According to the European Commission’s winter forecast, despite a severe economic contraction of around 9% in 2020, Malta’s economy will grow by 4.5% in 2021. A recent proposal by the Commission to end quarantine and testing for vaccinated adults travelling from one EU country to another will be welcome news for the island nation, for which tourism is one of the top five contributors to the economy. The Maltese government’s response to the Covid-19 pandemic has been robust and, at times, has been praised by the World Health Organisation. On 25 May, the minister for health Chris Fearne stated that 70% of the population had been vaccinated, making it the first country in the world to reach the estimated benchmark for herd immunity.
In June 2020, the Maltese government set out measures to alleviate the financial pressures brought on by the pandemic; these attempted to increase investment, incentivise domestic consumption and reduce the costs of operating a business. For workers, this meant the extension of the Covid-19 wage supplement with a particular focus on those who are dependent on the tourism industry for work. For businesses, a range of cost-cutting measures were introduced, including rent and electricity subsidies, refunds of trading licences, refunds on port charges and grants, among others. Employers were also offered cash to facilitate the costs of setting up workers to work remotely and a quarantine leave grant was offered for each worker who had to undertake mandatory quarantine. Also, at the start of the pandemic, €900m was provided in bank guarantees for businesses who required loans for operational matters, which was provided by the National Development and Social Fund, and a number of EU funds.
For its part, the legal industry in Malta appears to have responded well to the crisis. Ganado Advocates’ Matthew Bianchi says: ‘Most of the practice areas retained the same pre-Covid business levels, largely thanks to the firm’s ongoing investment in new technologies as well as the quick adaptation of lawyers and other professionals to the new way of working.’
Punching above weight
Malta has a strong economy in part due to its geographical location – situated in the Mediterranean between Europe, North Africa and the Middle East – and also its open and developed market economy; multilingual society; and low corporate tax rates. Key business sectors include shipping, tourism, financial services (banking and gaming in particular), real estate, pharmaceuticals and electronics. According to Bianchi, there has been a growing focus by law firms on financial services regulatory and compliance matters. ‘We have also encountered an upward trend in legal tech, as well as [environmental, social, and governance] ESG matters,’ he says.
Although the Maltese economy emerged from the global financial crisis in fairly good shape, many fear that the pandemic will be a much more difficult beast to contend with. Mamo TCV Advocates’ managing partner Michael Psaila’s suggests: ‘While the Maltese economy was not significantly affected by the 2008 crisis, the effects that this pandemic has had, and will continue to have, on a number of significant contributors to our GDP are likely to be greater.’ While the robustness of the Maltese legal market and the versatility of its lawyers suggests that most legal practices should be able to weather the storm, the same cannot be said for businesses generally. As the world begins to open up and government support schemes come to an end, there is the expectation of a marked increase in restructuring and insolvency work for legal professionals. According to Psaila: ‘While certain practice areas may take a hit others, such as our insolvency practice and our litigation practice, are expected to see an increase in work.’
Although a small jurisdiction with a population of around 500,000, Malta punches above its weight in the corporate sphere, with a number of international businesses resident. Its size allows companies to set up easily and gain access to the EU’s internal market through the exercise of the treaty freedoms of establishment and cross-border provision of services. In practice, this means that a lot of M&A deals have cross-border elements. Local law firms handle the gamut of corporate and commercial activities, many of which are tax driven, including cross-border and domestic M&A, reorganisations, capitalisations, liquidations and the establishment of Maltese holding structures; and the setting up of Maltese subsidiaries for multinationals. Local firms that dominate this area include Camilleri Preziosi, Fenech & Fenech Advocates, Ganado Advocates and Mamo TCV Advocates. Large international firms have yet to open shop in Malta, however Psaila states: ‘They continue to make significant inroads into the market through the strong relationships they have built with a number of Maltese firms and practitioners.’
The country’s legal system fuses civil law and common law, with the civil code originally being based on the French Napoleonic Code. However, its modern system is mainly influenced by the common law tradition, due to its history as a former British colony. As such, administrative law, shipping, finance and corporate law are similar to English law, and courts often refer to English jurisprudence. In the disputes and litigation arena, the main areas of activity include civil and family, commercial, maritime and financial services. While Covid forced Maltese courts to shut down for several months, they are now open again, but with a huge backlog. As in some other jurisdictions, courts began to utilise virtual sittings and allowed online cross-examinations. The government is now looking to legislate the use of technology in courts, which should speed up court proceedings and reduce costs.
As a small and open economy, Malta is easily affected by foreign demand shock, this is usually experienced most in the services sector. Although it is facing the current crisis from a strong financial position and has strengthened capital buffers since the financial crash, loss of income for borrowers and market uncertainty could affect banks’ asset quality in the future. As the crisis continues, an uptick in non-performing loans in a range of sectors is likely. Historically, Maltese banks have outperformed their European counterparts when it comes to profitability but profits have dropped due to sustained low interest rates, an increase in regulatory costs, administrative expenses and investment in technology. This increase in costs has been compounded by the pandemic and uncertainty around how long it will last and, according to the Central Bank of Malta, may lead to a credit crunch.
Bianchi is more positive: ‘We do not anticipate a major downturn – we expect the year ahead to be consistent with the previous one. We may not see an increase in work due to an inevitable international slowdown, but do not expect any major hits either’. Domestic legal firms often act in tandem with large international firms to assist global financial institutions with their Maltese law requirements. The main areas of focus include corporate finance, asset management, capital markets work, and asset and project finance. Camilleri Preziosi and Ganado Advocates have the strongest banking and finance practices in Malta.
Cleaning up
Malta has seen an influx of businesses looking to relocate to the island due to its corporate tax structures and firms wanting to set up an EU base due to the implications of Brexit. It also attracts high levels of private wealth due to low tax rates and its ‘golden passport’ scheme, which allows citizenship through investment. Where money flows, corruption is never far behind and this year 11 people face trial over the murder of Maltese journalist Daphne Caruana Galizia, who was researching links between government figures and offshore shell companies when she was killed by a car bomb in October 2017. The fallout from her assassination led to the resignation of prime minister Joseph Muscat and implicated corruption at the heart of government. Her murder, which has brought underlying problems to the surface and made international news, has put the country at a crossroads.
The 2020 Corruption Perceptions Index – published annually by Berlin-based Transparency International – ranks Malta as 52 out of 180 countries with its lowest score to date – well below the western European average. According to Transparency International: ‘The weak rule of law and the commodification of corrupt practices as a cornerstone of the economy’ are holding Malta back. In 2004, the island became the first EU member state to regulate online betting, allowing it to generate extra tax revenue. As well as attracting large and legitimate betting companies, the new gambling regulations caught the attention of international criminal enterprises. In one case, it is alleged that a Malta Gaming Authority (MGA)-licenced company laundered tens of millions of dollars for the Cosa Nostra mafia group. In January this year, former Malta Gaming Authority chief executive Heathcliff Farrugia was charged with corruption.
All this aside, although the challenges brought about by Covid are proving substantially more difficult than those of the financial crash, the perception among the legal industry is that Malta should weather the storm better than most countries. With a strong economy and lucrative business opportunities, the island is likely to remain a key business and finance hub and Psaila sums up the sentiment: ‘As we come out of the pandemic and face the resulting uncertainties and challenges, we feel that we are very well placed to maintain [our] position as a leading Maltese law firm.’
This is echoed by Bianchi, who is equally buoyant: ‘Given the dynamics of the local market we still expect growth and, possibly, consolidation and mergers among smaller outfits.’ LB