Schembri’s deliberately tangled mess

The compilation of evidence in the case of Keith Schembri reveals just how complicated money laundering is, and how poorly equipped the authorities in Malta are to deal with it.

Even careful readers must be confused by the testimony heard so far. There are so many company names to keep straight, registered in tiny countries at the fringes of the map.

Keith Schembri alone controlled Colson Services Ltd in the British Virgin Islands, Malmos Ltd in Gibraltar, Kasco Engineering in Malta, and more. The initial freeze of his assets listed 91 people and companies. His bank accounts were all over the place, too, from Switzerland and Dubai to BOV and Pilatus in Malta.

And to make matters more confusing, the monetary amounts of suspicious transactions might not necessarily match the amounts of suspected bribes. It’d be easier to trace that €100,000 if the same number moved from place to place in the global financial system.

This is intentional. It’s how money laundering works.

The goal is to disguise the source of illicit funds and to get those funds into the legitimate financial system so the person can use them. What good is hidden money that you can’t spend?

For the sake of simplicity, you can break money laundering down into a three step process: Placement, Layering and Integration.

Placement happens when you insert dirty money into the financial system. You have to get it into a bank account before you can move it, but you can’t just walk up to a bank with elastic-wrapped bundles of cash. The bank will want to know the source of those funds, and they’ll expect you to prove it.

It’s a lot easier to deposit dirty money when you have banks and compliance officers who are willing to look the other way — or who are willing to fake backdated documents to make those funds look legitimate.

Step two is Layering. You can think of it as muddying the waters. This is where the launderer tries to put some distance between the source of those funds and their ultimate destination.

It wouldn’t look good if the cash you’re spending could be traced back to 17 Black, for example. Especially not if you were involved in approving a massive government project that benefitted 17 Black’s secret owner.

Layering involves dispersing this money into multiple accounts held by multiple banks. Wire transfers are an obvious way to do it, but more creative methods include passing along say, the ownership of shares or bonds or even high value art.

Professional intermediaries like Nexia BT and corporations or trusts with nominee directors are used to hide the ultimate beneficial owner of those funds as they move around.

You can imagine how many wire transfers circle the globe each day. Thresholds are set that require banks to report transfers above a certain amount — typically $10,000 —and to document the source of funds, but even the world’s largest financial institutions have limited resources. Dodgers attempt to fly below the radar by breaking transactions into smaller wires. Doing this to avoid the threshold is illegal. It’s called ‘structuring’.

Layering is the most complicated phase of the money laundering game, as you can see if you’re following the compilation of evidence against Keith Schembri.

And then we come to the final step.

That freshly laundered money has been ‘cleaned’ through a blizzard of movements and companies designed to throw prosecutors off track — or to make them give up in frustration. You’ll recall former FIAU Head Manfred Galdes told the public inquiry that his unit was severely under-resourced.  I think you know why.

Integration is the stage where laundered funds are put back into the normal economy by making it look like they came from legitimate sources. Two popular methods for this are the use of falsified invoices and property deals — especially properties purchased through shell companies.

Brian Tonna pulled the false invoicing trick when he issued double invoices to three Russian customers of Malta’s cash-for-passports scheme. The invoices were sent from approved passport agent BT International and from a British Virgin Islands company called Willerby Trade — the name is misleading because Willerby did no trading. Funds were then passed from Willerby to Keith Schembri’s account in Pilatus Bank.

It looks an awful lot like Schembri got kickbacks from those passport sales, but it’s difficult for prosecutors to prove it decisively. That’s how money laundering works.

You’re going to become a lot more familiar with these terms in the coming years. The courts have only scratched the surface. Electrogas, Vitals Global Healthcare, the American University, and more are still looming on the horizon.

But the problem is larger than Keith Schembri, Brian Tonna and their many associates. Malta’s lax financial regulation has long been a magnet for people living beyond their apparent means.

One new strategy used for smoking them out is called an Unexplained Wealth Order (UWO) – they compel the target of an investigation to reveal their source of funds. If they can’t or won’t, then the authorities have the ability to seize those assets.

The car bombing Degiorgio brothers might have been caught years ago if Maltese prosecutors had access to UWOs. The alleged hitmen and career criminals were living conspicuous lifestyles well beyond their means. Registered as unemployed and on social benefits, they owned luxury cars and boats, vacationed in Monte Carlo, and sent their children to expensive private schools.

