Written evidence submitted by Shanker Singham (IEF0008)
Shanker Singham is CEO of Competere, an international trade law and economic policy which has advised governments and companies on all aspects of international trade, customs, competition and regulatory policy. We have worked with supply chains, special zones and trade flows around the world for over three decades and has written extensively on these areas, including a seminal academic text book in 2007. We have been growing increasingly concerned about the role that certain small jurisdictions have been playing in the current global context.
(Bio noted on last page of document)
The UK’s Role in Strengthening Vulnerable Nodes in Global Supply Chains
- As set out in Karlsson, Singham and Gottschald’s seminal article in World Customs Journal, special economic zones are emerging as key nodes on the world’s global supply chains with trade superhighways between them. These SEZs are fundamental parts of the global rules-based economic order and will contribute strongly to the acceleration of economic growth out of the pandemic. However, these nodes can be vectors of licit or illicit trade and financial flows. Increasingly there is no middle ground. They will either be sites of licit activities generating economic activity for the world and acting as accelerators on global trade superhighways, or they will serve the same purpose for increasingly interconnected illicit trade and finance. As Moises Naim demonstrated in his seminal book, Illicit, networks of illicit activities are closely linked together, and whether it is copyright piracy, human trafficking, terrorist financing, or the sale of nuclear weapons and technology, the same multinational criminal networks are involved.
- Rogue state and non-state actors are constantly seeking ways to develop their hold over vulnerable nodes in the global supply chain. The jurisdictions targeted are not international pariah states, but states integrated into key international economic and political networks with ties to desirable centres for capital. More often than not, these states do not have their own internal capacity to counter persistent, secretive attempts to circumvent their domestic governance structures. While many of these vulnerable nodes have been identified by international governance regimes, such as the Financial Action Task Force (FATF), more must be done to ensure that these states are given the support required to extricate themselves from the control of malicious actors. The UK, through the FCDO, has a clear and powerful role to play in enhancing the strength governance and compliance given the expertise in these areas of London as a global finance centre.
- This paper is submitted into the parliamentary foreign affairs committee call for evidence responding to illicit and emerging finance. We are particularly concerned, especially in light of the invasion of Ukraine by Russia, and the resultant sanctions by the UK, EU and US, about illicit flows of funds into Malta (a known destination for Russian funds), as well as Malta’s track record on the protection of property rights, and investor protections.
Case Study: Malta’s Relationship with Russia
- All of this has been brought into sharp and immediate focus with Russia’s invasion of Ukraine. While Russian oligarch and government funds have now been severely sanctioned by the West, it is vital that they do not find safe harbours anywhere else in the world. Historically Malta has been used as a site for Russian funds, as well as the EU visa of choice for Russian oligarchs. Cyprus has long been the target for Russian oligarch’s funds, but it does appear that the Kremlin is turning its attention to Malta.
- By way of example at least a quarter of new Maltese citizens in 2020 come from Russia, Belarus, and Azerbaijan. The latest list covering 2020 included Andrey Turba, the general director of Russian oil transporter Transneft, which is under EU sanctions. While the Maltese visa-for-investment scheme has recently been suspended for Russian nationals, it is clear that the more individuals are able to base their operations out of Malta, the more likely it will become a hub for illicit activities. In a meeting with finance minister Edward Scicluna, Marshall Billingslea – the United States’ Department of Treasury’s assistant secretary for terrorist financing – had expressed American concern over Russia’s role in the financing of Maltese operations involved in fuel smuggling, especially over possible indications that the fuel was being sold for an eventual destination to blacklisted Syrian forces, or to Khalifa Haftar’s army.
- Malta is home to a subsidiary of the state-owned Russian Railways, a company sanctioned by the European Union and United States. Russian Railways is Russia’s state railway company, operating freight and passenger services while managing Russia’s railway infrastructure. The company, which has been included in international and European sanctioned companies lists, set up Black Sea Ferries in Malta in 2009, and today the Maltese company has assets of over €42 million. Its last accounts from 2015 show a loss of €7.4 million. One of its directors is Andrey Puchkov, who could be the VTB director whose name features on the US sanctions.
