Pilatus Bank hit with €5 million penalty by FIAU

Pilatus Bank has been fined €4,975,500 by the money laundering watchdog after it identified “very serious and systemic” failures in the bank’s obligation to guard against financial crime.

The penalty imposed by the Financial Intelligence Analysis Unit was communicated today after a three-year supervisory examination of client accounts and bank procedures.

In its publication notice, the FIAU identified 11 red flags that they deemed should have raised the bank's suspicion on its customers' activity.

It turns out that the information available to the bank at onboarding significantly diverged from the customers’ actual activity, and substantial amounts of funds were being passed through various entities in incredibly short time periods without a valid reason.

Internal transfers within the bank between various entities having the same beneficial ownership were being cleared off by the bank as mere internal transfers, as were monies transferred on behalf of the entities’ owners. When documentary evidence was obtained by the bank, no consideration was given as to whether such evidence was sufficient or whether it made sense in the first place.

At times, the bank was even offering loans secured against cash held at the bank without a clear rationale and without the bank considering whether the loan granted would make economic sense. Loans were being offered without any economic rationale even for the bank itself, in view of interest never being paid, and were also being used to conceal the true source of funds.

The bank itself would prepare documentation for its customers in order to justify accepting an exceptional high amount of funds not he premise that these related to dividend distribution, even though the bank knew that these had not been paid out or that they could only provide a justification for part of the expected account activity.

There were also conflicting explanations not he movement and channelling of funds through various entities and legal arrangements, as well as contradictory information as to the source of funds.

According to the FIAU, the Bank relied heavily on generic information provided by its customers, “which was not even considered to be sufficient to establish the customer profile for normal risk customers”.

15 customers, €390 million turnover

In 15 of the files reviewed, the source of wealth (SOW) and expected SOF was indicated as being in part or in full being generated fro the operations of the same business operation, meaning that 15 customers were being funded by the same business activity.

“However, it was observed that were one to combine the expected annual turnover of the 15 customers abovementioned, this would amount to a total of circa €390 million. However, the financial statements in question referred to comprehensive income of €23.5 million – the shortfall between the two amounts had to be considered as too significant to ignore.”

In another instance, Pilatus Bank provided documentation stating that the account turnover for a particular customer will be €5 million. This customer turned out to be a well-known entrepreneur in the United Arab Emirates and Azerbaijan, involved in the agriculture, retail and construction industries.

“However, there were no details of the customer’s own assets (apart from names of corporate entities owned by the customer) and evidence of the business earnings obtained from the same. “

For another customer, whose wealth is estimated to be in the €100 million region, Pilatus Bank “failed to obtain the necessary documentary evidence to substantiate the SOW of the customer”.

Sketchy loan agreements and no transaction scrutiny

On transaction scrutiny, the FIAU found that Pilatus Bank allowed transactions to pass through its customers’ accounts relatively freely, and that this was the case in 86% of the customer files reviewed.

“Albeit the customers were using sketchy loan agreements and invoices to transfer money to and from each other, the Bank failed to inquire further with its customers to ascertain the veracity of the rationale behind the transfers taking place.”

The FIAU referred to one customer who transferred over $3 million to an external company under the guise of a loan. The only document available was a letter confirming that the company had been appointed by the customer to act as its agent in the UAE - no reference was made to the said loan.

A particularly suspicious case involves a customer who was provided with a $6.5 million loan from Pilatus Bank, secured with its own funds. “The Bank did not question what could be the reason for requesting such a loan rather than making use of one’s own funds. When one considers that the customer was to incur interest on the funds borrowed and could not make use of its own funds, the economic rationale behind such the transaction becomes even more doubtful.”

The FIAU said of particular concern was the bank’s “lax approach” towards both its due diligence and enhanced due diligence obligations despite being set up purely to serve high-risk customers.

“It must be remarked that the Supervisory Committee could not in any way ignore the bank’s direct or indirect exposure to a series of connections with figures from the Caucasus region considered to present extreme risks of money laundering,” the FIAU said.

Pilatus shuttered

Pilatus Bank was shuttered in November 2018 when the European Central Bank revoked its license two years after it was first implicated in alleged money laundering breaches.

The bank was thrown into the spotlight just before the 2017 general election when Daphne Caruana Galizia alleged that the former prime minister’s wife Michelle Muscat owned the Panama company Egrant, which had an account at Pilatus.

A magisterial inquiry into the allegations found no such account attested to Egrant or Michelle Muscat and dismissed the claims.

The bank’s owner, Ali Sadr Hasheminejad, an Iranian national, was eventually arrested in the US and charged with breaching sanctions against Venezuela. The case against Hasheminejad was eventually abandoned.