Responsibility has to be shouldered

It comes as no real surprise that the European Banking Authority (EBA) has established that Malta’s Financial Intelligence Analysis Unit had breached money-laundering rules in relation to its supervision of Pilatus Bank.

The EBA report may confirm suspicions raised publicly on the compliance visits carried out by the FIAU at Pilatus Bank, although it is important to clarify that the financial regulator’s recent suspension of the Pilatus banking licence was unconnected to the money laundering suspicions but due to the unsuitability of bank chairman Ali Sadr Hasheminejad in the United States on charges of having evaded US sanctions on Iran.

Back in 2016 after the FIAU’s compliance visit to Pilatus Bank in March, all the ingredients were already in place for the matter to be dealt with locally, especially after then-director general Manfred Galdes penned a letter of complaint to the Commissioner of Police in April about the preliminary findings of the FIAU at Pilatus. The MFSA too was copied in the findings of the FIAU in May.

A month later, Pilatus Bank made its representations with the FIAU, through the support of auditors KPMG and the Camilleri Preziosi law firm, and in a meeting held in early July with the FIAU, the agency agreed on a second compliance visit. After Galdes resigned, the FIAU found that the matters it had flagged earlier on had been dealt with by Pilatus Bank.

The most regrettable aspect of the EBA’s findings is that they come as an indictment of institutional failure across the board in Malta.

On closer scrutiny, the report details a number of serious deficiencies within Malta’s financial regulatory infrastructure. The EBA said the FIAU does not have sufficient records of the specific files and documents: “In particular, no record was made of any request for documents that the institution did not provide. Furthermore, during the second on-site visit, the FIAU did not establish a detailed list of the documents examined by reference to the first visit.”

This lack of records contributed to the FIAU’s inability to defend itself against the institution’s challenges, the EBA said.

It also said discussions in the Compliance Monitoring Committee Meetings, the FIAU’s decision-making body on supervisory matters (CMC), were not adequately reasoned or documented with the result that it is not possible to understand what led to the closure of the Pilatus Bank case without further supervisory measures or sanctions. “It is not possible to establish whether the decision was well founded.”

Perhaps more worrying still is the conclusion that “The FIAU did not effectively monitor and take the necessary measures with a view to ensuring compliance with the requirements of the [European Directive] [...] the FIAU failed to ensure that the institution put in place adequate and appropriate policies and procedures [...]; and the FIAU neither imposed effective, proportionate and dissuasive sanctions nor any other supervisory measures to correct the shortcomings it had identified to ensure the institution’s compliance with [the Directive].”

What this suggests is a reluctance to abide by the provisions of European Law. And yet, “notwithstanding the serious nature of its initial findings, the FIAU has not documented, or otherwise provided clear reasons and compelling arguments why it considered it appropriate not to impose any sanctions or other supervisory measures.”

Those are not questions that can remain unanswered. Nor can the EBA’s findings remain ignored.

In the course of the time period during which the FIAU carried out its compliance visit of Pilatus in March 2016, right up until the September communiqué to the bank, the agency felt that – having acquiesced to a second compliance visit – no sanctions were to be issued. This is a matter of policy which is also employed by regulators such as the MFSA, whose administrative penalties to financial institutions are always subject to appeal.

The FIAU has expressed disappointment at the EBA’s findings. Arguably, the agency will defend its modus operandi, not least because it feels it has been the victim of leaks which could have misrepresented its ongoing investigations.

But it is equally clear that ‘politics’, to some degree, can account for the general negligence, and reluctance to pursue investigations vigorously. Even the fact that things were allowed to come to this pass, clearly indicates that a form of state capture inside an agency such as the FIAU is itself a danger to democracy; that the FIAU’s approach could have allowed it to keep Pilatus Bank in business… when only a few months later, after the arrest of Hasheminejad, an in-depth transaction-by-transaction analysis started being carried out by the FIAU and the MFSA.

Surely, Prime Minister Joseph Muscat has to respond. It must be made clear that responsibility for this state of affairs will be shouldered, and that – if nothing else, for the good of Malta’s reputation as a financial centre – Malta will take all steps to fully comply with European regulations.

The one option which is not available to Muscat, is the one his government has consistently taken to date: i.e., to ignore the problem, and hope that it will go away on its own.

Nor can it escape notice that the Prime Minister’s chief of staff, Keith Schembri, had made use of the bank, and is indeed now also the subject of a magisterial inquiry dealing with payments and transactions carried out through Pilatus. Once again this raises suspicion over the degree of influence this bank enjoyed (not least, because both the Prime Minister and his chief of staff had travelled overseas to attend the wedding of the Pilatus Bank chairman the previous year).

The Attorney General, who chairs the FIAU’s governing body, this week told MaltaToday he would not comment on whether he should resign that position or not. It has been a torrid week for the FIAU, and yet nobody appears to want to shoulder any responsibility.