- At one point, the US was negotiating a Status of Forces Agreement with Malta, but the development of a US base in Malta was thwarted when Malta decided it wanted to remain neutral. It is highly likely that this “neutrality” was secured because of Russian and Chinese pressure.
- Increasingly governments are recognising that they do not have good visibility into global supply chains, and that dictators in certain rogue states are enriching themselves and using lax governance in certain nodes to launder their ill-gotten gains. These despots then pressure their nodes of choice to maintain the opacity of their regulatory regimes so that their funds can continue to flow there.
- Malta has to choose – there is no space between a licit node and an illicit one. Global capital (and also foreign governments who wish to strengthen legal flows and diminish illegal ones) should look to see whether Malta (or indeed any global node) can do the following:
9.1 Demonstrate that it protects property rights and investment in all its forms. This is a powerful signal to global capital. Part of demonstrating protection of property rights is recognising and implementing the sanctity of contracts. Malta has a poor record when it comes to the protection of property rights and sanctity of contract.
9.2 Demonstrate that it is governed by principles of competition on the merits and not cronyism. Increasingly, as the Foreign Secretary has said the world is dividing between corrupt and crony nations like Russia and China, and a network of liberty group of countries, such as the US, UK, and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) nations such as Australia, New Zealand, Canada and Japan. The EU contains network of liberty countries such as Sweden and the Baltics, but also some where it is not clear which side of the table they will be on such as Malta and Cyprus.
9.3 Demonstrate that it is open to trade - successful nodes will maintain low trade barriers to outside countries and will at least comply with WTO rules. They will additionally be parties to liberalising trade agreements such as the Comprehensive and Progresssive Trans Pacific Partnership (CPTPP).
9.4 Demonstrate that it applies the rule of law and good governance. The recent result of the public investigation into the murder of journalist Daphne Caruana-Galicia is particularly troubling for Malta as the enquiry essentially found that this was a state sponsored killing.
9.5 Demonstrate that it is living up to best practice for these SEZs with compliance to the core concepts of OECD Clean Zone and Safe Zone and private sector assurance such as World Free Zone Organisation Safe Zone. The requirements for either of these include high levels of transparency.
9.6 Demonstrate that it can, through rule of law, good governance and compliance with international best practice such as OECD Safe/Clean Zone and compliance with the requirements of the Financial Action Task Force (“FATF”) satisfy the private sector and government that it can provide supply chain visibility. This will become increasingly important as sanctions are applied against Russia and the need to ensure anti-circumvention of those sanctions.
- Failure to satisfy these core requirements will lead to the attraction of illicit and not licit capital flows. This will make Malta more likely to be the subject of sanctions which are focused on direct illicit flows but also indirect flows (the connection between the two are well illustrated in Moises Naim’s seminal book, Illicit) which are connected to other money laundering, organised crime and arms and human trafficking networks.
Protection of Property Rights and Investment
- Singham has written extensively on the importance of property rights as one of the core pillars of economic development. As one of the core pillars of economic development, property rights protection underpins the other two pillars, international and domestic competition (international trade liberalisation and pro-competitive regulatory frameworks). Investor protection is fundamental to this, and the protection of investment is a powerful signal to legitimate global capital. Legitimate global capital seeks security and transparency and the stability that comes with investor protection.
Sanctity of Contract
- Part of investment protection is sanctity of contract. Malta incorporates a mixed tradition of civil and common law. In both traditions, contract sanctity is a sine qua non of investor protection. If investors cannot rely on the fact whatever they agree in their contracts will be honoured in real time, and the contracts themselves are administered according to international norms, then the value of their investment is substantially eroded. The SRB economic model calculates the economic development which can be generated by a country in terms of a productivity measure (proxied by GDP per capita). The model shows that a key element of the property rights pillar is sanctity of contract. Indeed fully 30% or so of the property rights pillar is constituted of enforcement of contracts and the integrity of the legal system.
