Correspondence sent to the European Central Bank in a bid to shut down Pilatus Bank details the “mess” of poor liquidity, questionable loans, and a concentration of depositors, that was discovered after the indictment of its Iranian owner, the Times of Malta has learnt.
The ECB is the only authority that can actually withdraw a credit institution’s licence. It will now have to initiate a lengthy process which includes allowing the bank to weigh in on the charges against it.
Sources within the MFSA told the Times of Malta how the extraordinary state of affairs after Pilatus owner Ali Sadr Hasheminejad was arrested on US money laundering charges, had “severely impacted the bank’s ability to be soundly and prudently managed”.
This had led to a “serious liquidity problem”.
Read: Pilatus Bank operations compromised, MFSA says
The sources explained that banks are obliged to hold an amount of highly liquid assets that are equal to or greater than their net cash flow. The source said the MFSA had found that the bank was only at around 60 per cent liquidity, which constituted a breach of its legal requirements.
The problem had been underscored in a letter written to the MFSA by the competent person put in charge of Pilatus after the arrest of Mr Hasheminejad.
The source said that US financial regulator Lawrence Connell's letter had said that “Pilatus Bank’s current liquidity is critical”. Mr Connell went on to say: “There can be no credible plan to restore the bank’s liquidity.”
The MFSA told the European authorities that the bank’s deteriorating financial position followed a series of media reports in 2017 and 2018 which had uncovered major allegations of money laundering at the bank.
The correspondence also raises concerns about how the bank’s loan portfolio and the total deposits were concentrated on just a few clients. In fact, around half of the bank’s roughly €100 million in deposits come from just one client, according to the source.
Read: MFSA freezes Pilatus Bank's assets
The MFSA’s correspondence is also said to have detailed how, in the days after Mr Hasheminejad was arrested, the bank started receiving orders from depositors who were trying to get their hands on tens of millions of euros that they had entrusted to the bank.
Most of these requests came from people connected to the bank’s main client, the source said, declining to reveal the client’s identity.
The Times of Malta is informed that all these requests were turned down.
At the time of Mr Hasheminejad’s indictment in the US, Pilatus Bank had what are known as working relationships with 10 correspondent banks, including Malta’s Bank of Valletta and the Central Bank. Many of these relationships, the source said, had since deteriorated or been completely cut off.
The bank also had other problems, among them a number of “delinquent” loans, after the borrowers failed to honour the interest repayments.
One of these loans was to a company that was found to ultimately be owned by Mr Hasheminejad himself, while a similar company which had defaulted on loan repayments turned out to be owned by a relative of the chairman, according to the source.
Furthermore, the weakening of the quality of the bank’s loan book had quite seriously impacted its ability to attract new clients. And attracting a buyer to take over the company was “impossible, given the mess it’s in”.
So what’s next for Pilatus?
The Times of Malta is informed that a national resolution committee has already met and decided that insolvency proceedings are the best solution, given the bank’s position.
However, MFSA sources said this would not be considered before an ongoing forensic audit of the bank’s servers was concluded, to ensure that no “tainted funds” were returned to their owners.
Pilatus Bank has been at the centre of a political storm in Malta, with a whistleblower claiming that Michelle Muscat, the prime minister's wife was the ultimate beneficiary of funds in a secret Panama Company - Egrant - and some one million dollars had been deposited there from Azerbaijan via Pilatus Bank.
In the meantime, the beleaguered bank’s remaining directors are taking legal action against the MFSA in a bid to regain control. MFSA chief Joe Cuschieri on Saturday told the Times of Malta that the legal battle to stop the directors from regaining control was ongoing.
Weighing in on the MFSA’s decision to write to the European authorities, Mr Cuschieri said: “Making a request to the ECB for a withdrawal of a banking licence requires a great deal of effort in making sure that the MFSA has sound legal grounds but also that any actions (by the MFSA) are reasonable, proportionate and based on concrete evidence.”