Malta, home to hundreds of betting sites, is a target of an international money laundering crackdown

One spring night in 2007, Joseph Borg and several colleagues from Malta’s tiny gaming commission stayed late at their office to listen to the news from London. Online gambling was still a relatively new industry, but Malta, a sun-scorched island nation south of Sicily in the Mediterranean, had recently passed a law allowing companies registered there to offer web-based casino and slot games to customers anywhere in the world. The U.K., by contrast, was about to announce a tax on profits generated by internet betting, a development Borg hoped would bring a rush of business to the European Union’s smallest member state, which has just 500,000 citizens.

As Borg listened to the radio that evening, an announcer revealed the most important detail of the British levy: It would be set at 15%, much higher than expected—and triple the rate for gambling companies in Malta. “All hell broke loose,” recalls Borg, an attorney now in private practice. He and his eight-person team canceled vacations and worked weekends to handle the hundreds of applications from companies looking to relocate. “It was like, ‘Oh, my God, this is epic.’ ”

In the years since, Malta has emerged as the undisputed capital of Europe’s €24.5 billion ($27.7 billion) online gambling industry, becoming to internet casinos something like what tax rules have made Ireland to tech giants, but with 320 days of sunshine annually. At the end of last year, 323 companies were licensed to offer overseas online gaming services from the country, attracted by low taxes, obliging regulators, and a deeply agreeable lifestyle. On the outskirts of the capital, Valletta, glassy buildings house enterprises with names such as Play’n Go, Bet365, and Evolution Gaming. At sleek sushi restaurants and luxurious beach clubs, well-tanned young men (they’re almost all men), who come from a myriad of countries to work in the industry, unload some of their earnings from running online casinos or the companies that service them. Their income also supports a substantial hinterland of car dealerships, real estate agents, and private bankers, giving thousands of Maltese a direct stake in their success. It’s all rather novel for a country that’s struggled for decades to establish an economic base beyond tourism—one of its few prior successes had been a program to sell EU citizenship to rich “investors,” many of them Russians with unconventional sources of funds. All told, the gambling industry represents almost a tenth of the national economy.

Suddenly, however, Malta is being treated less like Ireland and more like a rogue state. In June the Financial Action Task Force (FATF), a body set up by the Group of Seven major economies to combat money laundering and terrorism financing, added Malta to its “gray list” of 22 jurisdictions where it can’t be confident that basic financial safeguards are in place. The decision was a response to concerns among U.S. and European law enforcement agencies that have been growing since 2017, when Daphne Caruana Galizia, a Maltese journalist who investigated political corruption, was assassinated with a car bomb. Subsequent inquiries into her murder and the graft she exposed reached the highest levels of the island’s elite. One of the people charged in connection with her death was Yorgen Fenech, a businessman whose family owns half of Malta’s brick-and-mortar casinos, and Keith Schembri, the chief of staff to the then-prime minister, was briefly detained. Schembri wasn’t charged in the murder case, but prosecutors later accused him of fraud, corruption, and money laundering related to transactions Caruana Galizia had investigated. (Fenech denies wrongdoing in her death, and Schembri denies wrongdoing in both cases. The two men are awaiting trial.)

The effects of the gray-listing on Malta’s gaming business could be substantial. No other EU country is on the list, which includes Cambodia, Syria, and Zimbabwe. If Malta stays on it long enough, payment processors and correspondent banks (which act as overseas agents or intermediaries for Maltese lenders) might start declining to handle transactions originating there; companies from other places, in particular the U.S., might decide that striking deals with Malta-based partners isn’t worth the risk.

The government is now trying to persuade international regulators that it can clean up the island’s financial system—and save its all-important gambling industry in the process. “Malta is putting all its efforts into making sure, first of all, that any negative ramifications of the gray-listing are mitigated and, secondly, that we convince our international partners, very soon, and we get out of the gray list,” Carl Brincat, chief executive officer of the Malta Gaming Authority, told me. During an interview at the MGA’s seaside offices, next to a development site promising “a lifestyle of commodity and luxury” for international buyers willing to spend almost €3 million on a shorefront duplex, Brincat insisted that the agency is doing everything it can to keep criminality out of the gambling business. “We have improved our processes significantly, both our onboarding and ongoing monitoring procedures, in order to make sure that as far as possible this is not the case,” he said.