Examples of Violations of Sanctity of Contract Principles in Malta
A. These include the renegotiation and restructuring of the concession to run three Maltese hospitals. The restructuring of the contract to bring it into line with international best practice and to correct the many deficiencies of the previous agreement had been identified by the European Commission and others, and agreed by the Muscat government. However, no action to implement any renegotiation has been taken by the Abela government. This has rendered the concession unimplementable by the respected international hospital operator who the Government invited to take on the agreement, Steward Health Care International, and inhibited the delivery of key health infrastructure to communities in Malta.
B. Similarly, in April 2021, it was revealed that a €274m contract awarded to the St Vincent de Paul Residence, a nursing home for elderly people, was in breach of the law, according to the National Audit Office. The NAO found that the state- run home and the department of contracts "acted in breach of legislative provisions" and broke public procurement regulations in the deal. St Vincent de Paul had committed to spending hundreds of millions of euros without seeking clearance from the finance ministry and the deal appeared to have been concluded "without the sanction of cabinet or the parliamentary secretaries" responsible for the home.
C. In 2002, Environmental Landscapes Consortium entered into a Public Private Partnership with the Maltese government, commissioned to maintain and upgrade open public spaces in Malta. A damning report by the NAO stated that the continuous renewal of this contract without an open call for bids was illegal. Both Nationalist and Labour administrations kept renewing the contract without a call. The NAO had also highlighted various irregularities in the implementation of the contract, including waste of public funds and duplication of work.
Compliance with the Financial Action Task Force (“FATF”) Requirements
- The FATF has issued new methodology to determine how to assess compliance with the 2012 FATF standards. Malta is currently on the list of countries for which FATF monitoring is required (others include Haiti, Cayman Islands, Myanmar and Panama). The FATF methodology consists of two components, a technical compliance assessment addressing the specific FATF recommendations. This looks into the legal frameworks operating in a country, and the powers and procedures of the competent authorities. The second component is the effectiveness assessment which identifies the extent to which a country achieves a defined set of outcomes which are relevant to a robust Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) system. Any assessment starts with an analysis of risks and context. This is done in the widest sense and specifically considers the nature and extent of the risks, the circumstances of the country, structural elements underpinning the AML/CFT system and broader contextual factors. There are recommendations requiring countries to have effective, proportionate and dissuasive sanctions. Effectiveness checks are at least as important as technical compliance.
- Given Russia’s invasion of Ukraine and the sanctions environment in which it is operating, and the historic propensity for Russian entities to use Malta to launder money, these contextual risks are clearly heightened in the case of Malta. As of this writing, collectively the EU, US and UK spend around $700m per day on Russian energy purchases. Although the US and UK have said they will suspend these purchases, EU purchases continue. Russia and Ukraine combined are a significant global producer of wheat and corn. Any sanctions that discipline these flows of funds should also discipline the ability of Russian entities to park these funds in traditional sites such as Malta or Cyprus. In addition the ever increasing tightening of sanctions affecting Russian oligarchs will soon force them to find alternative places to park their funds. Already reports note that Russian owned yachts are relocating en masse to the Maldives.
- The Maltese government was reluctant to put an end to the country's golden passport scheme. Their reaction lagged behind counterparts, eventually suspending new applications for Russian and Belarusian citizens, in line with the EU’s joint response to the war in Ukraine.
- The loss of a significant income for Malta will likely trigger efforts to fill the financial void – possibly ushering in a new influx of equally questionable Chinese and Central Asian money.
- Additional investment equals greater geopolitical influence, a demonstrable fact in the case of China. Malta enjoys strong ties to China with recent celebrations taking place for the 50th anniversary of diplomatic relations between the two nations. China is also an autocratic regime with an economic system built on cronyism and market distortion. This is one of the reasons that Russia and China have drawn closer recently.
