Corporate Governance – why all the fuss?

Corporate Governance

INTRODUCTION.

In February of 2020, the MFSA (Malta Financial Services Authority) launched a stakeholder consultation outlining several proposals for the setting-up of a comprehensive principles-based Corporate Governance Code.

This document would be applicable to all entities authorised by the MFSA and Listed Companies, which would then be supplemented by sector-specific rules and complementing guidance notes. It was formulated based on the new MFSA 2019-21 Strategic Plan to enhance Company Management & Compliance issues.

CONTEXT.

The ubiquitous question: ‘What is Corporate Governance?’’ continues to grapple with most company officers and managers – since there is no set criteria as to what constitutes a proper ‘Corporate Governance Code’. In some ways, what the MFSA will try and introduce is a set of ‘minimum standards’ similar to what already exists with Listed Companies here on the island.

Whilst ‘Corporate Governance’ is a concept as old as the company itself, the study of corporate governance has however gained momentum only recently – as an indirect result of increased AML and Compliance requirements that most licensed companies are already faced with.

Moreover, in light of the 2008 Financial Crisis, Companies have also been forced to upgrade their Risk Management and Dual Control functions (also considering MIFID principles) – which inadvertently have led to most Managers revisiting their Corporate Governance Frameworks to include beefed-up but manageable procedures.

Inasmuch as the subject offers an array of interpretations and different process management techniques, this article will try and outline a couple of key elements that will serve every Company in good stead. For the purposes of this analysis, external sub-committees will not be mentioned but will be tackled in a future piece.

DEFINITION.

 The G20/OECD Principles of Corporate Governance state that ‘Corporate Governance involves a set of relationships between a Company’s management, its board, its shareholders and other stakeholders. It provides the structure through which the objectives of the company are set and the means of attaining those objectives and monitoring performance are determined’. The definition sounds impressive but what does this mean in practice?

Corporate Governance includes formulating a system of checks and balances with clear and tangible objectives which ensure that the ‘best interests of the company’ are at the core of all Policies and Procedures.

To put it bluntly, all short-term goals should complement the overarching long-term objectives which should primarily focus on sustainability, effective management & protection of investors/shareholders. More importantly, Corporate Governance should lay-out an effective framework in pursuit of a set of commercial objectives.

THE ELEMENT OF ‘DUAL CONTROL’.

 The interoperability between the Dual Control Principle and Corporate Governance cannot be overstated. In most jurisdictions, especially Malta, the local Regulator emphasises the need to have proper ‘Dual Control’ principles in place.

The notion of ‘Dual Control’ basically means that for every policy and procedure under the control of a designated person, a second person will monitor said decisions and executions (in an oversight and monitoring capacity) – offering guidance and constructive criticism whenever needed.

Company Policies and Procedures should clearly stipulate which Company Officers are responsible for each process and that such decisions are properly documented accordingly to ensure an evidentiary trail of such decisions – and the applicability thereof of Corporate Governance. In most cases, the Regulator will request licensed companies to provide evidence that major decisions were actually vetted by more than one director.

SEPARATION OF MANAGEMENT AND CONTROL.

 Shareholders and Directors have two completely different sets of roles and responsibilities within a Company. Whilst it is generally understood that the Shareholders own the Company, the Directors are in charge of the management of the company. This segregation between Management and Ownership forms the basis for effective Corporate Governance.

The OECD Principles on Corporate Governance go one step further and recommend that a distinction is made between both the ‘Board’ and the ‘Management’ itself. From a practical perspective, the Board would normally be composed of experienced individuals capable of approving major policies, setting strategy and establishing Objectives. In major Companies, the Board also nominates and appoints a Chief Executive Officer (CEO) who oversees the ‘Management’ section. Management is generally involved in the Day-to-Day running of the Company and is tasked with the provision of Products & Services to clients.

The aforementioned set-up not only ensures that Management of the Company is structured and coherent (ensuring shareholders are afforded the most onerous form of governance) but the ‘Dual Control’ principle is satisfied holistically – across all forms of the entity.

DIFFERENT MODELS OF CORPORATE GOVERNANCE.

 It is generally understood that there are two principal models of Governance – 1) the Anglo-American Model and the 2) Continental Model.

Whilst the Anglo-American model advocates a market-oriented approach, the Continental System is primarily geared towards a stakeholder-oriented approach (and is prevalent across the majority of continental Europe).

To put it simply, the Anglo-American model seeks to compensate for minimal shareholder participation (especially in large companies) by placing emphasis on the Board of Directors to act with the duties of care and loyalty whilst ensuring member/shareholder protection.

On the other hand, the Continental Model involves greater shareholding control and involvement – complemented by the participation of other key stakeholders such as Customers and Suppliers. To note that there is a responsibility on the majority shareholders to keep the managerial officers in check.

Whilst there is no ‘right’ and/or ‘wrong’ system, the style of Governance is normally commensurate to the Quantity and Quality of Human Resources available and the long-term objectives which the company decides to establish prior to commencing its business operations.

THE BOARD OF DIRECTORS.

 Every Company is effectively managed by a Board of Directors. This organ should be of sufficient size such that the balance of skills and experience is appropriate for the requirements of the business and that changes to the Board’s composition can be managed without unnecessary disruptions. Moreover, the Board should be composed of personnel who, collectively, have the required diversity of knowledge, judgment and experience to properly execute their tasks to the best of their abilities.

EXECUTIVE V NON-EXECUTIVE DIRECTORS.

 The Board of Directors is usually composed of Executive and/or Non-Executive Directors. To note that the Maltese Companies Act does not provide a distinction between the two – and in the eyes of the regulator, both are treated as ‘Directors’. In fact, the Courts of Malta have often found Non-Executive Directors also liable for wrongful and/or fraudulent trading.

Notwithstanding the aforementioned, Non-Executive Directors are generally not engaged and involved in the daily management of the company. Their role is generally restricted to overseeing the executive or managing directors and dealing with situations involving any potential Conflicts of Interests.

DIRECTORS’ RESPONSIBILITIES.

 The Corporate Governance principle is largely dependent on the Good Conduct and Character of the Directors. Within this context, a couple of important principles should be raised to reinforce key traits that will ensure the Company is as closely aligned to this onerous principle as possible: –

  1. Directors must act within their Powers. The Board of Directors should act ‘intra vires’ – that is, within the scope of the Company’s objectives and Statutory Provisions rather than ‘ultra vires’ – whereby the Directors go beyond the scope of their powers.
  2. Directors have a duty to act honestly, in good faith and in the best interests of the company. Their duties extend towards all facets of the company and should not be restricted to any individual shareholders.
  3. Directors must use their own judgment – and should not enter into contracts, either between themselves or with third parties, on how they are to vote at important meetings. In this connection, there must therefore be ‘unfettered discretion’ in the course of their tasks and duties.
  4. There is also a duty of care, diligence and skill- wherein directors must exercise a degree of maturity which one would expect a reasonably diligent person to exercise.
  5. Conflicts of Interest should be avoided. Conflicts can range between the interests of the company and the interests of a director or the duties a director has towards a company and the duties he/she has towards another third-party. Conflicts must always be disclosed and properly recorded in a Register.
  6. Directors must also refuse any form of 3rd Party Benefits. They should not take ‘bribes’ from anyone and refuse favours and any other form of compensation which might inhibit their ability to act in an independent and impartial manner.
  7. Moreover, Directors should not make secret or personal profits without the consent of the company and should not benefit from any form of personal gain using confidential company information.
  8. Finally, Directors have the duty not to compete with the company. In this connection, they should not carry out businesses on their own account which directly compete with the company nor form any enterprise/business association which directly acts in competition with the Company.

