Law established the Malta Financial Services Authority (MFSA) on 23rd July 2002. It is a fully autonomous public institution and reports to Parliament on an annual basis. The MFSA has taken over supervisory functions previously carried out by the Central Bank of Malta, the Malta Stock Exchange and the Malta Financial Services Centre and is now the single regulator for financial services. The sector incorporates all financial activity including banking, investment and insurance. The MFSA also manages the Registry of Companies and has also taken over responsibility as the Listing Authority.
The organisational structure of the MFSA ensures that the regulatory and operational functions of the Authority are exercised within strict legal demarcations. The Board of Governors presided by the Chairman sets out policy and general direction and is assisted by the Legal and International Affairs Unit. The Director of this Unit is also the Secretary to the Board of Governors. The Supervisory Council, headed by the Director General is exclusively responsible for issuing licenses and regulation and is composed of the Directors responsible for Banking, Securities, Pensions, Insurance, Company Compliance, Corporate and Trustee Services. Operations are the responsibility of the Board of Management and Resources composed of the Directors responsible for Business Development, Human Resources, Information Technology and Administration led by the Chief Operations Officer. Co-ordination between these two organs is ensured at Co-ordination Committee level.
Creating the MFSA as a single regulator was a structured part of Malta's long term strategy to create a mainstream finance centre in the country. Malta is a jurisdiction that follows and helps develop international best practice. Finance companies have benefited from a reduction in bureaucracy, streamlined procedures, lower fees and compliance costs and a more consistent implementation of standards.
The MFSA is also responsible for consumer education and consumer protection in the financial services sector. This function is vested in the Consumer Complaints Manager.
The consumer therefore has one single point of decision-making and policy creation. More importantly, the founding of the MFSA means that Malta now has one skilled, experienced and powerful body seeking to protect consumers whilst encouraging fair and open competition in the financial services sector.1
Investment Services Regulation
The principal body of laws establishing a comprehensive regulatory framework for the provision of investment services in Malta is The Investment Services Act, 1994 and subsidiary legislation enacted under that Act. The Malta Financial Services Authority (MFSA) requires the highest levels of probity and honesty by operators and applies the Fit and Proper test to its licensees. This test requires key staff within an investment service provider together with any licensees to demonstrate solvency, competence and integrity in their dealings at all times. The Act lists a number of activities that require a licence from the MFSA. These activities include Dealing as Principal or Agent; Arranging Deals; Management of Investments; Trustee, Custodian or Nominee Services; Investment Advice and Stock broking.
The Act also requires that an investment scheme would have a collective investment scheme licence before offering its units to investors. The Act defines a collective investment scheme, the main investment setup in Malta, as any scheme or arrangement which has as one of its objects the collective investment of capital acquired by means of an offer of units for subscription which operates according to the principle of risk spreading, the contributions and the profits out of which payments are to be made are pooled and units can be repurchased, redeemed out of the assets of the scheme and units are issued continuously or at short intervals. The legal structure of the scheme may be in the form of a SICAV (Sociétés d'Investissement à Capital Variable), INVCO (Investment Companies with Fixed Share Capital), a mutual fund, an investment partnership or a unit trust.
Investment Funds
The different types of schemes available under the Maltese investment regulatory structure in which the level and strictness of regulation, depends on the type of scheme being set-up with investor and market protection as a whole being the underlying principle. These types include Professional Investor Funds; Private Schemes; Specialist Schemes and Retail Funds.
Professional Investor Funds can be promoted either to Qualifying Investors or to Experienced Investors. Professional Investment Funds for Qualifying Investors may be promoted to entities or individuals with net assets in excess of USD1.0 million and persons with reasonable experience in the acquisition and/or disposal of funds of a similar nature or property of the same kind in which the fund deals. The minimum initial investment in such a fund is of USD 100, 000 and the amount of invested funds may not be lower than this level except if it is a result of a fall in the NAV of the fund. Professional Investment Funds for Experienced Investors may be promoted to persons, who have the expertise, experience and knowledge to be able to make their own investment decisions and understand the risks involved. The minimum initial investment in such a fund is of USD 20,000 and the amount of invested funds may not be lower than this level except if it is a result of a fall in the NAV of the fund.
