Daphne Caruana Galizia and the rule of law: A note to law students

This post is by Dr Justin Borg-Barthet

It isn’t my job to preach to you or to teach you right from wrong.  But I will, on this occasion, explain why the skills we impart are so important.

Daphne Caruana Galizia was a Maltese journalist. I never met her, but wrote for her on a handful of occasions.  On Monday 16 October 2017, she was assassinated in a horrendous car explosion outside her home.  Her family explains that she was assassinated “because she stood between the rule of law and those who sought to violate it”.

Daphne – she is that well known in Malta; no need for surnames to identify her – was killed because she exposed corruption.  She argued that Malta had become a vassal State of criminal organisations.  She showed how the Prime Minister’s closest aides set up secret offshore companies, allegedly to process kickbacks from Azeri and Chinese dictatorships.  She showed how a bank – Pilatus Bank – was established in Malta to launder the money of politically exposed persons, and how action against the bank had been suppressed.  She revealed that the Leader of the Opposition had also engaged in money laundering; in his case as a legal practitioner acting for a transnational prostitution racket.

More importantly, Daphne saw the signs that the rule of law was being undermined.  She observed the perversion of judicial appointments, the emasculation of the police force and prosecutors, and the weakening of financial intelligence services.  She died because of what she revealed – not simply because she revealed it, but also because the violation of the rule of law results in organised crime running riot, in organised crime being enabled to commit heinous crimes against freedom of speech.

This, dear students, is where you come into the story.  As lawyers, you will be the first to note that the rule of law is being undermined.  You will be the first to see the tell-tale signs that rights are being eroded, and that systems for the protection and enforcement of rights are being reprogrammed.

Do not be complacent.  This can happen anywhere.  I too thought that I was growing up in a relatively normal country governed by the rule of law in Malta.  Change can be rapid, especially in constitutional systems which rely on trust and trustworthiness for institutional effectiveness.

If you see the signs, you will have but one choice.  You may choose, like Daphne, to stand between the rule of law and those who choose to violate it.  Or you may choose to stand with those who violate the rule of law.  There is no other choice.  You may not sit on the fence, because there is no fence on which to sit.  Those who violate the rule of law rely on a code of silence – omertà – silence is their weapon.

It’s a grave choice, and one for each of you to make for yourselves.  But remember the words of an Italian judge who was murdered by the Mafia: “they can kill one, two of us, but they cannot kill us all”.

Daphne

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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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