CONCLUSION.

Most Boards unfortunately fall into the pitfall of discounting the importance of Corporate Governance and perceive it as a burdensome compliance-forced exercise which must be implemented on a ‘tick-box’ approach basis.

The Companies that succeed are those that are not only driven by profit-making endeavours but are committed to create a ‘Culture of Compliance’ whilst ensuring that appropriate checks and balances exist throughout the organisation.

Here at Dr. Werner & Partner, our qualified personnel will be more than willing to offer consultation based on our experience and help you draw up your Corporate Governance structure as per local legislation.

You can contact us accordingly by sending an email to:

Disclaimer*

The above-mentioned article is simply based on independent research carried out by Dr. Werner and Partner and cannot constitute any form of legal advice. If you would like to meet with up with any of our representatives to seek further information, please contact us for an appointment.

Keywords: Corporate, Governance, Framework, Company, Compliance.

 

 

 

 

 

 

 

What banks are there in Malta? An overview

Each client of Dr Werner & Partner who founds an LTD in Malta sooner or later needs a bank account to guarantee the company’s payment transactions. In so doing it is not, however, absolutely necessary to open an account in Malta. Thus we have some clients who maintain their bank accounts with an international bank outside Malta. However, if the client wishes to open a Maltese bank account, our colleague Mr Darren Borg will lend her support by preparing documentation. She is also happy to help in communicating with the bank.

Below you will find an overview of the banks available in Malta. The descriptions that follow are not intended to constitute an evaluation, but rather reflect our subjective experiences with the banks in question.

General information

Following the recent influx of foreign companies and their demand for foreign skilled employees, Malta has experienced an economic expansion. This brought with it an increase in the demand for local banking services, to support such opportunities that were created within the local financial sector.

In fact, Malta is considered as an International Banking centre and it is esteemed just as other countries within the Mediterranean region. Here in Malta there are more than 20 operating Banks and each one of them can maintain the domestic funding in the market and credits for local and foreign individuals and companies in Malta. There is a clear distinction between the local retail banks that offer a wide range of financial services to corporate and private clients, and the internationally focused, specialised foreign banks that have been set up in Malta and which have almost no interaction with the domestic economy. Below you can find a list of current operating Banks in Malta: Agri Bank, AKBANK, APSbank, BOV Bank of Valetta, BNF Bank, Commonwealth Bank, Credit Europe Bank, credorax, ECCM Bank plc, Ferratum, FCM Bank, FIMBANK, HSBC, IIG Bank (Malta) Ltd, Izola Bank, LOMBARD, medidirect, MerkantiBank, NBG BANK MALTA, novum Bank, Sparkasse Bank Malta plc, Garanti BBVA, YapiKredi.

An Individual willing to setup a company in Malta will find the banking services being offered by local institutions convenient to both his or her personal and business needs. Many local banks offer a convenient broad banking experience through their vast range of products, services and expertise. The products and services being offered for both retail and corporate clients varies from business current accounts, savings account, term deposits, credit line facilities, business overdrafts, debit/credit cards, trade finance, foreign currency accounts, foreign exchange services, direct credit, internet banking, cash letters, cheque books and ATMs. Below one can find some information about major local Banks providing tailor made services to individuals willing to open either a personal or corporate account:

Bank Of Valletta p.l.c

Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap. 371 of the Laws of Malta) and the Investment Services Act (Cap.370. of the Laws of Malta). BOV was formed in 1974 following an agreement between the Government of Malta and the Malta Development Corporation. The Bank’s financial services are offered through a network of 36 branches, 1 satellite branch and 4 agencies in Malta and Gozo, and through a number of subsidiaries. It has also developed a worldwide network of correspondent banks and has 4 representative offices in UK(London), Brussels (Belgium), Italy (Milan) and Libya (Tripoli). Through these networks, the Bank has built the necessary backbone to service its customers in international banking and trade transactions.

The Bank of Valletta Group (the Group) comprises Bank of Valletta p.l.c. (the Bank) and two subsidiary companies namely BOV Asset Management Limited (BOVAM) and BOV Fund Services Limited (BOVFS). The Group also has two equity-accounted investee companies, MAPFRE Middlesea p.l.c. and MAPFRE MSV Life p.l.c. The Group’s principal activities are set out below.

The Group offers banking, financial and investment services and connected activities within the domestic Maltese market. The principal activities of the Bank comprise the following:

  • The receipt and acceptance of customers’ monies for deposit in current, savings and term accounts which may be denominated in Euro and other major currencies,
  • The provision of loans and advances to a wide array of customers, and
  • The provision of investment services, covering a comprehensive suite of investment products and services that meet the customers’ needs throughout their lifecycle, including stockbroking, advisory and discretionary portfolio management services.
  • The Group also provides a number of other services, including, bancassurance, corporate advisory, fund management, fund administration, and other services, such as 24-hour internet banking service, issuance of major credit cards, night safe facilities, automated teller machines, foreign exchange transactions, outward and inward payment transfers.

HSBC Bank Malta p.l.c

HSBC Bank Malta plc was registered in Malta under the name Mid-Med Bank Limited. The bank’s ordinary shares were listed on the Official List of the Malta Stock Exchange in 1993.

The status of the bank was changed to that of a public limited liability company in 1997. In the same year it changed its name to Mid-Med Bank plc. In 1999 the bank changed its name again to HSBC Bank Malta plc. The bank provides a comprehensive range of financial services including Retail Banking and Wealth Management, Commercial Banking and Global Banking and Markets. Through a number of specialised subsidiary companies, the bank is also active in the areas of life assurance and fund management, as per the below:

  • HSBC Life Assurance (Malta) Limited – A company authorised by the Malta Financial Services Authority to carry on the business of insurance in Malta under the Insurance Business Act, 1998. A range of protection and investment life assurance products are distributed mainly through HSBC Bank Malta p.l.c. which is enrolled as a tied insurance intermediary under the Insurance Intermediaries Act 2006.
  • HSBC Global Asset Management (Malta) Limited – A company managing a range of funds which have exposure to both Maltese and international financial markets. It is the distributor for HSBC Global Asset Management’s fund range and also specialises in the provision of tailormade discretionary portfolio management services for institutions and family offices.

BNF Bank p.l.c

BNF Bank plc, formerly known as Banif Bank (Malta) plc, started operations in Malta in 2008 and has been estabalished as a key player in the Maltese banking sector.

BNF Bank plc offers personal and business clients a highly personalised service through their network of twelve retail branches spread across the Maltese Islands and a Corporate and Business Banking Centre along with a local trading room.

JUD Investment Group Ltd, a subsidiary of Al Faisal Holding Group, one of Qatar’s largest private diversified groups, is BNF Bank’s majority shareholder having 92.4% stake in the Bank. The remaining 7.6% of shares are held by four Maltese shareholders: PG Holdings Ltd, Virtu Investments Ltd, Sak Ltd and Mizzi Capital Projects.

They have launched our new brand identity in October 2017 – BNF Bank – a brand that reflects their re-energised vision of increasing market share, taking the Bank across new frontiers, with a desire to build a new future.

Lombard Bank Malta p.l.c

 Lombard Bank was founded in 1955, when Lombard North Central of the UK was active in Malta by accepting deposits through agents.  In 1969 Lombard Bank (Malta) Limited was registered as a wholly-owned subsidiary of Lombard North Central p.l.c.

Today, Lombard Bank Malta p.l.c. is listed on the Malta Stock Exchange and is licensed and regulated by the Malta Financial Services Authority as a credit institution and as an investment service provider.

