MFSA alerted of risk Pilatus posed to Malta in May 2016

A stark warning on Pilatus Bank and its business model of “secrecy” for politically exposed persons (PEPs) was spelt out clearly by the Financial Intelligence Analysis Unit as early as May 2016.

It came in a hard-hitting letter from former FIAU director Manfred Galdes, which copy was provided to the Malta Financial Services Authority’s director of enforcement, Anton Bartolo who is also the FIAU’s deputy chairman. However, it appears that it was only in February 2018 when a money laundering probe at Pilatus was kicked off by the MFSA.

Yet only this week Bartolo fended off accusations from MEPs over inaction on Pilatus Bank, and said that the MFSA could not act on anything but firm evidence.

“We can’t simply work on allegations, on what’s written by newspapers, on intelligence we cannot use… we need firm evidence,” Bartolo told MEPs at a special committee hearing on financial crimes, on Thursday.

But in late May 2016, both he and the MFSA’s head of banking supervision, Karol Gabaretta, knew that the FIAU’s compliance visit had revealed “serious shortcomings” that placed Pilatus “in breach of several provisions” of Malta’s money laundering rules, and which exposed the bank and “the jurisdiction as a whole to a high level of risk”.

These were the serious observations pointed out by Galdes after the compliance visit that revealed “serious deficiencies” due to Pilatus’s dependence on a small clientele of mainly Azerbaijani PEPs.

But the red flag raised by the FIAU was not deemed serious enough for immediate intervention by the MFSA.

The compliance visit was later followed up with explanations from Pilatus, their advisors KPMG and the Camilleri Preziosi legal firm, and finally after Galdes resigned from the FIAU, with a clean bill of health from the FIAU in September 2016.

Meanwhile Bartolo’s comments to MEPs this week seemed to play down the extent to which the MFSA was informed of the risks posed by Ali Sadr Hasheminejad and his bank.

“Regulators cannot act on intelligence which is not supported… confirmed. Regulatory action needs to be taken not simply on suspicion but on factual evidence,” he told MEPs.

“Many times regulators are in a very difficult situation, having intelligence that is a whisper in the ear. But you cannot use it because you need a sound basis on which to act, because you might prejudice what another country is doing,” he said – referring to the FBI’s sanctions-busting investigation on Hasheminejad, which predates Pilatus Bank’s setting up in 2013.

While the MFSA was not aware of the US investigation, it was clearly aware of Galdes’s warning on how Pilatus was carrying out its business for mainly Azerbaijani clients.

In May 2016, the MFSA enforcement director was aware of the FIAU’s findings that:

• Companies which should have been classified as having PEP involvements were not in fact classified as such;
• Information on the source of wealth and funds was too generic, even in the case of high net-worth individuals or PEPs from Azerbaijan, a high-risk jurisdiction;
• Absence of documentary proof on the source of funds of the deposits;
• No documentary evidence of origin of funds of a €1 million transfer from a third party into an account classified as high-risk;
• A €505,000 “loan repayment” where the bank claimed that such loan agreements were not drawn up in writing but reached through a ‘handshake’;
• Lack of accurate and comprehensive documentary evidence kept on file on three particular companies that were the main source of wealth and large transactions;
• A “glaring, possibly deliberate disregard” of money laundering reporting obligations when transactions seemingly proceeded simply through an explanation from the head of private banking;
• No proof of actual purchase of immovable property obtained in cases where customers’ transactions were seemingly intended for such purposes.

While Bartolo told MEPs this week that the MFSA’s due diligence and monitoring of Pilatus Bank was constant after the bank obtained its licence, the FIAU was clear in 2016 that the bank was opening accounts a PEPs and that “a blind eye is being turned for these individuals to be able to invest their funds without appropriate questions being asked.”

FIAU told MFSA that Pilatus was turning a blind eye at PEPs “to be able to invest their funds without appropriate questions being asked”

In September 2016, the FIAU had told the bank its shortcomings “no longer subsist” after Pilatus furnished more documentation.

MaltaToday put it to the MFSA in a request for comment this week that Bartolo was informed of these shortcomings and that this was a clear warning that necessitated action – but a money laundering probe by the MFSA only started in February 2018, just before the arrest of Hasheminejad in the US. So why was this report not immediately used to start the “comprehensive review” Bartolo told MEPs about?

“My assessment of the actions taken so far with respect to Pilatus Bank is that the MFSA acted prudently and in the public interest, taking measured steps to build solid evidence on this case,” the MFSA’s newly-appointed CEO Joseph Cuschieri told MaltaToday on Friday.

“Regulatory action taken by a financial supervisor must always be proportionate and justified. Demanding a comprehensive review of the conduct of business of a licensed entity, such as the one which the MFSA/FIAU requested in relation to Pilatus, needs to be justified on the basis of concrete grounds.

“The MFSA has been very careful to build its evidence using all information and intelligence available to it before taking action.”

Since Hasheminejad’s arrest for having transferred US dollar payments to Iranian beneficiaries, Pilatus Bank has been placed under the control of a competent person appointed by the MFSA.

Bartolo told MEPs that while the MFSA was not aware of the US investigation, it received information that was “sketchy”. But its comprehensive review of the bank – a transaction by transaction examination – started in February 2018, just a month before Hasheminejad’s arrest.

The MFSA is now analysing all accounts opened by the bank and those that have been closed, all transactions and inward and outward flows of money, as well as having taken a copy of the bank’s data, records, documents, email exchanges, and audio recordings.

“It is a complex exercise – it cannot be finished in a few days, it has been going on for weeks,” Bartolo told MEPs. “We acknowledge that the bank may have money that is dirty and we are also ready to make sure we protect that money if it exists.”

In a humble admission, Bartolo pointed out, “We’re not perfect. In hindsight, we could have done better…”.