It’s an open question, however, whether any Maltese regulator, let alone one responsible for an industry as rife with opportunities for malfeasance as gambling, can credibly pledge to contain financial crime. Just 30 years old and the former head of the MGA’s legal affairs and enforcement team, Brincat took the top job after it opened up unexpectedly in October 2020 with the resignation of his predecessor, Heathcliff Farrugia. (Malta’s peculiar history, which includes periods of rule by the Kingdom of Sicily and the crusading Knights Hospitaller, as well as the British Empire, has bestowed its people with some outstanding names.) According to the Times of Malta, Farrugia, who didn’t reply to requests for comment, has since been secretly charged with colluding with Fenech to keep allegations of money laundering at a casino owned by Fenech’s family from going public.

Legal online gambling might still be something of a novelty in the U.S., but in Europe, with its fragmented regulatory landscape and generally less ferocious law enforcement, it was for many years never really prohibited. In the early days operators could be based anywhere; Antigua, Curaçao, and other Caribbean microstates were popular choices. But after Malta began developing its regulatory regime in 2004, it displaced many of the other options. In addition to being just a short flight from Paris or Rome, it was an easy place to operate. Britain took control of the island after the Napoleonic wars, ruling it as a heavily fortified colony until 1964, and virtually everyone speaks fluent English as well as Maltese, a cousin of Arabic with Italian influences.

Malta’s EU status also provided a measure of reassurance for customers wary of fly-by-night operations—a vague sense that online casino owners were unlikely to steal their account balances and start new lives on some extradition-averse tropical island. Not that Maltese businesses were necessarily aboveboard. As rising internet speeds made online gambling more widely available, Malta-based entities were employed to support substantial—and, under U.S. law, completely illegal—betting operations that serviced American customers. They did this in part by “miscoding” gambling transactions as something else on credit card statements; the cover story was often a purchase of jewelry or golf clubs.

There are good reasons to heavily regulate gambling, not just because of the very real risk that some players will empty their bank accounts to feed betting addictions. Since long before Meyer Lansky and Bugsy Siegel penetrated the Las Vegas Strip in the 1940s, gangsters have understood that casinos are an excellent way to turn criminal proceeds—from selling drugs, for example—into funds that can be easily deposited and invested. The same is true online. In one obvious scenario, a player might top up his betting balance with a credit card linked to a “dirty” bank account, then transfer the cash to a second, clean account, obscuring its origin. The player could also make an illegal payment to someone else by intentionally losing a game against them. As gambling winnings, the second person’s proceeds would generally be considered legitimate by banks and tax authorities, making it possible to launder them into the financial system.

As the Maltese sites became more popular in the late 2000s, other European governments took notice. France and Italy, in particular, introduced a raft of prescriptive rules and regulations. In those jurisdictions, a license issued in Malta was no longer enough to be allowed to operate legally. Instead companies based on the island or anywhere else had to apply for a patchwork of national gambling permits. As a result users would be prevented from logging into the .com domain of their preferred site, which might until then have relied solely on a Maltese license. They’d instead be directed to a .fr, .it, or .co.uk version, overseen respectively by L’Autorité Nationale des Jeux; L’Agenzia Delle Accise, Dogane e Monopoli; or the Gambling Commission. If for some reason that felt too quotidienquotidiano, or quotidian, the more committed gamblers would have to fire up a virtual private network to use an offshore site, whether in Malta or an even less regulated jurisdiction.

Marceau, who has piercing blue eyes and eyebrows bleached by the sun, might be a walking advertisement for the success the island can provide to migrants with the right skills. Born in a small city in Burgundy, he moved to Malta in 2006 and got his start in the industry as a customer service agent, helping gamblers sort out problems with their accounts. Now he commutes to an office in Tigné Point, a high-end commercial development with heart-stopping Mediterranean views, where he oversees billions of dollars in monthly transactions across Kindred’s dozens of sites. Listed on the Stockholm bourse, Kindred has a market capitalization of almost $4 billion and operates dedicated portals for the major European gambling markets, with local licenses for each one, as well as joint ventures in several U.S. states. (American consumers might be most familiar with its Unibet brand, which has sponsored the New Jersey Devils hockey team among other sports franchises.)