The Bank is an authorised currency dealer and a financial intermediary on the Malta Stock Exchange, as well as a member of the Depositor Compensation Scheme and the Investor Compensation Scheme.

Lombard Bank focuses on corporate and personal banking while developing a personalised and customised service. It offers the full range of traditional retail and commercial banking activities, including also home loans, deposit accounts, credit and debit cards, trade finance and asset management.

APS Bank p.l.c

 APS Bank is a Maltese bank established since 1910, with majority shareholding held by the Archdiocese of Malta and the Diocese of Gozo.

They offer a complete range of personal banking services including savings accounts, home loans and personal loans. They also provide comprehensive banking services for corporate customers. The Bank also provides Wealth Management Services since it is licensed as an investment services firm and is also registered as a Tied Insurance Intermediary. Such Wealth Management Services provide access to a selected range of products linked to APS Funds SICAV p.l.c. and other 3rd party product providers.

The Bank was incorporated into a private limited liability company in 1970 and granted a commercial banking licence in 1990. Since then, operations have vastly expanded and today the Bank employs over 400 staff working at a modern head office building located in Birkirkara (Swatar) and eleven branches across Malta and Gozo.

APS Bank is well known for its ethical banking tradition and exemplary corporate social responsibility practices supporting Maltese culture, art and various charitable causes.

Medirect Bank (Malta) p.l.c

 MeDirect Bank Malta plc, previously known as Mediterranean Bank is now considered as the third largest Bank in Malta having an equity of around Euro 170 million and is under the supervision of European Central Bank (ECB) and Malta Financial Services Authority (MFSA). The Head office of Medirect is located in Sliema and one can also find another Branch in Victoria Gozo.

Medirect Bank Malta plc mainly focus on savings, investments and wealth management for both retail and corporate clients. MeDirect SA/NV a subsidiary Bank of Medirect Bank Malta plc is situated in Belgium and is offering online investments opportunities and other saving products to retail investors.

All the above-mentioned banks take their compliance mandate very seriously, i.e. they check all directors and shareholders with great care. In this context we do not simply mean a thorough examination of submitted documents, but also comprehensive background checks in the internal banking system.

Conclusion

Anyone contemplating establishing a company in Malta and wishing to engage the services of Dr Werner & Partner for this purpose can be assured that we have in-depth knowledge of the banks available in Malta and can offer our clients active support in selecting the right bank. Help in opening a bank account is one of the core elements of our service package for company establishment in Malta.

Source of Funds and Source of Wealth – are we asking for too much?

AML - Source of Funds and Source of Wealt
  • Introduction;
  • Differentiating between SoF and SoW;
  • Why we ask for this information;
  • When do we ask for this information;
  • Categories and common example of SoW;
  • SoW and SoF in the context of Customer Risk Assessment;
  • How to treat SoF/SoW in the context of On-Going Monitoring;
  • Conclusion;

Introduction.

Compliance Officers and practitioners are often faced with the conundrum of how to request Source of Funds (‘SoF’) and Source of Wealth (‘SoW’) information to a prospective customer/client in a manner that provides comfort, discretion and confidentiality.

Inasmuch as local Anti-Money Laundering regulations request both SoF and SoW in certain scenarios (there are specific situations where SoF/SoW is not always required to be collected/corroborated), the ‘art’ of obtaining this sensitive information remains a highly subjective matter. Within this context, Financial Institutions (FIs) and TCSPs (Trusts and Company Service Providers) often adopt different approaches and depending on the client and his/her status, there could also be several intermediaries involved who would obtain and disseminate said information themselves (particularly prevalent in the context of high-ranking Politically Exposed Persons).

Notwithstanding the fact that details are at times hazy and ambiguous (with some clients, on rare occasions, choosing not to disclose information), this article will aim to elucidate the ‘why’, the ‘what’ and the ‘purpose’ of this exercise…and the reason it is so crucial in building up a ‘circle of trust’ between the client and the FI/TCSP.

Differentiating between SoF and SoW.

 For clients that are still grappling with these concepts, they can be explained very clearly as follows. Whenever a request for information pertaining to SoW is made, DWP would seek to identify how a customer accumulated his/her wealth. This relates to the entire economic activity that is generated throughout a person’s lifetime.

On the other hand, Source of Funds will provide the FI/TCSP with an understanding of how and for what purpose an account is going to be funded. This roughly translates as dissecting what ‘source of funding’ will be used to commence this account opening, business relationship or occasional transaction. It is not directly related to the Source of Wealth in that the origin of the funds (which is specific in nature) is what really needs to be surmised and identified.

 Why do we ask for this information?

Having a thorough and comprehensive understanding of the SoF and SoW of any particular customer/client will allow an FI or Service Provider to better comprehend the client’s wealth and (more importantly) funding sources – which will in turn ensure that the customer’s risk is assessed appropriately. To note that FIs and TCSPs should adopt a Risk-Based approach (as per FATF Recommendations) with respect to the amount of information collected for SoW and SoF purposes. The type of customer and the risk rating often entails different forms of Due Diligence.

Obtaining SoF and SoW helps DWP for the following reasons:

  • Understanding the customer’s background and financial history allows us to construct a better picture of his/her needs and business plans. We will be able to comprehend expectations based on either previous success in a particular field or embrace the start-up nature of a project.
  • In this connection, a comprehensive appreciation of what it took you to get to this position allows us to align ourselves thoroughly with your projections and company vision.
  • We will be in a better position to understand where and how capital was generated. This would serve us in good stead whenever we are faced with an Internal Audit or inspection by any Relevant Authority. Local Maltese Authorities have also placed an emphasis on being able to ascertain how and when capital was accumulated throughout one’s lifetime.
  • Throughout on-going monitoring (a legal necessity especially within the context of business relationships), having sufficient SoF and SoW information will allow us to identify any transactional activity which might not be in line with what would be reasonably expected based on pre-collated information.
  • To this end, we would not only be protecting our reputation as a service provider, but we’d serve as a second line of defence in case you are unaware of any transactions (inflows & outflows) or scams of which you have no knowledge of – but are discovered throughout the course of Transaction Monitoring.
  • As subject persons, we are under an obligation to assess transactions (commensurate to the size and nature of our business) and report any potentially suspicious activity – and this is in line with all local AML Regulations. It certainly helps if the information we had obtained in the first place was sufficient as it would help any unit formulate a comprehensive understanding.

 When do we ask for this information?

Each FI’s and TCSP’s AML Manual (Policies and Procedures) should normally state that SoW Due Diligence should be conducted either at account opening (or at on-boarding) and assessed periodically (e.g. annually) commensurate to the Risk given by the Compliance and AML Unit.

What is important to consider is that the Due Diligence exercise should be exhaustive enough to sufficiently create a coherent picture of the customer (which more importantly can be reviewed & understood in a logical and transparent manner by any Relevant Authority).

Similarly, SoF information should be gathered in accordance with the AML Manual (considering also the Risk Based Policies & Procedures). The Compliance Officer will seek to understand the ‘origin’ and ‘means of transfer’ of any currency which is deposited with the FI/TCSP – taking cognisance of the ‘method’ used for that transfer.

In other words, SoF will relate closely to the ‘nature and purpose’ of the account opening (or e.g. establishment of a business relationship). Moreover, SoF in particular should involve (1) the amount/value being transferred (2) the method of transfer (3) remittance and origin and (4) country from where the funds originated.Categories and Common

Examples of Source of Wealth.

As already hinted, Source of Wealth information is at times bordering on the ‘personal’ and ‘high confidential’. Obtaining both a thorough understanding and description as to the economic, business and/or commercial activities that generated the customer’s overall net worth is at times often difficult to holistically ascertain. (This is why at times, it is often necessary to verify Source of Wealth statements by asking for supporting documentation).

