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When banking supervision fails

Banking is one of the most intensively regulated industries. Stringent regulations are meant to prevent rogues posing as financial entrepreneurs from exploiting customers, shareholders, taxpayers and governments by using the banking system to hide their financial crimes.

Last week, Seyed Ali Sadr Hasheminejad, the chairman and owner of the Maltese-registered Pilatus Bank, was arrested in the US on charges that he tried to evade US sanctions and funnel more than $115 million paid under a Venezuelan construction contract through the US financial system.

How could it be that Pilatus Bank was granted a licence to operate in Malta in January 2014 when its chairman was at that time being investigated for money laundering by US authorities?

The bank licensing process is not merely a box-ticking exercise by the Malta Financial Services Authority. Nor is it, presumably, based on regulators communicating by nods and winks with influential people in politics or business. The MFSA must have done due diligence to determine how an entrepreneur in his early 30s was proposing to set up a bank. What real banking experience did Hasheminejad have apart from the fact that he came from a wealthy family of Iranian bankers? What was the source of his funds? Today, even the opening of a bank account requires verification that the money is from a legitimate source, let alone the licensing of a bank. Why did the MFSA fail to adequately investigate Hasheminejad’s international activities at the time?

Later, in April 2017, Pilatus was at the centre of a highly charged political controversy following revelations by murdered journalist Daphne Caruana Galizia and Russian whistleblower Maria Efimova, and from leaked Financial Intelligence Analysis Unit reports, pointing to illicit money flows through the bank benefiting politically exposed persons. Still, the MFSA defended its decision to grant the licence in 2014 as well as an additional licence to provide investment services in 2015.

To operate, Pilatus Bank needed to have correspondent banking relations with US-based banks through accounts held with one or more of the major Maltese banks. The US clearing system is exceptionally tough on screening US dollar transactions coming from foreign banks. It is relevant to ask whether any of the major banks in Malta had problems with clearing Pilatus transactions with US banks.

The European Central Bank (ECB) and the European Banking Authority (EBA) have strict directives on good governance in European banks. While relying on local regulators to ensure that these directives are implemented, the EBA has the authority to investigate if it is not satisfied with the local regulatory function. The EBA announced last February that it had opened a ‘preliminary inquiry’ into the supervision of Pilatus Bank. Presumably, this inquiry will now be upgraded to a higher level.

The MFSA has now taken limited action following Ali Sadr’s arrest for alleged crimes that could earn him 125 years in prison. Among its decisions, a retired US financial regulator has been appointed to take charge of the bank’s assets, an inevitable measure to protect the interests of bona fide clients.

Today we reveal that a few months ago the MFSA called in an international company to investigate the bank’s servers and single out suspicious transactions.  But is the MFSA closing the stable door after the horse has bolted?

It is now imperative to identify who was responsible for the blatant failure of effective supervision. Who was the very senior official of the MFSA who gave the all-clear for Hasheminejad to operate in Malta?

And to what extent did political influence, if at all, facilitate the bank’s acquisition of its licence to operate?

As is well known, the Prime Minister’s chief of staff, Keith Schembri, held an account at Pilatus and was suspected by the FIAU of using it to receive passport cash-related kickbacks and for money laundering purposes. The FIAU made it a point to highlight the familiarity between Schembri and Hasheminejad and the former’s personal interest in the licensing process.

And Schembri works for the Prime Minister, so the question follows naturally: did the PM himself have any influence? What did he and his chief of staff know?

The Maltese financial services industry has suffered enormous harm in the last few years because of alleged abuse by a few rogue financial operators who have used Malta’s financial services network to launder money earned from illegal economic activities. It is long overdue for an independent investigation to be appointed to determine how and why local banking supervision has at times failed so miserably. Such an inquiry would need to be conducted by competent banking and forensic accounting experts and its conclusions made public.

This would send the message that the government is truly serious about restoring the financial sector’s damaged reputation.

But don’t hold your breath.

This is a Times of Malta print editorial

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