At Kindred’s headquarters, decorated with pingpong and pool tables and other tech-bro accents, Marceau described the company’s policies for weeding out sanctions targets and criminals looking to launder ill-gotten gains. Kindred, he said, may ask for proof of the existence and source of a customer’s funds, run identity checks against lists of “politically exposed persons” and known problem gamblers, and cross-reference with property registries controlled by national governments. But he conceded that not everyone in the industry is so scrupulous. He sketched out a scenario where “there is a choice to go for a local license, but the operator decides not to do that.” In this circumstance, a company could target customers in, say, France without complying with French financial rules, a practice known among gambling executives as operating in the “gray market.” (They view the law in the same hues as the anti-money-laundering enforcers.) But such a company would be unlikely to base itself in his adopted home, Marceau insisted. Instead, he said, he’d mainly seen such unethical sites conduct business from a “more exotic licensing framework, outside of Malta.” Curaçao, maybe.

Daphne Caruana Galizia’s murder brought unprecedented, and unwelcome, attention to Malta’s political system, which is heavily influenced by a small number of wealthy local families. Concerned that corruption on the island was getting out of control, U.S. and European authorities demanded prosecutions and structural reforms, threatening severe sanctions if Malta didn’t comply. Those admonitions didn’t go entirely unheeded. The island’s government implemented rules requiring enhanced scrutiny of cross-border banking, stepped up examinations of charities that could be used as covers for terrorism financing, and pushed banks to report suspicious transactions more quickly. Joseph Muscat, the prime minister at the time and one of the primary targets of Caruana Galizia’s investigative work, was eventually forced to resign, along with several members of his cabinet and staff.

International assessments of Malta’s progress over the past few years have been mixed, though. In 2018 a team from Moneyval, an intergovernmental body that monitors financial crime risks in Europe, spent 11 days interviewing Maltese government ministers, regulators, and law enforcement officials, as well as top bankers and lawyers. Their report identified several areas of concern. Notably, they found that businesses were barely encouraged to disclose their ultimate ownership and that local regulators didn’t have the resources to supervise the financial sector, let alone sustain regular money laundering investigations. At least one deficiency they identified was related to the gambling industry: Authorities weren’t investigating when site operators flagged transactions as suspicious. But in a follow-up assessment earlier this year, Moneyval took a different view. Malta, its team wrote, had acted on the deficiencies, and its institutions were structurally robust enough to combat financial crime, at least in theory.

This summer’s gray-listing by the FATF, which acts as Moneyval’s de facto supervisory organization, therefore came as a shock. So did a move by the U.K., days later, to deem Malta a “high-risk third country” for laundering and terrorist financing, joining North Korea and Iran. For authorities in a place like Malta, such assessments are “not just about whether they’ve passed laws and regulations,” says David Lewis, a veteran of the U.K.’s Serious Organised Crime Agency who now serves as the FATF’s executive secretary. “It’s about whether they’re actually making a difference in terms of stopping money laundering”—that is, preventing a country from serving as a conduit for transforming criminal proceeds into legitimate assets.

To come off the list, Malta’s leaders will need to do several things they’ve never before managed, such as demonstrating that they’ve taken concrete action to prevent anonymous shell companies from helping move dirty money. “Ultimately this is about protecting Malta from crime and terrorism and protecting the financial system,” Lewis says. Gray-listing, with its attendant consequences for a country’s ability to do business, tends to focus politicians’ minds: “Unless they’re in a position where they have to act, they won’t.”

Brincat, the Malta Gaming Authority CEO, says that whatever regulatory failures exist in his country, they aren’t in the gambling industry. The MGA revoked the licenses of 13 operators last year, for reasons that included slow submission of change-of-ownership documentation and failure to submit financial reports. The agency also vows on its website to “take affirmative steps to prevent money laundering.” Brincat says these include periodic surprise audits, with inspectors turning up at gaming companies’ offices and informing them, “we want a copy of your database, we are going to extract player samples, we are going to see the files of 20, 30, 50 players at a time, and we want to see what you do.”

Scratch beneath the surface, though, and these inspections look less intimidating. The MGA, with three dozen compliance staff overseeing almost 10 times as many licensed operators, relies on a list of vetted private companies to carry out many of its evaluations. The online gambling industry is a small world, especially in Malta, and some of the approved companies also offer strategic, financial, and compliance advice to sites—a dual role that creates the appearance, at least, of a conflict of interest. “There is no arm’s-length. The same person is doing everything, because we are small,” says Mario Galea, one of Brincat’s predecessors as CEO of the MGA. “The same person funds your company, gets your license, becomes your key official, carries out your audit, and sends the reports to the MGA.”

