Gently dancing to Pilatus’s tune

It was July 2018 when the Financial Intelligence Analysis Unit (FIAU) was accused by the European Banking Authority (EBA) of breaching the requirements of a directive on the prevention of money laundering and terrorist financing concerning its dealings with Pilatus bank.

The EBA then concluded that the FIAU had failed to conduct effective supervision of Pilatus Bank due to a number of failures, including procedural deficiencies and lack of supervisory actions by the FIAU after its decision to close the case without imposing any sanctions on the bank. 19 months passed and there is no official reason given to justify such a lax attitude.

A public inquiry into Daphne Caruana Galizia‘s murder started late last year. It has interviewed a number of persons responsible for its administration although a number of testimonies are being held in private.

The testimony given by the chief supervisory officer of the Malta Financial Services Authority, Marianne Scicluna, revealed how the journalist’s Running Commentary was looked upon as an open source by the authority, which acted on allegations flagged by Ms Caruana Galizia. Ms Scicluna said that the first visit was held in 2016 (more than one year since the bank commenced trading). It was then that MFSA discovered that clients in Pilatus included a high concentration of Politically Exposed Persons.

On a separate initiative, there were two visits triggered by FIAU: one in March 2016 followed by another one five months later. Serious shortcomings were flagged.

When explaining how Pilatus had been granted a full bank license, Ms Scicluna recounted how MFSA conducted standard pre-application meetings with bank chairman Ali Sadr and his advisors from KPMG. The applicant was subjected to ‘enhanced due diligence’ in view of the fact that chairman Ali Sadr came from a ‘high-risk jurisdiction’.

On a separate note, Ms Scicluna explained how MFSA inspectors were uneasy about visiting the bank because of concerns that they would land in the media spotlight. A banking inspector had even resigned about the matter.

With hindsight, one may question why MFSA was so shy of enforcing its rights and obligations in fear of press comments. Apparently, in a smart move, Pilatus engaged its auditors and another top law firm to check deeply its Augean stables and they issued a clean report attesting that all documents were in place. Naturally, based on this report FIAU in August 2016, concluded that all concerns had been addressed.

This attitude comes as a poignant surprise when FIAU has updated its directive on AML and FS to reach a number of subject persons – including lawyers, notaries, gaming companies, auditors and banks. In fact, licensees are to bear in mind that AML/FS legislation is intended to address and attack serious crime which usually either involves substantial amounts and to install safeguards in place to deter the use of the financial system for criminal purposes.

FIAU further mandates that subject persons are required to appoint an MLRO whose main responsibility is to consider any internal reports of unusual or suspicious transactions. The saga continues when a few months before Caruana Galizia was killed in October 2017, the journalist had been sued by the bank’s chairman for defamation after alleging the bank had processed a $1 million transfer from a Dubai company to Egrant – allegedly owned by the wife of the Maltese prime minister Joseph Muscat.

Joseph Muscat immediately launched a magisterial inquiry over Ms Caruana Galizia’s allegation, with the inquiry concluding that there was no proof that Egrant was owned by Muscat’s wife. So far nobody knows who owns Egrant although - at one time – Nexia BT’s Brian Tonna claimed it was his (later rebutted).

Back to Pilatus, it was also noted that despite it being a high-risk institution, the FIAU did not plan or carry out any on-site inspections at Pilatus Bank until after it was instructed to do so by the MFSA, almost two years after the bank started its activities.

As background, Pilatus bank is owned by an Iranian national and was guided since its inception in 2012/3 by KPMG (its auditors) and later assisted by a prominent law firm. The bank has been at the centre of political controversy ever since a series of leaked financial intelligence reports flagged evidence of money laundering and serious compliance shortcomings.

It has also been alleged that the bank was used as a conduit for Azerbaijani millions making their way into Europe, with shocking allegations that Prime Minister Joseph Muscat’s wife secretly received graft payments (of which no evidence was found in a magisterial inquiry). Inter alia,  Daphne Caruana Galizia had reported that family members of Azerbaijan’s President Ilham Alivey used Pilatus Bank, along with Azerbaijan’s Minister for Emergency Situations, Kamaladdin Heydarov.

A man described by leaked US diplomatic correspondence as being a “front man” for Mr Heydarov set up a number of companies in Malta via audit firm Nexia BT a month after Dr Muscat, Mr Schembri and Tourism Minister Konrad Mizzi visited Azerbaijan to sign an unpublished contract with Socar (an Azeri owned company) to invest in building a massive  LNG plant in Malta.

The plot thickens when investigators reveal close proximity of Ali Sadr Hasheminajad to the Castille clique. A senior KPMG partner (specialising in AML law) together with the prime minister and the chief of staff were among the invited guests at a private champagne reception for Ali Sadr’s wedding in Venice.

Certainly, the proximity of the auditor to its client may ring a sour note contrary to strict ethical rules of auditor independence, but thus far no feathers have been ruffled by the Accountancy board. The story takes an interesting twist when in November 2018, Pilatus chairman Ali Sadr Hasheminajad was arrested for alleged sanctions-busting in the US.

Readers would be justified to ask why no surprise visits were ever carried out by FIAU at Pilatus Bank following a first inspection by the MFSA in 2015. This visit was prompted by a growth in business and deposits in about a year after the bank’s inception.

When asked about the register of business introducers kept by MFSA, Ms Scicluna explained that she could not disclose certain information in public in view of separate legal proceedings currently being faced by the authority.

The plot thickens, when one considers that millions of depositors monies held at Pilatus are frozen at the Central Bank and no acts and dealings have been published by a US expert and his team as a “competent person” engaged at a high fee by MFSA to administer the Pilatus bank affairs after its license was terminated.

More excitement is sure to follow as more people testify at the public inquiry.