Giving to Caesar what belongs to Caesar

This article was published in the Sunday Times on the 26th of February, 2023. https://timesofmalta.com/articles/view/giving-caesar-belongs-caesar-a2.1015731

Following my last month’s article, in which I covered the much-needed reform in our tax system, this month, I opted to elaborate on the law supporting the same tax system and how regulators sometimes misuse it without keeping things in perspective, to the detriment of SME owners.

SMEs dominate the Maltese business landscape, exceeding the EU averages in terms of the value-added generated and employment, led by the micro-sized enterprises that employ up to nine people.

Context: Before 2020, people being charged with a criminal offence for tax evasion in Malta (not to be confused with tax fraud) was unheard of, even though it is technically a criminal offence. Upon pressure from The Financial Action Task Force (FATF) on the Maltese government, which eventually led to Malta’s greylisting, the entire finance industry ecosystem adopted a shoot-from-the hip-approach without a specific strategy, policy, guideline, or process, sending shockwaves within the SME community.

The FATF is the global money laundering and terrorist financing watchdog coordinating the global response to preventing organised crime, corruption, and terrorism. Quoting their website, they “help authorities go after the money of criminals dealing in illegal drugs, human trafficking, and other crimes. The FATF also works to stop funding for weapons of mass destruction.”

The analogy: This means that FATF is in the business of ‘Hunting for Red October’, and when they recommended to Malta, through the greylisting, to tighten its money laundering procedures and tax collection modus operandi, they soon found out that instead, they were, in most cases, ‘Hunting for the little luzzu’ – with the small fishing boat suddenly finding itself fighting the same currents that a giant submarine was built to overcome.

I could be using different phrases to describe the response and the consequent action taken by Malta’s finance ecosystem, namely the regulators, banks, and finance professionals, and these range from “Missing the wood for the trees” to “A bull in a China Shop”. But let me try to put things into perspective.

Keeping things in perspective: In the past 20 years, Malta has announced five tax amnesties (2002, 2003, 2005, 2007 and 2014), allowing thousands of individuals to repatriate funds from abroad at a reduced tax rate or penalties with a no-questions-asked approach. The Central Bank of Malta administers the amnesties, with one of the schemes attracting around €456 million. Fast forward to 2020/2021 onwards, when we started reports that some sole traders, namely micro-businesses, were rightly so being investigated for tax evasion but also being charged for criminal and money laundering activities even though their business is a legitimate one.

At the same time, hardcore criminals making a living from illicit activities were also being charged with the same accusations. We can only assume that even the money in question is significantly different. I can also imagine how ill-prepared Malta’s finance ecosystem was, lacking educational campaigns on tax evasion and training, plus decades of cultural deficiency and mixed messages by policymakers. Unfortunately, in the end, only the little luzzu ended up suffering the most.

Solutions: Firstly, clear government guidance policies, principles, and procedures should be in place to guide officers on how to deal with offenders and cases, including proper training and understanding of the tax system and the laws supporting it.

Furthermore, young officers should also be taught about the Maltese business landscape and how this has been evolving in the past decades to avoid a carpet-bombing approach that could be unnecessarily harmful to the businessman who already has a lot to contend with, over and above in some cases the discriminatory fact that some foreign-owned businesses, in the end, pay 95 per cent less corporate tax than a locally owned business.

Secondly, it is essential to establish if the offender’s underlying activity is legit or illicit and categorise the case as an “administrative one” or a “hard-core crime”. If the latter, then it’s a no-brainer, and the offender/s should be charged in the harshest possible way, with tax evasion, money laundering and, of course, for the illicit activity conducted.

Administrative cases should be categorised into four areas or thresholds depending on the amounts: micro, small, medium, and large, with officers’ skillset and experience matching the level of the case. However, irrespective of the size of the case, money laundering charges should not be pressed. Each administrative case should be handled pragmatically, and while what is due to Caesar belongs to Caesar, the offender’s dignity and livelihood should come out intact from the process.

Once the investigation is concluded, offenders should be given a short period to come in line and agree on terms with the authorities. If the offender doesn’t execute this in time, then proceedings should follow.

The utmost importance should be dedicated to educating people. This always happens over time. The UK launched a massive tax evasion awareness publicity campaign in 2012/2013, but only recent statistics showed positive results.

Ultimately, it goes without saying that people must be led by example and not fed mixed messages.