Blockchain: A Solution or Enabler for Money Laundering in Malta?

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Blockchain has come to be a major buzzword in Malta in the past few weeks, with the frequently dubbed ‘Blockchain Island’ priding itself on being a global leader in the facilitation of this new ‘disruptive’ technology. At the same time, the European Commission and European Banking Authority have issued deep concerns about Malta’s ability to tackle money laundering and terrorist financing within its financial system.

Considering the fact that criminal activity, particularly money laundering and terrorist financing, are often central arguments put forward when discussing the risks associated with blockchain and cryptocurrency, the correlation of these developments particular to Malta may raise a few eyebrows eyebrows.

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On the 8th November 2018, the European Commission issued its first ever formally binding opinion on the enforcement of anti-money laundering measures. The opinion, which is directed specifically at Malta, demands the country to take positive steps within 10 working days. Failure to do so will lead Malta’s banks to fall under the jurisdiction of the European Banking Authority. Such severe action results from finding consistent and alarming systematic failures in the enforcement of measures aimed at combating money laundering and terrorist financing on the Island.

What effect could Malta’s newfound blockchain niche potentially have on the Island’s ability to tackle such crime and injustice? It has often been cautioned that cryptocurrency technology provides a safe haven for criminals and terrorists wishing to pursue illegal and dangerous activity under the radar. This is due to the anonymity cryptocurrencies such as Bitcoin offer, as well as the detachment from banks via the lack of centralised intermediaries which traditionally facilitates transactions. In fact, a report from Europol in 2015 showed that Bitcoin was used in 40% of illegal transactions in the EU.

On the other hand, many believe such fears are largely an exaggeration. Advocates of the technology often insist that blockchain can actually help Governments put an end to money laundering activities as data containing the transfer of financial assets can be encrypted in blockchains which are immutable and tamper-proof. This makes the tracking and tracing of transactions by Governments and law enforcement both more efficient and absolved from human error or arbitrary decision making choices by potentially corrupt officials. Of course, this depends on the impetus of Governments to utilise blockchain in this manner, as well as regulate its use stringently to ensure it cannot be used for illicit purposes.

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Malta’s newly enacted blockchain laws (the Malta Digital Innovation Authority Act, the Innovation Technology Arrangement and services Act, and the Virtual Financial Assets Act) indeed aim to regulate the legal recognition, legitimacy and supervisory authority of the emerging industry. This incredibly innovative and unique legal framework undoubtedly puts Malta at an advantage in its ability for the Governmental authorities to oversee the technology and ensure it is used in a lawful manner.

However, caution ought to still be taken. As financial crime specialist Isabella Chase notes, “In the case of Malta, recent scandals show that presence of laws are only as beneficial as how well they are enforced”. The recent anti-money laundering initiatives taken by the EU demonstrate that compliance with rules on enforcement against criminal activity is hardly robust.

Considering all that is at stake, with Malta being the world’s Guinea pig in blockchain regulation, it is positive that officials have been emphasising due diligent practices. The Maltese Financial Services Authority (MFSA) has reassured that it is practicing a “zero tolerance policy” with regards to “persons who are not fit and proper to operate”. Moreover, keen to assure the public that the Island’s new tech-based avenue will not cause a rumble with Brussels, the Parliamentary Secretary for Digital Economy, Mr. Silvio Schembri, commented that “the high level of principles of the European Union are reflected onto our laws”.

Given the Maltese Government’s new found enthusiasm for regulating blockchain, it doesn’t immediately appear to be a gateway for criminal activity. Rather, depending on the course of action taken by the Government, in the foreseeable future it could prove to be an excellent tool in combating money laundering activities. However, the Government needs to act with acute diligence to ensure that rules are actually complied with, whilst also focusing on the proper enforcement of the EU Anti Money Laundering Directive. This is not only imperative to maintain it’s ‘blockchain centre of the world’ reputation, but also to ensure proper protection and security for Europe as a whole.

Written by

Elysia Rezki

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Blockchain: A Solution or Enabler for Money Laundering in Malta?

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