KEEPING THAT CUTTING EDGE

FEDERICA TACCOGNA will chair FinanceMalta’s annual conference for 2019, which has innovation as its theme. She spoke to MONEY about the context of the conference at this point in Malta’s economic development.

You have provided consultancy services to a number of jurisdictions around the world. How important is innovation and what does Malta offer that could set it apart from its competitors, who are all trying to do the same?

Innovation is critical to the future of Malta; being able to support innovation, in a regulatorily safe and bureaucratically nimble environment, is crucial to attracting investment and achieving growth.

I try, though, not to use the term ‘innovation’ for its buzzword-value only. One meaning of the word particularly close to home for me is ‘adaptability’: possibly a product due to my working in the ever-changing world of regulation. It is undeniable that the characteristics (business models, systems, operating structures) required to exist in business today are different from those five or 10 years ago. And much of this change is due to regulatory evolution.

I believe successful firms, in the medium and long term, are those capable of constantly adapting. This means developing skills, structures and systems that are not just ‘good today’, but also capable of being ‘good tomorrow’ with minimal effort.

For example, most organisations have struggled through multi-year transformation programmes in order to be ready for MiFID II, by and large, succeeding by deploying new cutting-edge (innovative, one could say) systems or fundamentally upgrading existing ones.

But... the scope of MiFID II is quite oddly defined; it excludes, for example, loan products. Were the scope of MiFID to expand to such products (and the possibility is not to be excluded entirely), all those new systems and upgrades will suddenly become insufficient if they were not built in an adaptable manner.

THE THREAT OF FINANCIAL CRIME IS REAL AND THERE IS NOTHING TO BE GAINED FROM EITHER UNDERESTIMATING IT OR PLAYING IT DOWN

In another area — financial crime — firms are increasingly realising the crucial importance of robust transaction monitoring to identify behaviours indicative of money laundering or terrorist financing, and run to buy the shiniest, most expensive tool they can find in the market.

That tool is often built with a ‘typical transaction pattern’ in mind, which, without heavy customisation, does not meet the needs of the average firm and fails to detect anomalous behaviour.

And very often the firm may have had — all along — data and other systems that it could have adapted — thereby achieving innovation, compliance and perhaps even cost saving.

How did your involvement in Malta start? What reassured you that you could make a difference?

My initial introduction was about a year and half ago. A few individuals were interested in hearing a ‘global perspective’ on regulatory and compliance matters and I was only happy to discuss topics I am passionate about.

Being able to make a tangible difference to the present and future of an entire jurisdiction is a unique position.

I would lie if I said that reputational concerns were not raised at the initial stages of my involvement with Malta. As I grew to know the individuals and environment, though, my doubts were largely cast aside. Undeniably, there is a widespread desire, in Malta, to ‘do the right thing’.

In respect to negative coverage in relation to Pilatus and other financial crime scandals, I have never perceived any attempt to deny shortfalls (that exist in Malta like in a large number of other jurisdictions globally), but rather, a desire not to generalise and condemn an entire jurisdiction for the wrongdoing of a few bad actors.

And, provided this is accompanied by a serious investment in enhancing and improving the weaknesses that allowed those situations to happen, this is the only constructive way to approach such events.

The threat of financial crime is real and there is nothing to be gained from either underestimating it or playing it down.

Malta is at a crucial stage in its evolution. On one hand, cases such as Pilatus Bank have contributed to creating negative media attention, both locally and internationally and are likely to put the local financial services market and its regulators under increased scrutiny by central bodies. On the other hand, Malta’s geographical and economic position, the local market of highly skilled, English-speaking resources, the presence of technology firms, the robust business portfolio and entrepreneurial spirit represent a competitive advantage.

The role of all players in the financial services industry in the next months and years will be crucial to ensure that opportunities are maximised, and that Malta is positioned as a strong alternative to other jurisdictions, especially in light of Brexit.

My advice to firms that already are in Malta is to take the time to understand the financial crime threat – how it applies to them; how they can be exploited by criminals.

A number of MLROs, head of compliance, CEOs and other financial services professionals (not just in Malta, sadly!) cannot even describe a basic pattern of money laundering. Often they claim to have received training in the topic; however, theoretical knowledge is only the starting point.

True understanding comes from ‘experiencing’ through practice; my recommendation is to ‘get your hands dirty’ with case studies, simulated scenarios and real (but anonymised) data.

As far as firms that are considering coming to Malta are concerned, the degree of risk involved in the move has to be measured against the investment they are prepared to make to build resilient compliance structures.

The regulators and the government are investing in scrutinising and protecting the industry, but each firm has an individual responsibility that must be taken seriously and embedded into business models, budgets, operating structures and systems.

The financial sector deals with huge flows of money, which inevitably make it a target for those wishing to move money for illegal purposes. How can the sector remain one step ahead of the criminals looking for loopholes?

The financial services industry’s ability to fight financial crime rests on two pillars: strong due diligence and meaningful transaction monitoring, supported by real expertise and intelligent use of technology.

For example, let’s imagine that I am a criminal — a kleptocrat of a small country, at the fringes of Europe, who has made her money through corruption, control of the judiciary, taking bribes and manipulating the public procurement process. What do I do with all this money?

There is little I can do with it in my country and all the things I want (luxury goods and property, mostly) are overseas in Europe – so close and yet so far! Depositing it in a bank might open me up to being asked how I came to be in possession of the money… unless I hide the fact that I own it behind layers of shell companies and nominee directors across multiple jurisdictions, orchestrated and set up by very clever lawyers who specialise in these kinds of set-ups.

So, I make sure that I pick one or more banks that will not ask too many questions as part of their due diligence process – those that will stop at the first layer, without identifying that I am behind all those companies. Once the money is in the bank accounts, I start using it, aiming to strike a balance between buying all those things I want, and not attracting too much attention. Once again, choosing a bank that is good at monitoring transactions and detecting anomalous behaviour might not be a clever move on my part!

With this oversimplified story I am simply suggesting that criminals will attempt to take advantage of vulnerabilities. And the two main vulnerabilities (and defences) when it comes to financial crime are due diligence and transaction monitoring. Well-performed due diligence enables firms to weed out the unwanted and build solid foundations for transaction monitoring. Due diligence does not mean, however, obtaining a passport or verifying an address. Real due diligence means understanding who the ultimate beneficial owner of a company is, how the layers of ownership are built and for what purpose, how entities and clusters of entities relate to one another in complex networks (a clue: they are not visible to the naked eye!). Surprisingly enough, achieving this due diligence means hiring experts.

A firm’s obligations do not end with understanding its customers, rather, that is where they start. The real difference is in the monitoring of actual transactions.

Most approaches to transaction monitoring I see, both in Malta and elsewhere in Europe, are basic, weak and ineffective. Very often have I heard that transaction monitoring means stopping every transaction in excess of (for the sake of argument) €5,000 and comparing that to the ‘expected profile of the customer’. This does not even start to scratch the surface of what transaction monitoring really means and what technology can achieve in relation to it.

A static profile alone is hardly capable of defining an anomaly. Much more effective to this end are patterns of behaviour and statistically-defined, dynamic profiles. It all sounds very fancy, but even a simple database is capable of doing this.

In this sense, fintech firms have an advantage; their entire business proposition is built on technology; they simply need to extend it in a way that enables them to achieve compliance objectives, not just commercial ones. M

For more information about the FinanceMalta annual conference visit www.financemalta.org/conference-2019