos, financial services providers, and now, cryptocurrency service providers.

One source who wanted to remain anonymous told ETHNews:

“I was working at a Maltese law firm and when running a background check I noticed that there were issues with the individual’s criminal record. They had been charged with financial crimes and various other offenses. When I tried to report the matter I was told to drop it and not to make a fuss. This person was applying for citizenship and also opening an iGaming business.”

Dirty Regulatory Bodies Shrouded in Scandal

The new laws promise to regulate an industry that is shrouded in doubt and evidence of shady activities, but can the Maltese government really ensure transparency and honesty?

In 2017, Italian authorities found a massive, e-gaming (also known as online gambling, e-gambling, or iGaming) and money laundering operation headquartered in Malta. In the wake of the news, five other Italian gaming operators rescinded their licenses. The question is, how did they get licenses in the first place? And how were they able to operate with impunity for years before being discovered?

It seems that Malta may be more concerned with presenting a flattering public image than earning a reputation by policing corrupt business practices.

Hopes are high that the MDIA and its newly appointed CEO Stephen McCarthy will be able to shake the image of corruption and incompetence, but is this likely? Prior to his new position, McCarthy was the CEO of the Malta Housing Authority, and “worked in accountancy and iGaming.” While he is a certified accountant, he does not appear to have any demonstrable experience in the sector among his credentials

The fact of the matter is that Malta has long had excellent financial, fiscal, AML, KYC, and other regulatory measures on paper. The problem is that they are not actually enforced and are instead used to satiate the European Union and to tick boxes in the international arena. It seems, based on the reports coming out of the island state, that the laws are only there if you cannot afford to pay or benefit the right person – an attitude that would be disastrous for companies looking to build credibility in the field.

Importance of a Good Reputation

It’s crunch time for the reputability of cryptocurrencies. In the midst of hacks, growing numbers of scams, distrust from leading financial figures and institutions, and of course Europol’s shocking figures, if the industry does not clean up its act, it is set to fail before it has even truly begun. While many believe in the power of blockchain more than the use of cryptocurrencies, this technology risks being tarred with the same brush if the entire sector cannot get itself on the straight and narrow.

At the moment, Malta appears to offer several solutions, including regulatory clarity, but the overall credibility of the state and its regulatory agencies is seriously compromised. Some may hope that Malta is turning over a new leaf and that these efforts are an attempt to shake off its increasingly poor reputation amid recent scandals, but the question is, should crypto businesses risk it? And what happens to the industry if it all comes crashing down?