On the 10th June 2020, the Malta Financial Services Authority (the “MFSA”) issued a Circular addressed to all Company Service Providers (the “Circular”) regarding the Sectoral Risk Assessment and Action Plan on Legal Entities, Legal Arrangements and Voluntary Organisations (the “Sectoral Risk Assessment”).
The Sectoral Risk Assessment was a nationwide initiative led by the National Coordinating Committee on Combatting Money Laundering and Funding of Terrorism (“NCC”) and was finalised and endorsed by NCC board members in July 2019. The rationale behind this risk assessment was to evaluate Malta’s Money Laundering and Financing of Terrorism (“ML/FT”) risk exposure from the perspective of legal entities and arrangements, to improve the understanding of the nature of the above-mentioned risks, including through the identification of typologies and patterns, as well as to catalogue the necessary measures that would aid with strengthening the AML/CFT regime to mitigate the risks. This Sectoral Risk Assessment also addressed one of the key recommendations made by the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (Moneyval) in its Fifth Round Mutual Evaluation Report of Malta of July 2019 where it was recommended that the relevant authorities finalise their assessment of the vulnerabilities and the extent to which all types of Maltese legal persons and legal arrangements could be misused for ML/FT.
Since Company Service Providers (“CSPs”) play a key role in relation to ‘legal entities’, particularly with respect to private limited companies, public limited companies, partnerships and foundations which they can set up, the MFSA would like to draw the attention of all CSPs to the Key Results Documents of the Sectoral Risk Assessments available on the NCC website, in particular to the document entitled ‘Key Results on Legal Entities, Legal Arrangements and Voluntary Organisations’(the “KRD”). The KRD presents an overview of the methodology and key findings of the risk assessment specific to the sector, together with the planned action plan aimed at mitigating the identified risks.
Through this Circular, the MFSA urged CSPs to acknowledge and familiarise themselves with the findings outlined in the KRD, with a view to reviewing the sectors they operate in so as to implement risk mitigating measures where required. CSPs are expected to evaluate their findings and act upon them including by either exiting the relationship or reporting the structure where their regulatory and legal obligations so require.
The KRD revealed that tax evasion has been identified as posing the highest threat of money laundering vis-à-vis legal entities and legal arrangements in the sector. The KRD has also highlighted that bribery and corruption are relevant threats to legal entities and arrangements in Malta, with private companies, trusts and foundations being typically linked to this predicate offence. CSPs are to approach transactions relating to clients who are more susceptible to bribery and corruption (such as Politically Exposed Persons) in a critical manner and to ensure that they probe sufficiently to ascertain the sources and destination of funds which may be channelled through structures they set up or service. Moreover, CSPs should be alert with respect to possible channelling of funds emanating from unlicensed financial services products which may be placed through corporate structures, resulting in revenues earned from this predicate offence entering the system through a legal entity.
Keeping in mind the above-mentioned examples, the MFSA urged CSPs to incorporate the findings outlined in the Key Findings Documents in their internal business risk assessment and client risk assessment exercise and to conduct a gap analysis to develop proportionate and effective controls so as to undertake any necessary risk mitigating measures.
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