Within this context, it must be stated that the purpose of SoW information is not to verify an exact and precise amount of the overall net worth. Rather, any FI and TCSP should be comfortable enough to assess the wealth generating activities. To this end, this is often presented in a form which is filled in by the customer.

Some common examples of SoW ‘inter alia’ include:

  • Family Wealth (very prevalent in SoW declarations, which generally speaking, includes inheritance, family gifts, pension or retirement scheme pay outs.
  • Personal Backgrounds (e.g. casino or lottery wins, any sales from real estate, antiques, artworks or any other activity that has augmented the SoW).
  • Income and Business Activities (this is often linked to business ownership, operations, employment income, any other business activity etc…). Salaries, Bonuses and Commissions are often included here and should be declared.
  • Investment Activities (e.g. income from any sale of shares, real estate, intellectual property etc.).

SoW and SoF in the context of Customer Risk Assessment (CRA).

More often than not, the Compliance/On-Boarding Officer will inform the Customer that the purpose of gathering this information is to also help construct a ‘Client-Specific’ Risk Profile. This information is therefore factored into a Customer Risk Assessment. Once SoF and SoW Due Diligence has been carried out, the assessment of the customer’s risk to the FI/TCSP and the corresponding Risk Rating should reflect each of the enquiries in a holistic manner.

In the course of compiling the Customer Risk Assessment, the Compliance Unit will factor in:

  • Whether or not the overall net worth of the Customer has been properly documented in the On-Boarding process. (Also applicable to Source of Funds).
  • Whether the on-going SoW/SoF of the customer have been sufficiently corroborated.
  • Any inconsistences in the SoW and SoF information.
  • Any adverse media ‘hits’ on the Customer.
  • Checks on the Customer’s Reputability and Integrity.
  • Any SoW/SoF connections to a High Risk or Non-Cooperative Jurisdiction.
  • Whether the Customer is (or becomes) a PEP.

How to treat SoF/SoW in the context of On-Going Monitoring

The AML/Compliance Unit are often tasked with ensuring that SoW (where applicable) declarations are reviewed and updated throughout the course of the business relationship (although this could also be subject to period reviews or even triggered by changes in customer circumstances (e.g. change in residence or status).

The level of corroboration of SoW and SoF information during a review process should be risk-based and consider inter alia:

  • Any material changes or new events affecting the on-going SoW or SoF of the customer which had been obtained at on-boarding stage;
  • For how long the customer been a client of DWP;
  • Any new risk indicators;
  • Any previous transaction monitoring enquiries;
  • Whether the account records are in line with the expected activity which was earlier described in previous SoF/SoW declarations.

Concluding Remarks.

Are we asking for too much? If the customer collaborates and fully understands the essence of the on-boarding process (or request for updated information), then any SoW and SoF exercise will be a seamless process. Notwithstanding the ubiquitous clash between privacy and compliance, it is never too much to ask for accurate and up-to-date information. Inasmuch as Clients have a duty to provide such information (for wholly legitimate reasons), any FI and TCSP is equally obliged to protect both its’ reputation and the credibility of the jurisdiction from where it operates.

As previously hinted, trust is at the forefront between a Service Provider and a Customer and the information presented should display a level of maturity & honesty which ultimately will need to stand the test of time.

Disclaimer*

The above-mentioned article is simply based on independent research carried out by Dr. Werner and Partner and cannot constitute any form of legal advice. If you would like to meet with up with any of our representatives to seek further information, please contact us for an appointment.

 

Keywords: Source of Funds, Source of Wealth, Customer, On-Boarding, Risk Management.

Filing Income Tax Returns in Malta, for Entrepreneurs and Individuals

income tax return malta

As in almost every country, there is also an obligation in Malta to submit an income tax return once a year. This not only applies to entrepreneurs and the self-employed, but also to private individuals who have moved their center of life to Malta.

At DWP, we support almost all clients in filing their tax returns and therefore know that some people have basic questions about this topic. The following piece is meant therefore to explain the fundamentals of tax returns in Malta and provide answers to frequently asked questions, including two case studies that should make you feel better acquainted with the complex topic. Keep reading to the end for an additional short checklist that’ll be of use as you get started.

Essential Information on Tax Returns in Malta—Dates and Deadlines 

In Malta, tax returns for the previous year must be submitted by June 30 (documents for private tax returns are sent by post in May).

Due to the prevailing Corona crisis, the responsible Maltese authority has already granted a goodwill extension for the second time, postponing the deadline for submission to August 31, 2020. As of mid-July, most of our clients still have not received their paperwork in the mail, as the authorities are experiencing significant delays this year.

Who Must File a Tax Return?

EVERYONE! Every person who lives in Malta has to file a tax return, whether you are employed, a retiree, freelancer, or living on your savings—everyone is required to submit a tax return.

Which Authority is Responsible for the Private Tax Return?

The Inland Revenue Department is responsible for tax returns in Malta. Here, tax returns are sent by post; if you do not receive one, you can call them (at 153) or stop in (Block 4, Triq Vincenzo Dimech, Il-Floriana). Our experience is that employees on site are very helpful and courteous.

Who Can I Contact if I Have Problems Filing My Tax Return?

If you need help with either general or highly specific questions, Inland Revenue (IRD) is there to assist. If it is a very specific question, the customer service representative might ask you to write an email with the request (). Please don’t expect an answer immediately—it can take a few days or more.

Why Have I Not Yet Received a Tax Return?

The most common reason for not receiving your tax return is a move that was either not communicated to the authorities or communicated too late.

Even if you move your primary residence to Malta, you might not receive the tax return if you have not been properly registered.

If you have lived in Malta for several years and have not received a tax return, it may be that you are registered as a “non-filer.”

“Non-filer” means the IRD will no longer send you a tax return and that the data of your income might for example be provided by your employer. Please note: In this case you do NOT have to submit a tax return—you are exempt!

Can I Register as a “Non-Filer”?

No, the authorities decide who is or will be a “non-filer.” There is no standard procedure here and you will also not be informed by mail.

If you want to find out if you’re down as a “non-filer,” you can call 153 (if currently on Malta) and inquire by phone.

In our experience, the status of “filer” is changed to “non-filer” after 3 years. This means if you have submitted your tax return 3 years in a row, you will get the status of “non-filer” in Malta from the fourth year on. You must, however, always confirm this with the authorities.

Have Something to Declare/You Must Pay Taxes on Something but You Have Not Received a Tax Return from the Authorities?

Please don’t be led to believe you have nothing to declare simply because you haven’t received a return in the mail. You might still be obligated to do so!

Please call the IRD 153 and explain that you need a tax return so that you can properly declare everything.

You’re New in Malta and Not Sure How to Proceed?

Whether you have something to declare (such as income, expenses, rental income, or pension payouts) or not, you are obliged to submit a tax return. You might be a pensioner or employed or living on your savings—everyone who resides on Malta must submit the paperwork.

You are not Generating any Income in Malta but have a Worldwide Income of More Than €35,000?

Since 2018, a new rule has come into effect. There is a minimum tax liability on a worldwide income of more than €35,000. This means if you’ve earned more than €35,000 anywhere in the world, you have to pay a €5,000 flat rate. This is also declared in the tax return.

This “world income” addresses the case that there is unlimited tax liability (which applies in most countries). In that case, you will inevitably have to have taxed both domestic and foreign income. In concrete terms, this means that, regardless of your source of income, you are subject to tax in the country where you have your (official, tax) residence or place of business. To avoid double taxation, double taxation agreements exist between countries in most cases.