Private Schemes are investment schemes that limit their number of unit holders and that must show a close relationship between the unit holders. The nature of the scheme must essentially be private. Such a scheme does not require licensing under the Act although the promoters must apply to the MFSA for recognition.
Retail Funds are those funds that are offered to the general public – and therefore are the most strictly regulated. The special rules include specifications regarding the setup of the Manager, Custodian and Administrator of the fund together with investment restrictions with the general aim to ensure a minimum level of risk spreading.
Banking Services Regulation
The Banking Act, 1994, regulates banking business in Malta. This law, which has replaced the previous Banking Act 1970, has adopted European Union directives as the main reference for the regulatory concepts and supervisory practices, which it introduced.
The Banking Act, 1994 has introduced a modern regulatory regime with all the flexibility necessary in a modern and dynamic banking environment. To achieve this flexibility, the Act has provided for the appointment of a competent authority responsible to administer the provisions of the Act, particularly as regards regulation and supervision of banks. The MFSA as the competent authority is also empowered to issue directives to credit institutions, to monitor risks and establish other regulatory requirements.
The Financial Institutions Act, 1994 regulates non-bank financial institutions that are institutions, which do not fund their activities through the taking of deposits. The activities of financial institution amongst other activities include lending, financial leasing, venture or risk capital and foreign exchange dealing. The Act authorizes the competent authority so appointed to issue directives to financial institutions for supervisory, regulatory and prudential purposes.
Insurance Regulation
The Insurance Business Act, 1998, regulates the business of insurance in Malta. The Act provides for the authorisation and supervision of insurance companies by the MFSA. The MFSA has the power and the duty to ensure that companies authorised to carry on the business of insurance comply with the provisions of the Insurance Business Act, the provisions of any regulations made under the Insurance Business Act and the requirements by any Insurance Rule issued by the MFSA.
The MFSA may grant an authorisation to a company whose head office is in Malta to carry on the business of insurance in or from Malta or in or from a country outside Malta to a company whose head office is in a country outside Malta to carry on the business of insurance in or from Malta.
The class or part class or classes of business of insurance as specified in the Second and Third Schedules of the Act and different requirements (in terms of own funds and solvency) may be required for entities carrying on the business of insurance of different classes. An authorisation may be restricted to business of reinsurance or be subject to any condition imposed by the Authority.
Affiliate Insurance Companies
Captive Insurance Companies known as Affiliated Insurance Companies under Maltese law are companies licensed to undertake business of insurance limited to risks originating with shareholders of connected undertakings or entities. The motivation leading to the use of Captive Insurances may range from the lack of a specific type of insurance coverage required by a company in the market to an attempt to reduce costs of insurance suffered by a company to cover its operations.
Setting up your Captive Insurance in Malta may enjoy various benefits. Malta is an ideal jurisdiction for your Captive Insurance for risks originating in the EU and elsewhere. The benefits of EU membership, apart from assurance of compliance with EU standard Directives and Regulations in among others the Financial Services field, include the possibility to insure risks originating anywhere in the EU under the same licence and without the use of fronting arrangements. Captive Insurers and Insurance Managers in Malta benefit in terms of a workforce that is highly specialised and professional as well as in terms of the cost facilities.
Maltese registered Captive Insurances may draw up abridged accounts and are exempt from publishing their accounts in local newspapers, contributing to the protection and compensation fund and the payment of duty on any contract of insurance relating to a risk situated outside Malta. Captive Insurances are taxed at 35% while the shareholders are entitled to refunds reducing the effective taxation of the operation to single digit figures. Yet Maltese legislation requires Captive Insurances to maintain levels of solvency (which for Captive Insurances carrying out general business the solvency margin is calculated on a premium basis or on a claims basis, while for Captive Insurances carrying out long term business it is calculated according to the class in which it operates) and own fund's (which varies according to the class in which it operates) to the same level as required by current EU Directives, therefore making Malta an ideal jurisdiction both in terms of the quality of its regulation, under the watchful-eye of the Malta Financial Services Authority and in terms of advantages to the parent company.