Despite the obvious red flags, they were only charged with money laundering when stories about their lifestyle began circulating a year after they were arrested for Daphne Caruana Galizia’s murder.

An UWO would have flagged Edward Caruana, too. Evarist Bartolo’s former canvasser was gleefully skimming funds from Foundation for Tomorrow’s schools, hand-delivering cheques to Gozo while building a block of flats no one believed he could afford.

It’s a powerful tool, but it’s no wonder Edward Zammit Lewis refused to include it in Malta’s new Proceeds of Crime law. An awful lot of sitting politicians would have been asked for explanations, starting with Joseph Muscat.

The disgraced former prime minister was living beyond his declared means for years.

Muscat’s magical unchanging bank balance was a financial cornucopia that coughed out cash to support his family’s lavish lifestyle without ever running dry. First class flights, expensive vacations, private school fees and frantic 70-hour trips to Dubai. It’s difficult to explain on a prime ministerial salary of €55,978 per year plus €6,769 in allowances.

Konrad Mizzi would have been flagged, too, when his Panama company and New Zealand trust were exposed — and not just because stashing secret funds abroad is dodgy behaviour for a government minister. Companies, onshore or offshore, require annual licensing and maintenance fees, and Trusts are even more expensive.

According to a financial planner I spoke to, a Trust only makes sense for someone with wealth in excess of $500,000 to preserve. Mizzi’s officially declared assets didn’t come close to this, so why would he need it?

And what of Prime Minister Robert Abela? How did he accumulate three properties and a bank balance of €500,000, with no loans, mortgages or declared liabilities? How did he pay for the boat he likes to sit on in Sicily?

There are a lot of questions about money in Malta that no one is eager to answer.

Extending the law to include UWOs probably wouldn’t have smoked out Schembri or Tonna. They were much craftier when it came to hiding illicit funds. But it would go a long way towards reigning in the run of the mill corruption that has plagued the country since Joseph Muscat came to power.

Unfortunately, Malta won’t pass such a law because those connected to government have too much to lose.

                           
                               
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Henry s Pace
Henry s Pace
4 months ago

Exactly , this what a highly professional Accountant once said on a TV debate ‘The way these money laundering criminals do so that is hard to trace.

Godfrey Leone Ganado
Godfrey Leone Ganado
4 months ago

Excellent educational article on the basics and complexities of moneylaundering. Unfortunately our judiciary is still at kindergarten level on this topic, and they will never achieve a reasonable level, something that can only be achieved through a number of years working in a financial services environment, particularly forensic accounting.
There are hardly any lawyers who can read a set of financial statements, let alone analyse them and eventually give judgement in a court of law.
This can only be achieved through the creation of a seperate judiciary reserved for financially competent judges, built on an appropriate University degree and proven related professional practice.
There are many points raised which require seperate articles. One of these is the forgery and backdating of documents, which I must say were, in my opinion, conveniently mismanaged in the Egrant Inquiry.
All I can emphasise on, in a comment to an article which has to be read many times over, is the accusation against the Nexia partners, for forgery of documents and backdating of documents even up to four years.
This is the tool resorted to by Nexia BT, and presumably assisted by some lawyer or lawyers, and in co-operation with Mossack Fonseca, specifically Jacqueline Alexander and Luis Quiel. In fact, the forged signature of the Declarations of Trust of Egrant, presented in the Egrant Inquiry, were established by court appointed foreign experts, as having been lifted/traced, from a resolution of WILLERBY TRADE held in the offices of Nexia BT.
I ask: why has the EGRANT INQUIRY, not been reopened? Why is the judiciary/AG/Police so determined to bury this inquiry which Joseph Muscat keeps defining as the biggest political lie against his family, and attributing the forgery to Simon Busuttil, whose pizza boxes contained the best ingredients to nourish a whole prison?

Rachel Williams
Rachel Williams
4 months ago

Another thing that is not being mentioned are companies close to people within the present administration-or who resigned-who are sprouting over the place with high end shops that.

saviour mamo
saviour mamo
4 months ago

I hope that Moneyval knows what is going on in Malta and takes the appropriate action against the government. If it turns a blind eye and clears the government , Moneyval will be complicit in money laundering.

Albert Beliard
Albert Beliard
4 months ago

To bust a score, you need to follow the money and the lies.

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