Have You Left Malta Without Giving Proper Notice of Departure?

When leaving Malta, you should give notice in to the authorities, such as JobsPlus and the IRD.

JobPlus

For JobsPlus, a short email with the information that you’ll be leaving Malta is sufficient (). It’s best to ask for an acknowledgment in return. Employers are asked to give notice for employees, but it’s a step that is often overlooked.

Inland Revenue

With the Inland Revenue, the process is similar: you can either stop by in person (Expat Section, 4, Triq Vincenzo Dimech, Il-Floriana) or send an email (). Be sure to include the following information in your email:

  • You will be leaving Malta.
  • Your new place of residence.
  • Request your tax return for the current year. That means if you leave Malta in 2020, ask for the 2020 tax return.
  • Ask for confirmation that the three points above have been processed.

With regard to the open tax return, it is important to inform the authorities of the place where you’d like to receive the tax return. Once received, fill it out and return it to the IRD. In the last year of your residence, meaning the year in which you leave Malta, you will usually receive a tax credit.

Case Studies from Practice

Now that you’ve gotten answers to some frequently asked questions, we’ll give you two examples from our practice that will give you a better understanding of tax returns in Malta.

Example 1: Retirees Who Don’t File Tax Returns

Two years ago, a pair of retirees approached us because of the new worldwide income regulation. In previous years, they’d lived on their savings, had assumed there was nothing to tax and did not file a tax return. Their assumption, however, was incorrect. Even if you have nothing to pay tax on, you have to file a tax return. To receive the paperwork in the first place, you’ll need to get an ID card or a tax ID number.

Example 2: Employee Leaves Malta

Here’s another example: A woman who has worked in Malta for 3 years and hasn’t submitted a tax return in 3 years. It was only after leaving that she discovered she should have filed, so she came to Dr. Werner & Partner for help. Together, we submitted the tax returns for the last three years. We were also able to offset the late-filing penalties with a tax credit in the last filing year.

If you have any questions regarding tax returns, please don’t hesitate to contact us at any time.

Checklist: How to Properly File Your Tax Return in Malta

  1. Make sure to contact the Inland Revenue Department (IRD) to see that

  • you are properly registered with your current home address. To do so, simply give them a call at 153.

  1. Check if you are registered with your current address

See to the first two points and you should receive an income tax return in your mailbox (which, this year, 2020, might take until mid-August)

  1. Fill in everything that needs to be declared and send it back to the IRD in the envelope provided

  • Address: FSS Section, 4, Triq Vincenzo Dimech, Il-Floriana
  • Feedback or confirmation from the IRD usually takes several months. If you have done everything correctly, you‘ll receive a „statement.“ If there’s anything amiss, the tax return comes back with a note.

Liquidity crisis in times of COVID-19 (Coronavirus) – How to avoid financial constraints

Liquidity crisis in times of COVID-19.

How to get more liquidity in times of Coronavirus. Tips from experts.

Confidence in the financial markets has weakened since the financial crisis of 2008. Many companies are currently asking themselves how to proceed. Small and medium-sized companies, in particular, are facing an unprecedented challenge. Covid 19 – the virus that is turning our entire economic system upside down has brought about unnecessary and unforeseeable levels of discomfort.

In this connection, the German government has already announced tax measures. The government is planning liquidity support in the billions which consequently means that Germany as an economic country may be able to protect its companies with such packages of measures. But what about other countries?

The fact is that companies have to manage their financial resources as best as I can. There must be sufficient liquidity reserves to pay employees – even if no or little revenue can be generated. The solution? Increase liquidity and build reserves.

According to experts, the virus will accompany us for another 1-2 years. So what can be done to maintain financial resources for as long as possible?

Liquidity crisis

A liquidity crisis can also arise in healthy companies if circumstances such as Covid 19 (Coronavirus) or the financial crisis in 2008 occur, which result in short-term obligations such as the repayment of loans and payment of employees no longer being able to be met. In order not to repeat the events of 2008, measures must be taken early on to ensure that sufficient liquidity and reserves are available to survive in the market.

Definition of liquidity and liquidity ratios.

Liquidity can be defined as the ability of the company to meet its payment obligations at all times, on time and in full.

A distinction should be made between relative liquidity (financial plan liquidity) and absolute liquidity (asset liquidity).

Financial liquidity exceeding the available cash of the due liabilities

Asset liquidity describes the liquidity of an asset, i.e. the possibility of using or exchanging assets as means of payment

Determination of the liquidity situation

In practice, the liquidity position of companies is determined by means of liquidity ratios.

Understanding Liquidity Ratios

Interpretation:

Quotient > 1: current liabilities covered

Often: Cash ratio < 1*

*Some companies, however, have a first-degree liquidity of < 1, as not all current liabilities are due at the time of observation and a high level of cash and cash equivalents due to a lack of interest runs counter to the goal of profit maximization.

Quick ratio > 1**

**All the same, at least the 2nd-degree liquidity should be above 1 since in addition to the short-term liabilities recognizable from the balance sheet, personnel costs and other expenses whose due date is not evident from the balance sheet must also be settled.

Measures to increase liquidity

General liquidity management

  •  Preparation of a liquidity plan (Prepared Liquidity File downloadable below!)
  •  Definition of spending priorities
  •  Stop spending

Fixed assets

  •  Sale of non-essential assets (land, machinery, vehicles, etc.)
  •  Sales-and-lease-back
  •  Renting of unneeded rooms, unused machines, vehicles
  •  Possibilities of outsourcing certain activities
  •  Review planned investment
  •  If necessary, lease rather than buy investments

Inventories

  •  Check stock level (inventory turnover) and reduce
  •  Shift stock keeping to supplier
  •  buy on commission
  •  Review and optimize the ordering system
  •  Set production to stock

Claims

  •  Invoice completed orders immediately (an invoice with delivery) Issue partial invoices for partially completed services
  •  Agree customer prepayments and installments in the future
  •  Invoice finished orders immediately (an invoice with delivery)
  •  Shorten payment terms for customers
  •  Create payment incentives (e.g. customer accounts)
  •  Push advantageous means of payment (cash, direct debit, discount bill)
  •  Dunning overdue receivables immediately
  •  Check dunning system
  •  In case of unsuccessful reminder: judicial dunning procedure
  •  External debt collection (a collection agency)
  •  Monitor and document customer payment behavior
  •  Avoid payment defaults by customers through credit checks
  •  Factoring
  •  Replace security retentions with performance bonds
  •  Sales financing via the bank

Equity

  •  Private deposits (private reserves)
  •  Recovery of outstanding deposits
  •  Reduce private withdrawals (cost of living) to a minimum
  •  Review contributions to the pension scheme
  •  If necessary, reduce contributions to the compulsory craftsmen’s insurance (exemption from compulsory insurance due to insignificance or fulfillment of the compulsory insurance period, auxiliary craftsmen’s business, income-related contribution)
  •  Temporary suspension or possible termination of life insurance policies
  •  Check health insurance for possible savings
  •  Temporarily interrupt savings contributions (building society etc.)
  •  Check donations, membership fees, etc. and if necessary reduce or avoid them
  •  Acceptance of new shareholders (e.g. dormant partner, capital investment company)

Long-term loans

  •  borrowing from relatives or acquaintances
  •  Rescheduling of excessive current liabilities
  •  (e.g. with LfA consolidation loans)
  •  Agreement of a suspension of loan repayments
  • Substitute loan (e.g. in the case of public loans with too short a term)
  •  Repayment deferral
  •  Review of interest rates
  •  Agree on grace periods when financing necessary new investments
  •  (e.g. public loans)

Current liabilities

  •  Increase of the working capital loan (e.g. current account credit line)
  •  Use payment deadlines for invoices (e.g. from suppliers) as far as possible
  •  Select advantageous payment type (for example, check/bill of exchange procedure, bill of exchange, check)
  •  Payment of urgent commitments in installments
  •  Make concrete agreements with main creditors (e.g. payment by installments)
  •  Regulate relations with small creditors (prevent insolvency filing!)
  •  Arrange settlement with creditors (if necessary against debtor warrant)

Expenses

  •  Explore ways to reduce personnel costs
  •  Review voluntary benefits and special payments to employees
  •  Reduce overtime instead of paying out
  •  Reduction of advance tax payments
  •  allow tax payments to be deferred
  •  A critical review of all expenses and, if necessary, reduction

Proceeds

  •  Completing orders that have already been started as quickly as possible
  •  Quickly deal with remaining work and complaints about individual orders
  •  Marketing measures

Comments: The measures listed above serve to bridge short-term liquidity bottlenecks. It should be noted that these measures lead to an improvement in liquidity in the short term, but that other ways and means should be considered in the long term.

