Malta accused of failing to enforce EU money-laundering rules

Damning report criticises handling of private bank now embroiled in criminal probe

US prosecutors alleged that it was set up in 2014 using the criminal proceeds of an Iran sanctions-busting scheme

Europe’s top banking watchdog has accused Malta of “systematic” failings in its enforcement of EU anti-money laundering rules, in a damning report into the country’s handling of a private bank now embroiled in an international criminal probe.

The European Banking Authority’s investigation found that a Maltese government agency failed to act on evidence of “serious breaches” at Pilatus Bank. The bank’s Iranian-born owner and former chairman has since been charged in the US with organising a scheme to evade sanctions against Iran by illegally funnelling more than $115m from Venezuela to Iraniancontrolled companies.

The criticisms will heighten pressure on the Maltese government to explain why the bank was not more carefully scrutinised.

Pilatus Bank was at the centre of murdered journalist Daphne Caruana Galizia’s reporting on allegations of government corruption and money-laundering in the months before her death in a car bombing in October 2017.

The EBA report will also feed into broader concerns in Brussels that some EU countries have become gateways for money-laundering operations. The EU has endured a string of financial scandals in the past year, including allegations that billions of dollars of suspicious transactions passed through the Estonian branch of Danske Bank and US accusations that a now closed Latvian bank helped to finance North Korea’s nuclear programme.

Vera Jourova, the EU’s justice commissioner, said that the EBA’s findings were “troubling” and that Brussels was reflecting on how to ensure “a stronger common EU approach to anti-money laundering supervision and compliance”.

US prosecutors have alleged that Pilatus was set up in 2014 using the criminal proceeds of the sanctionsbusting scheme. The bank, which has since been put in the hands of regulators with its activities frozen, is understood to have had some 130 clients, including Iranians and companies owned by Azerbaijani nationals with links to the Azerbaijan regime.

The EBA said that its findings “point to general and systematic shortcomings” in the work of Malta’s Financial Intelligence Analysis Unit (FIAU), an independent government agency tasked with combating moneylaundering and terrorist financing.

The EU watchdog is particularly critical of a decision by the agency to close an investigation into Pilatus “without imposing any sanction or considering any other supervisory measure”. It adds that the FIAU “failed to ensure” that the bank “put in place adequate and appropriate …. policies and procedures”.

The report says that the FIAU, in a letter to the EU watchdog on 28 June denied “the existence of breach of Union law.” The letter added “that the EBA’s conclusion is based on a single case” that had since been addressed.

The EBA said that the FIAU closed its investigation into Pilatus in September 2016 despite having written to the bank in May to say that it had serious concerns about possible violations of anti-money laundering rules. The agency’s findings were later made public by Caruana Galizia.

After the May letter, Pilatus Bank hired a local law firm as well as KPMG, which had originally helped it obtain its banking licence, to conduct an audit of the bank’s clients and procedures. That review gave Pilatus a clean bill of health.

The EBA said that the main development between May and September was a second on-site visit by the FIAU where the bank supplied “previously missing customer due diligence documentation”. But the EU watchdog said that this could not have been enough to allay the full range of concerns set out in the May letter, which stretched far beyond missing paperwork to include a broader lack of appropriate policies, controls and procedures for preventing illegal activity.

“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” on the bank, the EBA said.

The then head of the FIAU, Manfred Galdes, resigned shortly before the revised letter to Pilatus was sent in September. The EBA said that the shortcomings in the agency’s work were not limited to the case of Pilatus. It said that, although the FIAU has since drawn up an action plan for overhauling its working methods “these measures are not enough to be satisfied that the deficiencies that led to a breach of Union law have been resolved”.

The EBA findings mean that the FIAU has 10 working days to explain how it plans to improve its operations and ensure compliance with EU law. Should it not do so, the EBA ultimately has the power to issue direct instructions to Maltese banks to comply with EU rules.

“I expect Malta to comply,” Jourova said. “This is not only important for Malta but also for the whole EU, as we cannot afford weak links in our fight against money-laundering.”

The FIAU said in a statement that it was “disappointed” with the EBA’s conclusions and that it had “serious reservations on the process adopted by the EBA in carrying out its preliminary enquiry and the subsequent breach of Union law investigation”. The agency said it would “be responding to the EBA in due course”.