Malta enabled a money laundering machine

The failings of due diligence in every possible sphere at Pilatus Bank were deliberate, not accidental, as was the decision of regulators to look away.

It’s difficult to understand just how flagrant the abuse was if you’ve never tried to open a bank account abroad.

Proving the source of the funds you want to deposit is the most onerous challenge for the honest customer.

If you’re an employee, you’ll be asked to provide copies of pay stubs, previous income tax declarations (both as proof of income and proof you paid taxes), and if self-employed, proof that your money comes from the services you say you’re providing.

If you own your own business, you’ll have to include your official business registration, proof of ownership of that business, and proof of how that business earns money.

All of these things must be notarized, of course. And if the bank decides to accept you as a customer, you can expect to be hounded for updated copies every couple of years.

Oh, and don’t imagine you’ll be able to just transfer funds on a whim once you finally have an account, either. You’ll be expected to provide documentation showing proof of the source of funds for every deposit.

What did Pilatus ask its new customers for?

According to the FIAU, “The bank relied heavily on generic information provided by its customers”, and “it did not substantiate this with more detailed information and documentary evidence.”

In 15 files referenced in the FIAU’s report, the Source of Wealth and Source of Funds were dismissed with a single phrase “Source of wealth is same as source of funds”. That’s exactly what was scribbled on Konrad Mizzi’s declaration form when he opened his Panama company Hearnville Inc, too.

No one at Pilatus dug any deeper, or verified the links between the customer and the businesses they claimed to earn money from — not even when the amounts listed were in the tens of millions of euros.

“In other instances, the bank obtained CVs of customers”. Yes, CVs, just like the one you whipped up on a laptop to get your first job. No normal bank would accept such a document as proof of anything.

They also apparently relied on coffee. “The committee also observed that the bank was heavily relying on visits bank officials carried out at the customer’s premises, this to build an understanding of the customer’s operations and risk profile.” Did that include story time at Castille?

Pilatus didn’t dig any deeper because they didn’t want to know.

Once a customer account was opened, the cash flow turned into a torrent. The bank allowed money to pass through accounts without any scrutiny or documentation in 86% of the customer files reviewed by the FIAU.

Those transactions that were documented used dodgy ‘loan agreements’ and invoices between customers. We saw how well that strategy worked for Keith Schembri and Brian Tonna in their recent money laundering trial.

And when customers exceeded the account activity they had anticipated on their account opening form — a massive red flag that triggers immediate demands for documentation — no one at the bank even blinked an eye.

In fact, Pilatus failed to update Know Your Customer (KYC) files for 96.5% of its clients. They didn’t even bother to fill their files with enough documents to pass the most cursory inspection.

And they did get inspected, you know.

The FIAU and MFSA paid a compliance visit to Pilatus in March 2016, when it had become impossible to ignore all those stories about politically exposed persons from Azerbaijan moving millions through the bank. And they noticed “systemic and governance issues”, including unsound anti-money laundering policies.

Pilatus wasn’t happy to hear this, of course, and filed a complaint backed by reports from KPMG.

FIAU officials returned in August for a follow-up examination, and lo and behold, everything was A-OK. Nothing to see here. The shortcomings they noticed a few months earlier “no longer subsist”.

That failure to take action earned them a stern scolding from the European Banking Authority (EBA) two years later when it concluded that Malta’s FIAU had breached a directive on the prevention of money laundering and terrorist financing by failing to adequately supervise Pilatus, and for closing the case without imposing sanctions when deficiencies were found.

The FIAU said it was ‘disappointed’ with the authority’s conclusions but would continue to cooperate with the EBA — as though it had a choice.

And now here we are more than three years later, talking about the very same issues that were flagged in 2016.

This latest Notice published by the FIAU contains nine pages of examples detailing not just failures to dot a few i’s and cross a few t’s. It seems Pilatus didn’t follow any rules at all, and the amounts of money it moved are shocking.

You’ll recall that it didn’t have its own direct links to the US banking system. No, Pilatus relied on Bank of Valletta’s correspondent banking relationships to shove this dirty money into the global financial system.

And they used the fact that they’d been duly licensed in Malta to obtain a freedom of services passport to open a branch in London.

It isn’t surprising that BOV lost all US dollar correspondent banking relationships, and that Malta was greylisted by the FATF. The only surprise is that it didn’t happen sooner.

But I suppose we shouldn’t be too hard on Malta’s little money laundry for not doing any due diligence on its customers. After all, Malta didn’t apply much of any diligence to Ali Sadr when he showed up with big dreams of starting his own bank.

The 34-year-old Iranian with no prior banking experience applied for a licence in October 2013, and it was granted three months later. No one seemed to inquire too deeply into where his startup funding came from.

Malta didn’t even act against Pilatus when its mysterious owner was arrested in the US in March 2018 and charged with a laundry list of financial crimes. Instead, they chose to ‘wait for the outcome of the inquiry’.

But Europe wasn’t fooled by the excuse that brought the likes of Konrad Mizzi, Keith Schembri, and so many others “serenity” and years of peaceful nights, content in the knowledge the inquiry they were waiting for would never have an outcome, by design.

After waiting in vain for Malta to take action, the European Central Bank shut the Pilatus money laundry down by withdrawing its licence in November 2018.

And now here we are three years later.

The government is desperate to do something to ease the pressure and get off the grey list because they know the consequences — severe financial hardship for average citizens — will will start hitting home soon after Labour’s likely reelection.

Robert Abela has got himself into an unfortunate corner, and he’s forked no matter which way he turns.

The prime minister who used to be Joseph Muscat’s lawyer can’t take real action to clean up the rot because he and his colleagues are involved in it. But if he doesn’t clean up the rot, Malta will stay on the grey list, other walls will begin to close in, and the resultant economic downturn will hurt enough average people that he risks the sort of social unrest that drove his smug predecessor from power.

It isn’t a very good position to be in. Not with the entire world watching Malta thanks to the brutal public execution of the journalist who first started exposing this rot.

The government is hoping a €4,975,000 euro fine and criminal charges against the bank’s former Money Laundering Reporting Officer will be enough to buy them some relief.

But fining a bank that’s been closed for three years, prosecuting an employee, and taking Keith Schembri and Brian Tonna to court for financial shenanigans that happened before the 2013 election (and that are minor compared to the rest of the allegations stacked up against them) isn’t fooling anyone.

It’s a lot like touching up a crack in the windscreen when the engine’s on fire and all four wheels have fallen off.

The boulder that’s headed for Malta is still bounding down the hill, and it’s picking up speed.

The only way to stop those consequences from final impact is to take actual steps against the source of impunity, starting with the octopus at the top.

I wouldn’t want to be in Robert Abela’s shoes.