Reserves

In times of potential bottlenecks, the formation of reserves is another option, in addition to improving liquidity, for securing the existence of companies.

Reserves = liabilities + components of equity.

A distinction can be made between open and hidden reserves.

Open reserves = are shown openly in the balance sheet and must not, in principle, reduce taxable profit. They must be added to equity for tax purposes.

Hidden reserves (or hidden reserves) = are disclosed through the sale or withdrawal of assets or the sale or discontinuation of operations. Taxable profit must be generated in the amount by which the disposal consideration or the going concern value exceeds the book value of the WG at the time of the sale or withdrawal. A disclosure (realization) of hidden reserves occurs in the event of withdrawal or the event of the cessation or sale of business operations.

How much reserves should one have?

The rule of thumb for private individuals is that one should have at least 3 net monthly income reserves. For companies, however, the question is not so easy to answer. Here it depends on whether you are obliged by law to pay a certain amount or whether you can set aside voluntary reserves. So there is no correct lump sum here. However, you should check whether you have to set aside money for tax and investments.

Difference between reserves and provisions

 

Reserves Accrued Liabilities
Balance of accounts Equity capital Borrowed capital
– Formation according to the law or company statutes. These are used to prevent possible losses (not known whether loss will occur at all)

– Should help companies to secure future payments and keep dividend payments constant

– Creation of a reserve = increase in equity without reducing the profit

 -Represents expense & thus influence the annual profit, which is reduced

– Provisions are made to offset future financial losses and liabilities

– a liability is assumed to be certain to materialise when it is created

– Creation of provisions = coverage of future liabilities

Obligation yes (corporations, depending on law and articles of association) as soon as the situation requires
Fixed purpose free of purpose for specific purposes
Effect on profit profit without effect on profit loss Minimising profit

A tip from the tax expert: Try to save taxes. You can use these saved taxes as a reserve.

Do you need help?

Here at DWP Dr. Werner & Partner, we are specialized in international tax law and are happy to help you. Feel free to contact us via: or call us on +356 213 777 00.

We look forward to hearing from you.

7 Things you need to know about the AML/CFT Implementing Procedures to the Virtual Financial Assets Sector

It is the moment all MLROs and Compliance Officers within the local Virtual Financial Asset sphere have been waiting for – the publication of the legally binding Implementing Procedures (IPs) (Part II) in relation to the VFA sector!

Issued on the 3rd of February by the Financial Intelligence Analysis Unit, these Implementing Procedures set out how VFA Agents, VFA Service Providers and anyone conducting VFA offerings to the public are to comply with the AML/CFT obligations arising from the Prevention of Money Laundering and Funding of Terrorism Regulations.

Here are seven things you need to know about the Implementing Procedures in terms of the AML/CFT obligations to the Virtual Financial Assets Sector:

1. It is not a stand-alone document

Reading, understanding and following Part II of the Implementing Procedures with regards to the VFA Sector is a good start towards fulfilling your AML/CFT obligations towards local law. However, if you really want become proficient in this area, then Part II of the Implementing Procedures will need to be read in conjunction with Part I of the FIAU’s Implementing Procedures, as well as the relevant sections of the Prevention of Money Laundering Act, and the Prevention of Money Laundering and Funding of Terrorism Regulations.

In cases where there are conflicts between Part I and Part II of the IPs, then it is the VFA specific IPs that shall prevail.

2. A different side to Jurisdictional Risk…

Subject persons should know that conducting jurisdictional risk assessments means considering a number of factors relating to that particular country, such as the money laundering threat, the perceived threat of terrorists and terrorist groups associated with that region, the level of corruption, and tax haven status.

Part II of the Implementing Procedures states that jurisdictional risk should also take into account the amount of cybercrime that is associated with a particular jurisdiction. Therefore, if a client who holds VFAs resides in a jurisdiction or is receiving or sending VFAs from/to a jurisdiction that is associated with a high level of cybercrime, then the Customer Risk Assessment must be amended to reflect this.

3. …and also to Interface Risk

Part I of the IPs divides interface risk into the following categories: (i) face to face; (ii) non-face to face (using technological systems with embedded safeguards); (iii) non-face to face using means with no embedded technological safeguards; and (iv) non-face to face through intermediaries.

The IPs in relation to the VFA sector dictate that when analyzing interface risk, the use of proxies, unverifiable IP addresses and geographical location, disposable email addresses or mobile numbers, as well as the use of different devices with the intention of obscuring geographical location must be factored into the Customer Risk Assessment. Therefore, it is very important that this information can be collected also from an IT perspective.

4. Collecting information on wallet addresses and the wallet types is very important

In the case of a VFA service provider who receives VFAs or is to send VFAs, it is necessary to collect and retain on file the wallet address from which the VFAs are to be received or to which the VFAs are to be sent. This is vital as it will show from where the VFAs are coming from and where they are being sent. Together with the address, the VFA service provider is also to ask the customer whether the address relates to a private wallet, a multi-signature wallet or a custodial wallet.

In the case of a private wallet, it is important that the VFA service provider establishes that the customer has control over the address that the VFAs originate from, especially in situations that involve significant amounts of VFAs, where there are doubts as to the actual location of the customer due to differing IP addresses/device geo locations, and where there are connections to high risk jurisdictions known for generating high amounts of crime, corruption or cybercrime activity.

In the case of multi-sig wallets, in situations where the different keys are held by different individuals, then such individuals are also considered to be customers and must be duly identified and verified as such (so they would need to be on-boarded as well).

In the case of custodial wallets, consideration must be made of whether such custodian is regulated or not. If not regulated, this would lead to an increase in the ML/FT risk and must be reflected accordingly in the CRA.

5. Assessment of VFA transactions needs to be done using specialized tools

Whenever VFA payments are made, the VFA Service Provider needs to (i) check the wallet addresses associated with the payment (both incoming address and outgoing address) for any adverse media in the public domain and (ii) use, where available, DLT analytical tools to detect potentially fraudulent or suspicious activity.

Analyzing wallet addresses will put VFA Service Providers in a better position to detect activity that could potentially lead to a filing of a Suspicious Transaction Report with the FIAU.

An issue that may arise with respect to DLT analytical tools is that they do not cater for all available crypto currencies. In this case, the absence of such a tool should be factored into a VFA Service Provider’s Customer Risk Assessment by specifying measures that can mitigate any corresponding ML/FT risks.