Captive Insurance companies may not be the ideal solution for all operations and depends on the specific circumstances of the operation in question. Maltese legislation provides an alternative to such entities in the form of a Protected Cell Company (PCC). The business of a PCC is limited to insurance and the assets of each cell are segregated from that of the company and also those of other cells within the company. This implies that the creditors of a particular cell have no recourse against the assets or other cells within the PCC. However the PCC with its cellular and noncellular components form a single legal entity. A PCC may lead to reduced expenses and overheads where the use of a Captive Insurance company may not provide sufficient advantages to justify its existence.
The European Single Passport
Following Malta's accession to the European Union, insurers and intermediaries whose head office is situated within the European Economic Area (EEA) are able to passport their services or establish a branch in Malta without the need to go through the application for and granting of a licence by the MFSA. On the basis of the same rule, insurance undertakings and intermediaries established and licensed in Malta are also able to provide their services in any of the other EEA states through the European Single Passport.
In order to avail of the benefits of the European Single Passport this consists merely in a brief application to the home regulator (the original regulator that has issued the licence) as well as a notification to the host regulator (the regulator of the jurisdiction in which such services will be provided). Pass-porting insurers/intermediaries are only subject to regulation by the home member state and both the host and home regulator may be in direct contact with each other on any issue that may arise related to the activity of the pass-ported entity in the host state, thus ensuring protection of customers in the host jurisdiction while respecting the fundamental freedom of provision of services.
The Prevention of Money Laundering and Funding of Terrorism
The laundering of money is generally considered to be the process by which funds, which have been derived in an illicit manner, are converted to give such funds the appearance that they have been legitimately derived. Criminals have traditionally developed their techniques to cater for changes in anti-money laundering legislation. The term laundering was coined from the use of laundries to legitimise illicit income being a business that usually dealt in cash payments. Following several developments in prevention of money laundering legislation, money launderers have altered their techniques to make use of the banking system, auditors, external accountants, professional services providers, nominee companies, trustees, casinos, dealers in precious stones, metals or works of arts and the real estate market. Antimoney laundering legislation traditionally focussed on financial institutions however has developed over time to catch up with the new techniques used by launderers.
Prevention of money laundering legislation was often limited to certain sources of income, such as trafficking in illicit substances with other criminal activities being subsequently included. Today prevention of money laundering legislation usually covers any income derived from a crime.
As a result of the terrorist attacks on the United States in 2001, the world community had diverted its attention to prevent the use of the financial institutions for the funding of terrorism around the world therefore imposing an additional burden on subject persons to follow the source and use of funds which they are involved in. This has lead to the promulgation of several United Nations resolutions seizing funds belonging to suspect terrorist foundations together with a global enhancement of prevention of money laundering legislation.
The process of money laundering generally includes three stages - placement, layering and integration.
- Placement is the initial point of entry of illicit funds into the financial system. It is at this stage that money laundering is most easily detectable. The launderer may attempt to do this in several stages depending on the source and the amount of the illicit funds.
- Layering is the creation of complex networks of transactions which attempt to obscure the link between the initial entry point of the funds and the end of the laundering cycle. A general rule of thumb is that when a transaction is more complex than it justifiably needs to be then it should give rise to suspicion.
- Integration is possible following the completion of the above two processes. It is at this stage that the money launderer may invest the funds in other legitimate operations.
