No breach of EU law by MFSA on Pilatus supervision, EBA says

The European Banking Authority (EBA) will not open a breach of EU law against the Malta Financial Services Authority and close a preliminary inquiry in relation to the supervision of the private bank Pilatus.

The inquiry focused on the authorisation process, the prudential supervision of Pilatus Bank, and the recent supervisory measures taken by the MSFA.

The bank’s license was withdrawn on 30 June 2018 after the indictment of its owner Ali Sadr Hasheminejad in the United States over charges of breaching US sanctions against Iran.

MFSA CEO Joseph Cuschieri said the regulator was pleased that its supervisory actions with respect to Pilatus Bank were recognised. “It is clear that there were lessons to be learnt from the Pilatus Bank case, but it is also clear, and recognised by the EBA, that there has been an uncompromising commitment to identify and address these issues by the MFSA.”

Pilatus chairman Ali Sadr Hasheminejad was arrested in the US in March 2018

Pilatus Bank was alleged to have held accounts for the Prime Minister of Malta, an allegation by the journalist Daphne Caruana Galizia which was later proved to be false in the ensuring Egrant inquiry. The bank did hold accounts for members of the Azerbaijani ruling elites, as well as the prime minister's chief of staff Keith Schembri.

The Nationalist MEP David Casa said that the MFSA had narrowly escaped a formal investigation because it withdrew the Pilatus Bank licence.

“The EBA nevertheless identified serious concerns with the manner in which Pilatus Bank was handled, and whcih must be addressed,” Casa said. “The MFSA took far too long to take the obvious decision to prevent Pilatus from continruing to operate in Malta. The MFSA must effectively and immediately address the serious concerns raised by the EBA. The financial sector and the many livelihoods that depend on it must be put above the intersts of corrupt politicians.”

In a letter written to MEPs, the EBA Chairman Andrea Enria said however that the EBA’s preliminary inquiries had raised “significant concerns concerning the MFSA’s authorisation and supervisory practices in relation to Pilatus Bank. However, in the light of the requirements set out in Union law for prudential supervisors which make it difficult to conclude that there have been breaches of clear and unconditional obligations established in Union law, and especially in light of the significant supervisory actions taken by the MFSA in relation to Pilatus Bank, I have decided to close the case without opening a breach of Union law investigation.”

The EBA issued a number of recommendations for the MFSA, and acknowledged that the Maltese regulator had informed it of a number of measures it is implementing to improve its supervisory processes. “The EBA intends to monitor this, including through an on-site visit which we currently propose to carry out in mid-2019,” Enria said.

The EBA specifically referred to four key areas of concerns: the MFSA’s engagement with the  Financial Intelligence Analysis Unit during authorisation process, robustness of due diligence checks, prudential supervisory response to concerns about effectiveness of anti-money laundering and financing of terrorism controls, and the risk prioritisation given to private banks with non-resident clients.

Enria said the MFSA will be updating the EBA on a quarterly basis on the measures adopted to strengthen supervision.

Enria however said the EBA had identified deficiencies in EU law which led to perceived shortcomings in prudential supervision. These included better harmonisation of member states’ efforts in to verify the accuracy of information provided by banks requiring authorisation. “Competent authorities making suitability assessments of individuals face significant difficulties under some national legal regimes because of constraints in taking into account negative elements other than definitive judicial and administrative findings in the assessment of the fitness and propriety of qualifying holders and managers,” Enria said.

MFSA CEO Joseph Cuschieri

The EBA chairman said the level of information exchanged can vary between Member States, and that there were no specific triggers for particular forms of supervisory action.

On his part, Cuschieri said the MFSA had already started to implement a number of initiatives to strengthen its regulatory performance.

These include improving engagement with the FIAU, protocols for FIAU cooperation for ongoing supervision of banks, digitisation for due diligence checks both during authorisation and throughout the licensee’s lifecycle, integrating anti-money laundering risks in the risk assessment framework for banking supervision at the MFSA, and increasing human resources at the MFSA.

EBA inquiry ‘confirmation institutions’ robustness

In a statement, Parliamentary Secretary for Financial Services Silvio Schembri said the EBA’s decision to close the preliminary inquiry had confirmed the “robustness” of Malta’s authority.

Schembri said that the decision came at a time when “destructive criticism” was being directed at the MFSA with the intention of undermining the financial services sector for the sake of “partisan antics”.

Schembri emphasised that the EBA had also noted Malta’s commitment to implementing anti-money laundering directives.

The junior minister insisted that the financial services sector was of the utmost importance to the country, acting as a large contributor to employment and economic growth. “Therefore its nurturing by the government is crucial.”

Furthermore, Schembri pointed out that government had “enacted changes with respect to the operations of the MFSA, giving it more tools with which to carry out its work more efficiently and effectively”.

The government, he said, was fully committed to investing further in the MFSA through the “engagement of more employees, investment in IT, modernisation of processes, and improved working conditions.