6. Emphasis on Enhanced Transaction Monitoring 

As every subject person is aware of, the process of on-going monitoring involves the updating of documents and information that is kept on file, plus transaction monitoring. For VFA Service Providers, the scrutinization of transactions needs to take on a more enhanced approach, and we’re not just talking about the flagging of unusually large or unusual patterns of transactions here.

VFA Service Providers need to ensure that their transaction monitoring system has the following capabilities:

  • Detection of mixers and tumblers;
  • Detection of use of multiple wallets or frequent change in wallets;
  • Detection of transaction history which will help to create a transaction profile, which will be used to identify transactions that do not match with the customer’s transaction profile;
  • Capable of linking accounts controlled by the same customer;
  • Capable of assigning alerts to customers identified as high risk or those conducting suspicious transactions;
  • Identify rapid exchange of currencies;
  • Identify rapid movements of funds;
  • Identify the use of high-risk counterparties and transactions that use the darknet.

Such Transaction Monitoring Programs need to be reviewed during the annual AML/CFT control review, which should be undertaken by an independent party, with such testing including back-testing, post implementation testing and data integrity checks.

7. Did someone mention an AML/CFT Control Review?

Why of course! This is a new requirement that VFA Service Providers have to adhere to. The AML/CFT Control Review must be carried out by an independent party on the measures, policies, controls and procedures that VFA Service Providers have in place with respect to AML/CFT. This control review should result in a report detailing the following:

  • whether the VFA Service Provider’s AML/CFT systems are fit for purpose and compliant with the obligations of the VFA Service Provider under the PMLA, the PMLFTR, and the FIAU’s Implementing Procedures;
  • whether the AML/CFT systems and controls were adequate and effective throughout the review period; and
  • whether any changes/enhancements are needed.

7 Things you need to know about the implementing procedures to the virtual financial assets sector

In Conclusion

It is evident through the legislation and enforcement of such legislation that local authorities are leaving no stone unturned in fighting money laundering via crypto currencies. Despite their best efforts, the local authorities cannot fight this battle by themselves, and this is why VFA Service Providers need to take a stand against money laundering, and seriously implement systems and controls in place that will enable them to fulfil their AML/CFT obligations.

It is important to note that this article cannot be construed as being a substitute for reading the full Implementing Procedures (Part II) in relation to the VFA Sector, and readers are highly recommended to refer to all the relevant legal text in relation to local and EU wide AML/CFT obligations.

Disclaimer: The above-mentioned article is simply based on independent research carried out by Dr. Werner and Partner and cannot constitute any form of legal advice. If you would like to meet with up with any of our representatives to seek further information, please contact us for an appointment.

 

The Extraordinary General Meeting

Every company duly registered under the Companies Act shall convene an Annual General Meeting (AGM) once per year. We have already dealt with the requirement of calling an AGM and the formalities that are required for the calling and holding of such meeting, however, what does a company do if it holds its AGM and then later during the year has other business to discuss?

The Companies Act, Chapter 386 of the Laws of Malta (the Act) does not include a definition of the term “Extraordinary General Meeting” (EGM), however, Article 128(2) states that: “Every general meeting other than an annual general meeting shall be an extraordinary general meeting”.

This means that the Act itself is stating that companies may have other meetings throughout the year over and above the AGM. The legislator does not include any list of matters which may be transacted at an EGM and, therefore, it is at the discretion of the company to decide which matters are to be transacted at an EGM, with regard being taken to those matters that are specifically to be transacted at an AGM.

The similarity between the AGM and the EGM

One might notice that the legislator mentions two instances which are to be transacted at an EGM, however, the legislator does not in any way stipulate that such matters cannot be transacted at an AGM. The reason for the legislator not stating that such matters need to be explicitly transacted at an EGM is the fact that there is no intrinsic difference between the AGM and the EGM.

Amongst the matters that require a decision to be taken at an AGM or an EGM are the following:

  1. Alterations to the Memorandum and Articles of Association;
  2. Dissolution of the company;
  3. The company recovery application;
  4. The merge, division or conversion of the company.

The EGM is in several ways similar to the AGM. For example, sufficient notice must be given to the parties who are entitled to attend, and such notice should include details of the meeting such as the time, location and detail on the business to be transacted.

Convening of EGM

Whilst the AGM can only be convened by the Directors of a company, the EGM may be convened, either by the directors themselves, by the Court, at the request of the resigning auditor and on requisition by the members of the company.

Although the above-mentioned persons may convene or requisition an EGM, there are both limitations and obligations that may be imposed on the persons who may convene or requisition an EGM.

EGM convened by the Directors

To start with, the directors of a company may convene an EGM on their own volition, this may be limited through clauses in the Articles of Association stipulating that the directors may only convene an EGM for specific matters.

Having said this, the directors are obliged under the Act to convene an EGM if the company becomes unable to pay its debts or is likely to become unable to pay its debts. The Act stipulates that the directors must convene an EGM by not later than thirty days from the day that they became aware of such fact. The legislator goes on to state that the directors must convene the meeting for a date which is not later than forty days from the date of the notice calling the EGM.

The legislator also imposes an obligation on the directors of public companies to convene an EGM in cases where the company’s net assets become half or less than half of its’ called-up issued share capital.

More often than not, one finds a clause in the Articles of Association stating that the directors have the power to convene an EGM. It must also be noted that it is an inherent right of the directors to duly call an EGM which emanates from the wide-ranging powers conferred on the directors.

EGM convened by the Court

The Court may convene an EGM either on its own motion or through a request by a director or a member of a company in cases where for any reason it is impracticable to:

  1. Call a meeting of a company in any manner in which meetings of the company may be called; or
  2. Conduct the meetings of the company in the manner prescribed by the Articles or by the Act.

EGM requisitioned by a resigning auditor

The Act states that when a resigning auditor considers that the circumstances of his resignation should be brought to the attention of the members and / or creditors of the company, the resigning auditor has the right to requisition an EGM.

The resigning auditor must deposit, together with the notice of his resignation, a signed requisition. The purpose of such requisition should be that of receiving and considering the explanation of the circumstances linked with the resignation of the auditor. The Act states that the resigning auditor may also request that the company circulates to its members a statement of the circumstances linked with his resignation.

Once again, the legislator imposes an obligation on the directors to convene an EGM within twenty-one days from the deposit of the request by the resigning auditor, for a date which is not later than twenty-eight days from the date of the notice calling such EGM.

EGM requisitioned by members of the company

Any member of the company holding not less than one-tenth of the paid-up share capital of the company may requisition an EGM.

The legislator states the formalities that members must follow when requisitioning an EGM, such as:

  1. As stated above, the requisitioning member/s must be a holder/s of at least one tenth of he paid up share capital of the company carrying voting rights.
  2. In the requisition, the member/s must state the objects of the meeting and the requisition must be signed by the member/s.

The legislator also laid down the obligations of the directors for when a requisition is deposited by members of the company:

  1. The directors are obliged, upon the deposit of a requisition, to proceed with convening an EGM within twenty-one days from the date of the deposit of the requisition;
  2. If the directors do not convene an EGM within the prescribed period, the legislator shifts the power to the members to convene the EGM themselves;
  3. The members then have three months from the date of the deposit to convene the meeting;
  4. Although the Act prescribes a twenty-one-day period within which the directors should call the EGM, there is nothing in the Act precluding the directors from calling a meeting within the twenty-one-day period and convening it for a date in the distant future.

Conclusion

The Extraordinary General Meeting

As explained afore, there is no intrinsic difference between the AGM and the EGM, however, whilst the AGM is mandatory, the EGM is only convened for specific purposes.

Therefore, if a company needs to discuss, approve or transact any kind of business which requires the consent of the members of the company, and the company had already held its AGM for that year, it may convene an EGM to transact the necessary business.