Legislation aimed at the prevention of money laundering has been introduced to the Maltese legal system in 1994 with the Prevention of Money Laundering Act and has not stopped developing since. The most recent amendments being adopted in 2005 extended the scope of the Act to include the funding of terrorism. The Prevention of Money Laundering Act applies to all persons, whether natural or corporate and stipulates that any person convicted of money laundering shall be liable to a fine not exceeding € 2,329,373.40 or to imprisonment for a period not exceeding fourteen years or to both such fine and imprisonment. The Act also establishes the Financial Intelligence Analysis Unit (FIAU) – which strives to combat money laundering and contributes to a safe and stable financial and economic environment and provides details of powers and obligations of the FIAU and how it should fulfil its duties. Subject persons are obliged to report any suspicious transactions within three days from when such suspicion has arisen to the FIAU for further investigation and failure to do so will render subject persons liable to fines imposed by the FIAU without recourse to the courts.
The Prevention of Money Laundering and Funding of Terrorism Regulations enacted in 2003 and amended in 2006 transposing most of the Financial Action Task Force (FATF) forty recommendations into the Maltese legal system.
The Regulations impose obligations on subject persons, being those persons, whether natural or legal that carry out relevant financial activity or relevant activity in terms of the Regulations. Relevant financial activity includes any business of banking, life assurance business, investment business and stock broking; while relevant activity includes the activity performed by auditors, external accountants and tax advisors, real estate agents in the exercise of their profession, notaries and independent legal professionals while assisting their clients in the planning or execution of transactions while buying or selling or real property or business entities, opening or management of bank, savings or securities accounts and others, fiduciaries acting as fiduciary shareholders, casino licensees, dealers in precious stones or metals or works of art or similar good whenever payment is made in cash in an amount equivalent to € 11,646.87 and associated activities.
Before forming a business relationship, subject persons are required to carry out certain controls that include a prior due diligence exercise, implement record keeping procedures and maintain an internal reporting setup. The Regulations do not provide a definition of what customer due diligence (CDD) is, apart from including identification procedures. Subject persons are free to apply additional CDD requirements that generally include:
- Verification of the customers identity
- Details regarding the corporate structure of the prospective client
- Information about the purpose and nature of the business relationship
- Ongoing monitoring of the business relationship and maintaining any information updated.
Where possible, the information required above should be provided by an independent and reliable source.
With Malta's accession to the European Union, Maltese prevention of money laundering legislation has taken on further developments and shall remain on the cutting edge of prevention to money laundering regulation. The EU has already implemented two Directives aimed at preventing money laundering with a third being adopted and having repealed the previous two Directives in 2005. The Third Money Laundering Directive is intended to bring EU legislation in line with the FATF Forty Recommendations. This Directive provides for risk classification where relevant persons may opt to apply enhanced or simplified customer due diligence depending on the risk-sensitivity of the transaction or relationship concerned. While conducting their risk analysis relevant persons should focus on products and transactions that are characterised by a high risk of money laundering. Member States should have implemented the Third Money Laundering Directive by the 15th December 2007.
Foundations
Introduction
By means of Act III of 2007 there have been some amendments to the laws of Malta. Such changes have affected the laws on private foundations. Some of the most significant changes in this regard, have been done to the Notaries Profession and Notaries Archives Act, the Income Tax Act and the Duty on Documents and Transfers Act.
There has been a new provision inserted in the Duty on Documents and Transfers Act, namely that of Article 32D by means of the said Act III of 2007, which holds that administrators of a foundation may opt for the foundation to be treated as a trust in certain circumstances. In such instances, the provisions relating to trusts shall apply to foundations.
The said Act also clarifies the position on private foundations, where it holds that a foundation is to be treated like a corporation and taxed at the rate of 35%.
Definition of a Foundation
A private foundation is a legal entity, which may be set up by an individual person or a group of persons for a specific purpose. As properly defined by the law, a foundation is an organisation consisting of a universality of things constituted in writing, including by means of a will, by a founder or founders whereby assets are destined either for the fulfilment of a specified purpose for the benefit of a named person or class of persons, and are entrusted to the administration of a designated person or persons.
