Perceptions of Corruption and Corporate Mobility: Malta as a real-time case study

This blog post is by Justin Borg-Barthet, a lecturer in EU law and Private International Law. Dr Borg-Barthet is the author of The Governing Law of Companies in EU Law (Hart/Bloomsbury 2012) and several other publications on corporate mobility. He recently formed part of a steering committee overseeing an extensive study for the European Commission on the law applicable to companies.

It is fairly well-established that cost is the primary driver for corporate choice of law and the choice of the physical location of a company’s business. Becht et al, for example, note that entry cost is the primary consideration for choice of corporate law. These authors also note that non-price factors in choice of law have been minimised through the intervention of intermediaries. Recent developments in Malta, however, suggest that non-price factors have some bearing on choices of establishment destinations in the internal market, at least insofar as they concern physical location as opposed to mere choice of law.

By way of background, following the publication of the Panama Papers, allegations concerning kickbacks have emerged involving the current Maltese Prime Minister, his chief of staff, a close aide, and a senior minister. I make no comment here on specific allegations. I am concerned, rather, with the effects of perception on inter-jurisdictional competition for incorporation and physical relocation of businesses.

Anecdotal evidence has emerged suggesting the some companies seeking to relocate from the United Kingdom to an EU-27 jurisdiction are influenced in their choices by the reputation of regulators. Hiscox Ltd, in particular, has chosen to situate its EU business in Luxembourg, having weighed up Malta and Luxembourg as its final shortlist. This cannot be explained with reference to entry cost. Operational costs in Malta are significantly lower than those in Luxembourg. Nor can it be explained with reference to familiarity with laws. Relevant Maltese laws are closely modelled on UK acts, whereas Luxembourg is of a civilian tradition. The key, instead, appears to be in Hiscox’s reference to Luxembourg’s “well-respected regulator”. It is not beyond reasonable interpretation to read this statement in its broader context; that is to say that the alternative regulator is no longer as well-respected, and that this affected choice.

Of course, this could be an isolated example. But it is consistent with the notion that choices of law and physical location are motivated by more than cost; or, more accurately, more than direct pricing. As noted by Devrim Dumladag, among others, ‘corruption in the political system is a threat to foreign investment’. It constitutes a risk which cannot be measured accurately, and which therefore cannot be accounted for with any degree of precision. Perception, therefore, is important. In 2017, Malta dropped ten places in the international Corruption Perception Index. Risk, therefore increased.

What is more, further evidence is emerging of a direct correlation between the ability to exploit the internal market and political reputation. It emerged on 14 May 2017 that, as a consequence of money laundering concerns, Commerzbank AG will no longer accept at face values audits conducted by branches of international firms situated in Malta. There have been no legislative changes in Malta which could have informed Commerzbank’s decision. The motivator appears instead to be political and administrative developments. It seems, therefore, that political branding matters.

Indeed, branding could, in principle affect not only physical corporate mobility, but also the legal fiction of mobility in the form of choice of corporate law. Drury argues, albeit in a quite different context, that a choice of corporate law – and with it the national suffix attached to a company name – affects public perception of a company. ‘Such labels give that company a distinctive national flavour in the minds of the public.’ Clearly then, it is not just the price of entry that would affect incorporation decisions, but also the associations arising from the national label which comes with incorporation.

This suggests that further evidence may emerge of downturns in the establishment of legitimate businesses under Maltese law. In other words, it is quite likely that both de facto and de jure mobility in the internal market may be affected by perceptions of corruption. While any evidence will likely be anecdotal in the absence of sustained academic investment, there is certainly some scope to qualify assumptions concerning price as a driver for corporate mobility.

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High Court orders UK Government to publish air pollution plan by Professor Florian Becker

The High Court ordered the Government to publish its strategy against air pollution on the 9th of  May.   European Union Law obliges the UK to develop and publish a plan to reduce nitrogen dioxide levels in the air to an acceptable level. For quite a while now, the development and the publication of this plan has been a controversial issue between the Government and environmental NGOs.

Such a plan might contain controversial and unpopular measures. Accordingly, the Government was not too keen to have the plan published before the local and general elections. To justify this reluctance it referred to the constitutional convention that there has to be a limit to government (and civil service) announcements with political implications during the pre-election period. One reason for this limitation is quite obvious: it is the parties and their candidates who are battling (re-) election, not the Government. It must not get involved and government (tax payers’) resources or authority must not be used in this battle, because it would be unfair to the opposition that does not have similar resources or departments at its disposal. This explanation, however, only makes sense when popular measures are at stake and the Government tries to raise the image of the supporting parties. Additionally, limiting the ability of Government to initiate potentially controversial policies with long term effects protects the freedom of manoeuvre for a new government (possibly supported by other political parties) and that government might have completely different views on a certain matter.

In this particular case, the Government probably tried to hold back discussion about measures against air pollution, because everyone agrees that pollution has to be tackled, but very few people accept that they have to give something up to reach this objective. Holding back the publication was probably not so much about protecting the fairness of the election and the political scope for potential successors, but more about avoiding a potentially damaging controversy. However, of course, the country cannot come to a standstill during the pre-election period and Government has to keep fulfilling legal obligations.

Image courtesy of pixabay.comairquality