Under a clear Mediterranean sky, the great and the good of Malta’s gambling scene converged in July on the InterContinental hotel in St. Julian’s, a Valletta suburb that’s become the center of work and play for many of the younger expats working in the industry. After a pandemic hiatus in 2020, the annual CasinoBeats Summit was back, albeit with far fewer in-person attendees, a lot of hand sanitizer, and well-spaced chairs. Its sessions were being held in a ballroom with a swirling blue-and-orange carpet and oversize glass chandelier, decorated with a big board of sponsors displaying the logos of the local gambling trade body, as well as several of the island’s largest site operators.

Toward the end of the second day, a small group of attendees stuck around to hear from Richard Schuetz, a former commissioner of California’s state gambling regulator, a role he left in 2015 to run its counterpart in Bermuda. After more than a week in Malta, Schuetz sported a deep tan and wore a powder-blue suit. He held the microphone breezily, his delivery honed by years of appearances at similar gatherings. Schuetz has built a successful consulting business advising casino operators, and his role, at age 71, seemed to be that of a designated wise man—an adventurous great uncle who happens to have an encyclopedic knowledge of gambling laws. “Of all the products we generate, the most important is trust,” he told the audience solemnly.

The formal purpose of Schuetz’s appearance was to pitch his plan to create a gambling “knowledge center” that would assemble research on subjects such as addiction, which he argued could help head off politicians’ concerns about the industry. But in the Q&A session afterward, a man put up his hand to ask Schuetz for his view on the future of Malta’s gaming business. Schuetz asked the man to consider the U.S. experience, noting that the Nevada Gaming Control Board, now one of the industry’s most respected regulators, had been created to stave off federal efforts to shut down Las Vegas gambling in the 1950s, when organized crime dominated the city. The implication was clear: If the industry cleans up its own act, the good times can keep rolling. “Maybe it’s even relevant to a country like Malta,” Schuetz said.

That evening, several hundred summit attendees turned up at a waterside restaurant in another high-end hotel. The men tended to be in open-necked shirts, light blazers, and fashionable sneakers; the women, in colorful summer dresses. A breeze ruffled the palm trees, interrupted by the roar of two jet skis offshore, as a battalion of waiters ferried platters of puff pastry topped with tomato, pesto, and generous slices of Parmesan. Just before dinner appeared, a bartender told me my soda was the first nonalcoholic drink she’d poured all night.

Standing beside an empty table, Schuetz was telling me about how insurance giants he’d met with in Bermuda, ever anxious about unfriendly regulatory changes, had the ability to unplug their servers and leave almost immediately, when his partner, Susan Hensel, joined us. “All this could vanish, too,” she said, looking out over the crowd. Schuetz agreed. He explained that after Malta’s gray-listing, business promotion agencies in places such as Alderney and Gibraltar, self-governing British territories with arguably better regulatory reputations, were “pounding the phones” to poach gambling companies. In Malta, “the politicians aren’t helping,” he added. “The people that dragged this ship onto the rocks are not the right ones to get it off again.”

The next morning, I went to see one of the men responsible for that salvage operation. A part-time economics professor and former government statistician, Clyde Caruana serves as Malta’s finance minister, a key member of the government installed after the turmoil over Daphne Caruana Galizia’s murder. (The two weren’t related; the surname is common in Malta.) His ministry sits on a quiet street in the center of Valletta, in a baroque stone building that once housed the aristocratic descendants of a Hospitaller naval commander.

So far, Caruana said, the gambling industry appeared to be staying put, waiting to see how the consequences of the gray-listing played out. But he warned that the task of earning international confidence was urgent. “It doesn’t mean that if business is waiting it will keep on waiting forever,” Caruana said. “I, together with the rest of the government, with my colleagues, we have to make sure that they don’t leave.”

To hear him tell it, Malta had already put in place the necessary legal infrastructure to satisfy its international critics; now it just needed to demonstrate concrete results. But recently there have been some signs that the necessary action isn’t happening fast enough. In mid-October the Bank of Valletta, one of Malta’s largest lenders, told its customers it would no longer be able to process some payments in Canadian dollars after a correspondent bank terminated its relationship. There have also been several reports of Maltese citizens struggling to open overseas accounts or make foreign payments.

I asked Caruana if improving Malta’s international reputation would require a broad change in mentality, across all of its governing institutions. “I fully agree,” he responded, adding, “it’s not something that you achieve in a couple of months. It’s a process that takes time.” Would that mean more prosecutions, and convictions, of high-profile rule breakers? “Of course, of course,” he allowed quietly, frowning. “The effectiveness, it has to be measured somehow, in some way.”

https://www.bloomberg.com/news/features/2021-12-14/malta-europe-s-online-gambling-capital-troubled-by-money-laundering-crackdown

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