The patrimony, namely assets and liabilities, of the foundation are kept distinct from that of its founders, administrators or any beneficiaries. Such assets may originate from any lawful business or activity, and may be present or future assets of any nature. The law seems to classify foundations under two headings. A foundation shall be referred to as a 'purpose foundation' if it is established exclusively for a charitable, philanthropic or other social purpose or as a non-profit organisation or for any other lawful purpose. Whereas a foundation shall be referred to as a 'private foundation', when it is established for private benefit. Unlike a charitable foundation, a private foundation does not solicit funds from the public. Unless evident form its statue, a foundation shall be considered a private foundation. Private foundations must indicate the names of their beneficiaries or a declaration that the foundation is constituted for the benefit of beneficiaries.
Thus the foundation consists in the dedication of a fund to a specified object with an appropriate organisation for its administration.
Foundations and Trusts
The term 'foundation' does not include trusts. However a foundation may be converted into a trust and a trust may be converted into a foundation. The Civil Code of Malta clearly lists a foundation as a legal entity. There are many areas of similarity between trusts and foundations, such as their beneficiaries and their interest, however one main difference between the two, is that a foundation has legal personality, whilst a trust does not. In many countries, the law on foundations does not address beneficial interests in any particular detail; however this cannot be said about the new Maltese law of foundations.
Formation and Revocation of a Trust
Maltese law requires that foundations must be created by public deed or by a will. They shall be deemed to have a legal personality from the date of their establishment. Just as any other public deeds, foundations must be registered with the Public Registry. The legal personality of the foundation also requires registration. Prior to registration, there must be the written consent of persons who were named in the statute to act as administrators. A private foundation also requires a beneficiary. If there is no such beneficiary, then subject to certain exceptions, the Court may strike off the legal personality of the foundation. Once registered, a foundation is valid for 100 years, unless otherwise indicated with regards to certain forms of foundations. As a rule, a foundation cannot be revoked prior to the term for which it is established. However, a private foundation may be terminated prior to this time, on the demand of all the beneficiaries of the foundation and with the consent of the founder, provided that the founder has not expressly excluded such a right. Following the death of the founder, the Court shall have the power to dissolve and wind up any private foundation when requested by all the beneficiaries of the foundation, if it is established that the foundation is no longer necessary to achieve the intentions of the founder. Furthermore, the statue of the foundation may provide that it is revocable. However revocation shall not invalidate acts already lawfully carried out, or lawful acts which are in progress. Revocation shall neither affect lawful commitments made and not yet fulfilled. Revocation of a foundation must be notified to the Registrar who shall strike off the said foundation.
In order to establish a foundation, there is the necessity of an assignment of property or money. Very low thresholds are set in this regard. The founder, or any other person with his consent, may add to the assets of a foundation by additional endowments, at any time.
A foundation may be set up for various reasons, provided that there is a legal purpose. However, a foundation may not be established to trade or carry on commercial activities, even if proceeds are for a social purpose, subject to certain exceptions.
Private Foundations
A foundation may also be established for the private benefit of one or more persons, or of a class of persons. This is known as a private foundation. In such an instance, the beneficiaries shall enjoy the benefits of the foundation, and shall have legally enforceable rights against the foundation. Foundations hold fiduciary obligations upon all persons administering them. Benefits under a foundation are personal to the beneficiaries, where creditors have rights only to the extent of the beneficiary's entitlements under the foundation. Unless otherwise provided for, the death of a beneficiary does not devolve his entitlements under the foundation to his heirs, but such entitlements shall dissolve. On the other hand if it is the foundation that terminates, the assets thereof shall devolve on the founder or his heirs at law. The founder of a foundation may also be a beneficiary. If there are two founders, decisions shall be taken unanimously; whilst if there are more than two founders, decisions are taken by the majority unless otherwise is provided in the deed of the foundation. There must also be an administrator of the foundation, who may apply to the court for directions concerning his duties. Administrators must inform the beneficiaries regarding their entitlement in the foundation.
Footnote
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
