April 26, 2018 / 10:57 AM / 25 days ago

Malta had concerns about bank with Azeri clients, kept it open

VALLETTA, Malta (Reuters) - Last April, a Maltese journalist published stories saying a private bank on her island was serving high-ranking customers in Azerbaijan, and alleging it was processing corrupt payments. Six months later the journalist, Daphne Caruana Galizia, was murdered.

FILE PHOTO: Whitehall Mansions, within which the offices of Pilatus Bank are situated, is seen in Ta' Xbiex, Malta, October 28, 2017. REUTERS/Darrin Zammit Lupi/File Photo

Many of her claims, including the one about corrupt payments, remain unproven. There is also nothing to link her death to the reports she wrote about the bank or its staff. But one of her key findings has held up: The bank, called Pilatus Bank, did depend for much of its business on the Azeri elite.

Two sources briefed in detail on the bank’s transactions told Reuters that by 2016 more than 50 accounts at Pilatus, holding the majority of the bank’s more than 250 million euros ($307 million) of deposits, were operated for the ultimate benefit of Azeris with close ties to Azerbaijan’s leadership. The biggest clients were companies ultimately controlled by two children of Ilham Aliyev, the country’s president, the sources said. Aliyev and the children involved, Leyla and Arzu Aliyeva, did not respond to questions.

The Azeri clientele’s role was underlined in a confidential regulatory report, written in 2016 and leaked to Maltese journalists last year. The report, sent by Malta’s anti-money laundering watchdog the Financial Investigation and Analysis Unit (FIAU) to Pilatus, showed that the bank ranked at least two of its principal clients as “politically exposed people” (PEPs), which under European Union rules means politicians, senior government officials, or their close family and associates. Both were from Azerbaijan.

There is no evidence the Azeri customers were doing anything illegal; under EU rules their PEP status means their business should be handled with special vigilance to prevent financial crime. The report added that Pilatus’ profitability depended to a large extent on a few select PEPs, the majority of whom were Azeris.

But in what has become a politically charged issue both in Malta and the EU, this and other reports by the FIAU have raised questions about how the island managed these risks. Pilatus was granted a licence under the current Maltese administration, led by Prime Minister Joseph Muscat. Keith Schembri, Muscat’s chief-of-staff, has confirmed opening an account at Pilatus.

After a visit to Pilatus in March 2016, FIAU inspectors wrote of “systematic issues of grave concern” about the bank, citing a lack of documentation and other problems which suggested its business model “concentrates on accommodating clients who value their secrecy above everything else.”

In other reports, they raised concerns about payments made to Schembri, Muscat’s chief-of-staff. The inspectors sent these to police on the island, who did not investigate.

Six months later, the FIAU inspectors said they had seen the documentation they needed and no longer had major concerns. The bank operated freely until last month, when its founder, an Iranian national called Ali Sadr Hashemi Nejad, was arrested and denied bail in the United States on money-laundering and sanctions violation charges. After that, Malta froze Pilatus’ operations.

Pilatus did not respond to requests for comment and Sadr’s lawyers declined to make any comment.

At issue for Europe is the effectiveness of financial regulation in Malta, and by extension in Europe: A banking licence in any EU country is valid in all other member states. At the time Pilatus’ operations were frozen, it was preparing to open a branch in London.

The European Banking Authority (EBA) launched a “preliminary inquiry” into two Maltese financial supervision agencies in November 2017, after the EU Parliament asked for clarification on how Pilatus got its license and the EU Commission requested a probe of “alleged incorrect or insufficient application of EU law pertaining to the prevention of money laundering” in Malta. That is ongoing, an EBA spokesman said.

The FIAU is one of two agencies under scrutiny. The other is Malta’s Financial Services Agency (MFSA) – which awarded Pilatus its license. Asked why they let Pilatus stay in business, the MFSA said last week it did not have enough evidence to act against the bank. “Any action at law needs to be based on evidence,” said a spokesman.

The FIAU said in a statement Pilatus had responded to many of its inspectors’ criticisms but the agency had kept the bank under review because inspectors were still concerned. “We disagree that the Pilatus case is an illustration of weak AML (anti-money laundering) controls in Malta,” it said. “One shouldn’t look at a single case to reach such generic conclusions.”

FILE PHOTO: Maltese investigative journalist Daphne Caruana Galizia poses outside the Libyan Embassy in Balzan, Malta April 6, 2011. REUTERS/Darrin Zammit Lupi/File Photo

POLITICS

Pilatus’ founder Ali Sadr is the son of a rich Iranian businessman. He submitted documents for a Maltese banking license in February 2013. The MFSA said it “followed the regular authorization process,” including commissioning an independent third-party intelligence report because of “Iran’s risk profile.” Pilatus was granted a license in January 2014 and started operations soon afterwards.

Muscat said in a statement: “The licensing process for Pilatus Bank is entirely independent from the Government, with extensive due diligence taking place, and I understand that the license process was not ‘sped up’ in any way for Pilatus Bank.”

Muscat said he was not aware of the details of whose accounts were held by Pilatus Bank, “nor as Prime Minister would I be expected to know who holds accounts in any banks in Malta or elsewhere.”

In June 2015, Muscat and Schembri attended Sadr’s wedding in Florence, Italy. Muscat said the event was unexceptional and that he coupled it with a short personal break. “I know Mr Sadr, as I would know any person who invests in Malta and meet a number of times,” he said. Schembri told Maltese media he was also at the wedding, but did not respond to questions from Reuters about it.

