When one thinks of Bermuda's competitors in the provision of international financial services, Malta does not immediately come to mind. That may change, however, if the Maltese Government continues its progressive economic strategies. Roger Crombie reports.

@EDITRULE:

In the words of John Dalli, Finance Minister since 1992, Malta is setting itself up as "Europe's new model finance centre".

It is almost ten years since the establishment of the Malta Financial Services Centre (MSFC). The goal was to establish Malta as a viable financial services location, to compete for business directly with such locations as Dublin and Luxembourg and, to a lesser extent, Bermuda, for fund administration, investment management and incorporations. In 1994, Malta began the process of converting itself into an onshore jurisdiction.

Monaco, the supreme European financial services meeting ground for the super-rich, may eventually feel the heat, if the Maltese succeed. Meanwhile, North Africa is Malta's largest source of business. Plans to expand Malta's influence in the financial services world will centre on the same region. Insurance and reinsurance are not among Malta's immediate targets, but the insurance sector is a giant global industry, always attracted to well-established jurisdictions.

Malta has had something of a chequered past in the post-war years. It won its independence from the United Kingdom in 1964, but earned the nickname of "the Cuba of Europe" for its aggressively socialist government under Dom Mintoff in the 1980s. Recently, however, Malta has been on the fast track to success. Since the government took a decision to shake off the "offshore" tag, the results have been dramatic.

Between 1995 and 2000, growth in Malta's Gross Domestic Product averaged six percent per annum, probably four times as great as Bermuda's. In 2001, with all the downward pressure on global economies, Malta still estimates that its economy will have grown, but only "slightly". Unemployment has hovered at around five percent (although it has recently risen to 6.5 percent) and inflation has been kept under control for several years.

Finance is the fastest-growing sector of the Maltese economy, now contributing about 12 percent of GDP. Three years ago, that figure was eight percent. The three- to five-year target is 20 to 25 percent. About 5,000 people are directly employed in the financial services sector. Malta is a much larger island than Bermuda, with a population of 380,000, so it has the room to grow at a fast clip, unlike Bermuda, where the infrastructure is increasingly stressed.

"A lot of our senior finance people have a very attractive mixture of entrepreneurial drive and good old-fashioned financial caution," said Professor Joe Bannister, chairman of the MSFC.

"On the whole, they're good at measuring and managing risk. We're also well endowed with skilled legal and accountancy firms.

"The combination of these factors perhaps goes a long way to explaining the low level of recent corporate failures in Malta and a leap in the number of big corporations showing an interest in Malta."

Malta was the first European country to satisfy the OECD initiative, at the same time Bermuda did, in June 2000.

"We were happy to work with the OECD because its position was very much in line with our strategy and policies," Prof. Bannister said.

"I believe that being ahead of the game gave us a competitive edge."

That view has been echoed in Bermuda's case, where the general feeling in the boardrooms and government offices is that Bermuda, like Malta, took a step clear of its competition by agreeing to meet the OECD on their terms, i.e. the highest international financial standards. Other Caribbean jurisdictions have, to an extent, been playing catch-up with Bermuda since, as have some of Malta's European competitors.

In 2001, the US Internal Revenue Service approved Malta's "know your customer" regulations, which lie at the heart of anti-money laundering regulations around the world.

This year, Malta is consolidating its financial regulatory authorities under a single banner, to be called the Malta Financial Services Authority.

It will combine the powers of the MSFC, the Central Bank of Malta and the Malta Stock Exchange.

The exchange is ten years old, and was doing exceptionally well until last year, when attempts by the Maltese Government to encourage the repatriation of an estimated $3 billion held overseas - mainly in Switzerland - backfired. Local residents pay 35 percent income tax, which is a major reason why the majority of their savings are held elsewhere. From 2000, funds investing in Malta became subject to a ten percent withholding tax, while foreign funds had to pay 15 percent income tax and 15 percent capital gains tax.

Those who look to Bermuda to introduce an income tax and other income-related taxes would do well to analyse Malta's experience. A proposed tax amnesty in 2000 for those who repatriated their capital and the introduction of the various taxes on funds investing in Malta, instead of producing greater government revenues, led to a massive exodus of local residents' money, and a stock market crash from which the markets have yet to recover.