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This article has first been published by lovinmalta  on 11/03/2021

Are you a warranted professional offering incorporations, registered offices, directorship arrangements and other CSP services? Here’s why 16th May 2021 is such an important deadline for you.

1.Who do the CSP changes concern?

Company Service Providers (CSPs) have been offering their support to businesses in setting up and facilitating the running of their companies in Malta for years, This included forming companies or other legal entities, provision of registered office and related services, and arranging or acting as director, company secretary or similar positions in other legal entities.

Mainly there have been two ways to operate such services:

  1. As governed by the Company Services Act (2013) any company or person offering such services was required to register with the MFSA.
  2. That same Act however allowed for exemptions from such registration in the case of warranted professionals (lawyers, accountants, auditors, notaries) as well as trustees and fiduciaries.

2. A national ML/FT vulnerability required addressing.

Malta’s National Risk Assessment in 2018 highlighted the risk that the CSP sector poses in terms of money laundering and terrorist financing (ML/FT) risks. The MONEYVAL Mutual Evaluation Report published in July 2019 followed this in identifying the CSP sector as part of the top-most significant risks to Malta. The main reasons were the nature of the international client base, involvement with complex structures, and the fact that not all CSPs were required to be registered

The MFSA has been spearheading changes that have led to regulatory reform in the CSP framework. The consultation process for these changes kicked off in November 2019 through the ‘Raising the Bar’ Document which set out the first version of this new framework. Following a year of consultation, ACT L of 2020 (CSP Amendments) passed through Parliament and was published in November 2020.

These changes came into force on the 16th March 2021 through the LN96/2021. On the same day, the MFSA also published the new CSP Rulebook which all CSP operators need to be in compliance with.

3. Are lawyers, legal procurators, auditors, accountants, notaries still exempt?

The answer is no. One of the key changes is that the exemption to operate as a CSP based on the professional warrant without the requirement to be registered with the MFSA has been removed. This will allow better supervision by the regulators as it now gives fuller visibility of the sector.

Anyone who has been offering CSP services without having been registered with the MFSA is now required to submit an application for authorization by the MFSA.

The deadline is 16th May 2021Any such warranted professionals must terminate this service before this deadline unless they apply accordingly.  This registration applies irrelevantly to the number of customers being serviced, including those previously captured under the de minimis rule.

A separate legal notice also published on the 16th of March 2021 (LN105/2021) outlines some operations that are exempt from applying for authorisation.

4. How are the new authorisations classified? Which class should I apply for?

The new CSP authorisations are set out in three main Classes (A, B & C) and two Under-Threshold Classes The types of services and size of the business are taken into consideration in establishing the applicable classification. The classification would also take into account different requirements such as initial share capital and mandatory professional indemnity insurance.).

5. What happens with currently registered CSPs?

Currently registered CSPs do not need to submit an application as they will be classified by the Authority. They need to keep abiding by the CSP framework they were already subject to and ensure they fulfil all the new obligations as per the new classification and CSP rules definitely by not later than  15th September 2021.

6. What are the salient changes?

The core change is that the regulators are seeking to instil a compliance culture across the board. The principles of compliance must move into a realm that is not simply a tick-the-box approach or do-business-now-and-comply-later scenario. Compliance is expected to be a core function within any organisation operating these services and something that transcends within all the business cycle and departments – not merely owned by one individual for the sake of having someone assigned.

The principal pillars are the following:

  1. Regulatory Compliance
  2. Risk Management
  3. Anti-Money Laundering and Countering Financing of Terrorism

Although some may interpret the new requirements as burdensome, once structures are in place, CSPs will appreciate that this ultimately protects their customers’ interests, their own business’ wellbeing, and Malta’s reputation.

7.What is expected to happen?

Although the MFSA has actively gone through consultation and dissemination of information, it seems that on the ground there is still some lack of awareness or at least clarity, especially amongst those previously exempt from registration. There may be an impression that since one’s operation may be somewhat small in size, these requirements may not be applicable in their entirety. Those who are not considering these changes seriously will find themselves in a challenging situation come 16th May 2021. Ceasing to operate is also something that takes time as one needs to communicate with clients and undertake the necessary procedures to divest the portfolio.

The process takes time and although communicated over the past year, operators may still be misaligned by the urgency to act. The warranted professional is faced with an imminent decision: continue his current practice therefore apply, or transfer one’s business portfolio. Merging is also considered an option!

Once setups understand the nature of the changes, they may be considering to merge, acquire or, partner up. Time is required for negotiations, trust-building and more importantly to ensure correct compliance procedures, onboarding processes and due diligence. If this is underestimated, in six weeks’ time such CSP providers will find themselves in breach of the new regulations.

In terms of compliance, there will clearly be the need to address a knowledge gap within certain entities and there may be pressures in ensuring that the right resources to assist are available within the timeframes.

Such a reform is expected to result in fewer players opting to remain in the market, but not necessarily less business. If the consolidation of the market takes place in good order, the sector will benefit from an improved standing. However, if the lack of awareness and appetite to comply are not immediately addressed it can otherwise lead players to be left out or wake up on 17th May to find themselves in breach of the changes that came in on 16th March.

Matthew Agius is a Public Policy and European Affairs professional who serves as CEO of Diligex Ltd, an AML/CFT Compliance Advisory Company in Malta.