Money laundering: Will Malta’s prosecutors fumble the ball?

A court in Panama has acquitted twenty-eight people charged with money laundering in connection with the 2016 Panama Papers scandal. 

Those exonerated include Jurgen Mossack and the late Ramon Fonseca, founders of law firm Mossack Fonseca — the very same firm that opened secret offshore companies for Konrad Mizzi, Keith Schembri and the owner of Egrant.

The judge ruled that evidence collected from Mossack Fonseca’s servers hadn’t been gathered in line with due process and that the chain of custody had been broken. Other evidence “was not sufficient and conclusive to determine the criminal responsibility of the accused.”

This raises questions over whether Malta’s many money laundering cases will lead to a similar dead end.

Defence lawyers in Panama had argued that the prosecution failed to submit a report from Panama’s Financial Analysis Unit (UAF) on the alleged money laundering activities carried out by members of the firm, and that the charges were not supported by testimony, legal assistance or financial reports. Was this simply a way of botching a politically sensitive case involving powerful people?

Prosecutors in Malta had better be on their toes because money laundering is very difficult to prove, especially when it comes to specific intent.

Laundering money is a convoluted process designed to break the link between the perpetrator and illicit funds by running it through a tangled web of banks and offshore companies incorporated in tiny tax havens at the fringes of the map. 

How does money laundering work?

For the sake of simplicity, money laundering can be broken down into a three step process: Placement, Layering and Integration.

Placement happens when dirty money is inserted into the financial system. 

The funds have to be deposited into a bank account before they can be moved, but walking up to a bank with elastic-wrapped bundles of cash won’t work — not even in Malta. The bank will request proof of the source of funds for every deposit.

It’s a lot easier to deposit dirty money when the perpetrator has access to banks and compliance officers who are willing to look the other way or to accept generic nonspecific information. You might recall reading about issues like these in the FIAU’s report on Malta’s very own Pilatus Bank.

Step two is Layering. This is where the launderer tries to put some distance between the source of those funds and their ultimate destination by moving the money between offshore companies in different jurisdictions, or by passing along the ownership of shares, bonds, high-value art or exclusive collector’s items like fashion pieces.

When the financial system works as intended, such funds are stopped. The VGH inquiry established that Accutor AG’s monthly payments of €15,000 to Joseph Muscat were stopped because Swiss bank UBS froze the company’s account and all subsequent payments on suspicion of kickbacks. Bank of Valletta also flagged payments from UBS to Joseph Muscat on suspicion of money laundering and kickbacks.

But even the world’s largest financial institutions have limited resources. Money launderers attempt to fly below the radar by breaking transactions into smaller wires. Doing this to avoid the $10,000 threshold is illegal. It’s called ‘structuring’.

And then we come to the final step. The money has been ‘cleaned’ through a blizzard of movements and companies designed to throw prosecutors off the track — or to make badly under-resourced units like Malta’s FIAU give up in frustration. 

Integration is when laundered funds are put back into the normal economy by making it look like they came from legitimate sources. 

Consulting contracts are a common way of doing this because prices for such services are non-transparent and performance is difficult to measure objectively.

Shortly after leaving office, Joseph Muscat entered into a series of consulting agreements with companies that benefitted financially from controversial decisions made by his government. This looks an awful lot like deferred bribes: a bribe promised for some service that is paid only after the politician has safely left office. He raised red flags due to the timing of his agreements, who they were with, and because of other entities that his ‘clients’ were connected to. 

Another common ‘integration’ tactic involves real estate transactions using dirty money and artificially inflated property prices to produce clean funds when the property is sold.

Prime Minister Robert Abela’s many land speculation and property deals have raised questions both because of large discrepancies in his personal wealth declarations and because of land speculation and development deals involving a former client of Abela’s law firm and deals with contractors close to the government.

Secrecy matters

A secret offshore structure is only useful as long as it remains a secret. Give a skilled investigator the right clue and they’ll start making connections between companies. Once you have a company name, you can follow the money trail. But money laundering is very difficult to prosecute successfully, especially when it comes to intent, and Malta’s track record is nonexistent.

A leading academic consulted by The Shift described the VGH trials as “set up to fail”. Nearly every prominent criminal lawyer in Malta has been hired to defend those accused. The three young prosecutors representing the Maltese people are seriously outmatched.

The burden of proof lies with the prosecution. If the prosecution loses for whatever reason — inexperience, ineptness, a botched trail of evidence — those accused cannot be tried again.