It is of utmost importance that when an EGM is convened, all the necessary formalities and requirements are duly followed by both the person/s requisitioning the EGM and the directors who ultimately convene the EGM accordingly.

Disclaimer*

The above-mentioned article is simply based on independent research carried out by Dr. Werner and Partner and cannot constitute any form of legal advice. If you would like to meet with up with any of our representatives to seek further information, please contact us for an appointment.

 

Summary to the MFSA Circular regarding Amendments to Chapter 3 of the Rulebook

MFSA Circular regarding Amendments to Chapter 3 of the Rulebook

Chapter 3 of the VFA Rulebook applies to VFA Service Providers who are seeking to obtain their license within the VFA sphere as per the laws and regulations of Malta.

The MFSA issued a circular addressed to VFA Service Providers in support of innovation of the sector adapting a more principles-based approach. The new amendments shall be effective as at 1st February of 2020.

1. Systems Auditor 

The Authority shall require the engagement of a Systems Auditor when there is an Innovative Technology Arrangement (ITA) in place or where the operations interact with an ITA in some way or another. Consent must be obtained from the MFSA before engagement or replacement of the auditor of the system.

The Systems Auditor shall be registered with the MDIA.

Responsibility of Systems Auditor: To review and audit the ITA.

IT Auditor Requirement 

If there is no ITA in place, the MFSA has introduced an IT Auditor Requirement.

The IT Auditor shall be responsible to review and audit the systems of the applicant. Upon application, the applicant shall submit an IT Audit Report to the Authority. Such Report shall confirm that there is no ITA in place and shall be submitted at the application stage and then on an annual basis.

Forensic Note Guidelines 

The Applicant shall have a Live Audit Log and there shall be an appointed person responsible for legal compliance and operational behaviour of the system (similar to the role of a Technical Administrator) in line with the Forensic Node Guidelines (https://mdia.gov.mt/wp-content/uploads/2019/09/Forensic-Node-Guidelines.pdf). This shall be notified to the MFSA given that the Authority may object to the proposed appointment or replacement.

Deletion of Proviso 

The following proviso of R3-3.5.2.1.6 has been deleted: “Provided that where the Licence Holder’s IT Infrastructure is not located in Malta, or is located in a cloud environment, the Licence Holder shall ensure that data is replicated real time by virtue of a live replication server located in Malta.”

Additional Information 

Service providers operating in transitory who wish to continue with the provision of their services following the expiration of the transitory periods or applicants commencing their application before 1st February 2020 shall submit the first Systems Audit Report or IT Audit Report within 6 months from the granting of the license or commencement of business.

2. Live Replication Server 

The Live Replication Server shall be understood as the machine connected to the rest of the system of the service provider and thus to avoid confusion this is now being referred to as ‘Live Audit Log’.

The Live Audit Requirement shall apply to all service providers irrespective of whether there is an ITA in place or not.

3. Fitness and Properness 

The Fitness and Properness shall apply to every:

  • A person having a qualifying holding;
  • Beneficial owner;
  • Member of the BOA;
  • Senior Manager;
  • MLRO;
  • Compliance Officer;
  • Any other person which the Authority may deem necessary.

This still applies a case-by-case basis.

Also, since there are limited approved courses for Compliance Officers and/or MLRO, they are no longer required to complete an approved course before the license. These individuals shall still be subject to a mandatory interview.

To fulfil the competency requirements, both Compliance Officer and MLRO are to attend the training which is relevant to their role.

The Authority shall amend its FAQs to indicate accepted courses.

4. Exercising a European Right 

The Rulebook shall now refer to the provision of services in other jurisdictions. The service provider shall be required to list the countries in which they are providing their VFA Services. The requirement to obtain a legal opinion from other jurisdictions is no longer required, however, the service provider shall still be responsible to comply with the rules and regulations of such jurisdictions.

5. Approval 

The engagement of administrators, senior managers and/or other employees engaged in portfolio management or investment advice shall now be notified to the MFSA and the written consent is no longer required.

6. Cyber Security 

Cybersecurity architecture shall be in line with the guidelines of the cybersecurity (issued by the Authority). For this reason, the following has been removed: “Pursuant to R3-3.1.2.1.8, the Licence Holder shall ensure that its Cybersecurity Framework complies with internationally recognised cyber security standards, any guidelines issued by the Authority and shall also be in line with the provisions of the GDPR.”

7. Board of Administration (BOA)  

The BOA shall no longer be required to oversee policies on the VFAs and VFA Services concerning the risk tolerance and characteristics/needs of clients to whom they will be offered or provided.

8. Compliance Certificate 

The Compliance Certificate shall be based on the Compliance Monitoring Plan which is to be carried out by the Compliance Officer.

The certificate shall now include the outcome of the compliance monitoring plan which shall also list identified breaches. The certificate shall confirm that all local AML/CFT requirements are satisfied as per the confirmation of the MLRO, and it shall also list the disciplinary actions taken against clients; describing the breaches and actions taken.

9. Financial Instrument Test (FIT)  

The FIT shall no longer be the responsibility of the Compliance Officer but of the person responsible for carrying out the FIT in line with the business model and endorsed by at least one administrator.

10. Insurance Requirement 

The Service Provider shall ensure that it has a Professional Indemnity Cover which is in line with market standards and covers business associated risks.

11. Supplementary Conditions 

  • Presence of Systems Auditor: The Systems Auditor is not required at all times but shall be appointed to carry out the Systems Audit concerning the ITA.
  • Listing Criteria: The Listing Criteria was decreased to two (2) criteria:
  1. (i) The Technological experience, track record and reputation of the issuer and the development team thereof;
  2. (iv) The determination under the FIT and its endorsement.
  • Custody: Custody Requirements shall now apply to all Service Providers.
  • Suspension/Removal of VFAs from Trading: Notification regarding the suspension/removal of a VFA from trading shall only be required when such suspension/removal has regulatory implications.
  • Systems Resilience: There is no longer a requirement to report the parameters for halting trading and any material changes thereof. Also, there is no longer the requirement of identification of orders by algorithmic trading.
  • Bye-Laws: There shall be guidelines about the bye-laws.
  • Inability to discharge functions: Where a Licence Holder is unable to discharge its functions it shall notify the Authority without undue delay instead of on the day of occurrence (given that it may not always be feasible to do so.)

Disciplinary Action: The list of disciplinary actions shall now be included in the Compliance Certificate and not notified every time an action is taken.

12. Capital Requirements

Additional capital requirements were deemed too prescriptive and thus have been removed.

13. Inducement Rules 

Inducement Rules shall apply across the board given that there may be further implications when carrying out activities. (These were only applicable to investment advice and portfolio management).

14. Sales Processes and Selling Practices 

The requirements of the Licence Holder dealing with a person who is acting under a power of attorney have been removed and the FIAU’s Implementing Procedures shall apply instead.

The rule covering the reception of client money has been revised as follows: ‘The Licence Holder shall acknowledge receipt to the Client of all money received in connection with a virtual financial asset or VFA Service and that any charge or fee imposed shall be disclosed separately.’

With regards to the Assessment of Appropriateness, the Licence Holder, when providing a VFA Service which is not investment advice or portfolio management shall warn the clients of associated risks through a Risk Disclosure Document which shall deal with the risks involved when investing in VFAs.

15. Disclosure Requirements and Transitory 

The Disclosure requirements laid down in the Rulebook shall be disclosed to the Authority instead of the general public.

Article 62 of the VFA Act which covers the transitory provision has been removed since the transitory period has ended.

16. Glossary 

The Glossary shall be updated by the Authority to reflect new definitions.