Corporate and land registry documents in Malta, France and Dubai show that the Azeri-owned companies with accounts at Pilatus Bank spent millions of euros buying properties in Dubai, and three French factories that make luxury household linens and porcelain. Some of the bank’s corporate customers were Maltese companies that never filed financial accounts, existing only for a few months before being dissolved by their directors, the Maltese corporate register shows.

In March 2016, the MFSA and FIAU carried out an inspection of Pilatus. The inspection report said the bank had not classified as PEPs all the clients who should have been, that important documents had been left unsigned, and that sometimes no documentation existed to prove where deposits had come from.

The report also said that in most cases the inspectors examined, Pilatus’ clients had said they planned to invest in real estate but “proof of actual purchase was rarely, if ever, obtained.” It was not clear which clients these referred to, but the inspectors said Pilatus had lent the clients money for the investments.

In addition, the report said, Pilatus’ head of private banking was “on familiar terms” with the bank’s two main clients in Azerbaijan – it did not name any of those involved. The report said the employee in charge of vetting money-laundering risks was only able to explain complex, large transactions to inspectors after she had had “private discussions” with her superior, and that she had told inspectors that “the culture of these clients is not one where loan agreements are drawn up in writing but one where agreements are reached through a ‘handshake.’” This “clearly reveals that the bank is being exposed to very high risks of Money Laundering and Funding of Terrorism without basic mitigating measures being applied,” the report said.

Pilatus contested the findings and hired external auditors to address the issues. It did not respond to requests for comment and the employees concerned could not be reached. The FIAU has not disputed the authenticity of the leaked documents.

LOAN REPAYMENT

In April 2016, the month after the FIAU inspected Pilatus, it wrote another memo expressing concerns about the bank’s vigilance. It sent a copy to Malta’s police.

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The report warned of two “suspicious” 50,000 euro payments made to Muscat’s chief-of-staff Schembri in his Pilatus account.

The cash came from another account at the bank, in the name of an offshore company from the British Virgin Islands whose owner, the report stated, was an accountant and agent for Malta’s “Individual Investor Programme,” the government’s official scheme to raise money by selling passports.

The FIAU said the money came from commissions paid by three Russian applicants for Maltese citizenship. “A large portion of the funds received” from the Russians was “then transferred to the personal account of Mr Keith Allen Schembri, the Chief of Staff within the Office of the Prime Minister, an office that has been actively involved in the promotion of the scheme in several countries.” That, the FIAU said, would give rise to a “reasonable suspicion of money laundering;” the payments could be the “proceeds of crime.”

Both Schembri and the accountant involved, Brian Tonna, have since stated publicly the transfer was a repayment of a personal loan to Tonna from Schembri.

In its report, the FIAU, which examined documentary evidence for the payments but never interviewed Tonna or Schembri, questioned why a personal loan given interest-free “required such an elaborate and costly set up” involving a company in the British Virgin Islands. The FIAU also suggested the loan agreement might have been back-dated “in order to justify” the transfers.

Tonna declined to comment, as did two of his Russian clients. The third client could not be reached.

The police took no action. Asked why, Lawrence Cutajar, the Malta police commissioner, told a delegation from the European Parliament in 2017 that police had never “formally” received the FIAU’s report, although they had received several reports from the FIAU and registered them under the same file number. Malta police did not respond to questions from Reuters.

The payments to Schembri are now under investigation by a magistrate, after a complaint was filed in 2017 by an opposition politician.

Schembri told Reuters in a statement he could not comment in detail on the issue as it was part of an inquiry but there had been “no wrongdoing in my loan to Brian Tonna.” He added that the Maltese government had a policy of not commenting on “leaked or allegedly leaked documents, false or true,” and that it “does not have any access or influence over the Financial Intelligence Analysis Unit.”

Muscat, who came in for criticism from several members of the European Parliament for not suspending his chief-of-staff during this investigation, said he would not prejudge any inquiries: “If any wrongdoing is found the persons involved should step down immediately.”

A CHANGE OF VIEW

In September 2016, Malta’s financial inspectors returned to Pilatus. Their follow-up report was not made available to the media, but Pilatus told the European Parliament in January that the documentation related to the PEPs that had been missing on the previous visit was now to hand.

Pilatus did not elaborate, but said that the FIAU had told the bank that its shortcomings “no longer subsist.”

The FIAU declined to explain to reporters this month what this meant. It said the reply “would be rather detailed and technical,” citing client confidentiality and the legal scrutiny it is under at the EBA. “However, it suffices to say that following the follow-up onsite examination, the FIAU ... did not deem that there were sufficient grounds for the imposition of a sanction.”

Pilatus’ founder was arrested on March 19 by U.S. authorities who allege he “funneled approximately $115 million through the United States on behalf of Iranian entities and individuals in flagrant violation of U.S. sanctions” from 2006 until at least May 2014. That indictment makes no reference to Pilatus or Azerbaijan.

Two days after Sadr’s arrest, Maltese authorities stripped him of any role at Pilatus and froze its operations. Sadr, who pleaded not guilty to the charges, is in custody in the United States. The Federal Bureau of Investigation (FBI) and federal prosecutors did not respond to questions asking if any activities at Pilatus were under investigation by the United States or if the bank was involved in any aspect of the U.S. case against Sadr.

Reporting by Francesco Guarascio in Brussels and Stephen Grey in Valletta. This story is part of the Daphne Project, coordinated by Forbidden Stories, a Paris-based group that continues the work of journalists silenced through murder or imprisonment; ; Edited by Sara Ledwith and Richard Woods

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