- Despite not being the direct focus of this inquiry, the influence of hostile nations and Russian allies, such as China, cannot be ignored. Facilitating the decline of Russian influence in Malta should be welcomed by the UK but authorities should remain on high alert to ensure that the vacuum created is not filled by the influence of other autocratic countries on the wrong side of an emerging global divide between the “network of liberty” countries and the emerging autocratic nations built on market distortion and cronyism. Supply chains are in the process of rapid realignment, and trade superhighways between nodes on global supply chains will form a critical part of this. As sanctions and export bans begin to bite all over the world, it will be important to ensure that these trade superhighways and supply chains are not tainted by exposure to Russian or other connected assets.
- The West has come together in impressive fashion in facing arguably its greatest military crisis since the start of the Cold War. This solidarity clearly has surprised Putin, and all his calculations were that the West would remain divided pursuing their own narrow interests. It is vital as the Russian invasion of Ukraine reshapes the global order that there is no chink in the Western armoury. Right now, Malta like other vulnerable nodes is a chink that could be exploited unless it immediately takes all steps necessary to prove that it can be trusted to deliver the core elements of a successful economy, while at the same time attracting capital from like-minded countries and not from corrupt dictatorships such as Russia.
- The FCDO has an important role to play, given the development and deployment of the right expertise, to help secure these nodes against malicious actors. Liz Truss recently announced British Investment International, starting with a commitment of $100bn in Africa and the Caribbean and building on the old Commonwealth Development Corporation. This will over time be extended to other developing countries and a network of special economic zones will develop in these countries. They will be linked by trade superhighways to other nodes in developed and developing countries alike. The Foreign Secretary has also talked about a developing “Network of Liberty” countries and this development is taking place before our eyes. The signals that Malta sends now will determine whether it is on that superhighway of network of liberty countries or not. It has every chance. But the choice is in its hands.
Shanker Singham is Chief Executive Officer of Competere, and an academic fellow to the IEA. He sits on the Wilton Park Advisory Council and is a life member of the Council on Foreign Relations, and Bretton Woods Committee. Shanker was an advisor to the US Trade Representative on SPS and TBT issues, and to the UK Trade Secretary on international trade issues
. He is a non-Government Adviser to the International Competition Network. He is one of the world’s leading international trade and competition experts and advises governments and companies on trade, customs, competition and regulatory issues. and is a
regular commentator on TV, radio and in newspapers. Shanker has chaired the market access/WTO practices of two global law firms. He has advised parliamentarians and government ministers on the overall approach to UK trade policy including the Brexit negotiations. He is also the Policy Lead of the Trader Support Service Consortium, which is delivering on behalf of HMG the implementation of the NI Protocol.
He has authored over 100 articles and book chapters, as well as the leading textbook on the interface between trade, competition and regulatory issues.
 See Karlsson, Singham and Gottschald, Global Zones Network, A Safe Pathway to Prosperity in the Post Coronavirus Era, Vol 15(1), World Customs Journal (2021), available at https://worldcustomsjournal.org/Archives/Volume%2015%2C%20Number%201%20(Apr%202021)/1910%2001%20WCJ%20v15n1%20Karlsson%20et%20al.pdf
 See for example A General Theory of Trade and Competition: Trade Liberalisation and Competitive Markets (CMP Publishing 2007); see also https://img1.wsimg.com/blobby/go/bf4d316c-4c0b-4e87-8edb-350f819ee031/downloads/1cste8tfi_599507.pdf?ver=1636064739990
 For details of the SRB economic model, see Anti-Competitive Market Distortions: A Typology, bu Shanker Singham and U. Srinivasa Rangan, Economic Affairs, 18 October, 2018 (available at https://onlinelibrary.wiley.com/doi/10.1111/ecaf.12311); See also Introduction to Anti-Competitive Market Distortions and the Distortions Index, Shanker Singham and Molly Kiniry, Legatum Institute, 2016 available at https://img1.wsimg.com/blobby/go/bf4d316c-4c0b-4e87-8edb-350f819ee031/downloads/1cste45av_640953.pdf?ver=1636064739990
See https://www.london-globe.com/world-news/2022/02/03/malta-chinas-satellite-state-in-europe/ and https://timesofmalta.com/articles/view/widow-of-kazakh-oligarch-wins-human-rights-case-against-malta.939051