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FIAU: who answers for failures?

When the government, regulators and the regulated are linked by an invisible umbilical cord, systemic governance failures become inevitable.

The clinical recommendations made by the European Banking Authority, following their Breach of Union Law investigation linked to the Financial Intelligence Analysis Unit’s supervision of the notorious Pilatus Bank, reveal gross weaknesses in the financial ser­vices regulatory framework.

As was to be expected, the international financial media reported the findings of the EBA prominently, thereby once again putting the spotlight on Malta’s claim to be a reputable financial services centre. The Financial Times titled an article ‘Malta accused of failing to enforce EU money-laundering rules’.

Vera Jourova, the EU’s Justice Commissioner, said that the EBA’s findings were “troubling”. US prosecutors who have alleged that Pilatus was set up in 2014 using the criminal proceeds of the sanctions-busting scheme will continue to embarrass the Maltese government and regulators, much to the detriment of the financial services industry.

In its report, the EBA concluded that the FIAU had “general and systematic shortcomings” and that the Compliance Monitoring Committee, the decision-making body of FIAU, failed to explain why they decided to close the investigations on the operations of Pilatus Bank without further supervisory measures or sanctions. Closing one eye, and possibly two, when there are clear indications of abuse, is not a quality that regulators should treasure.

The response of the FIAU to the EBA report borders on the arrogant. In a statement, they said they were “disappointed” with the EBA’s conclusions. They also said they had “serious reservations on the process” adopted by the EBA in carrying out its preliminary enquiry and the subsequent Breach of Union Law investigation.

One of the conclusions of the report is that “although the preliminary enquiry was initiated to address the concerns raised by the FIAU’s supervision of Pilatus Bank, the findings from the EBA’s investigation reveal a general practice of the FIAU at the time of the case at issue and not only, as argued by the FIAU, a failure of this particular case”. Put simply, the FIAU system of controls was not fit for purpose.

While the EBA’s report is very good at identifying the weaknesses they saw at FIAU, it was not the agency’s brief to investigate why the control systems of the agency were so intrinsically weak. Those familiar with the way the regulators interact with the regulated and with their political masters will undoubtedly have many questions to ask.

Are the FIAU’s control systems weak because of incompetence, lack of re­sources, or lack of experience of the senior executives and the Compliance Moni­toring Committee of the agency? If this is the case, on what merits were these executives and supervisors chosen?

If the executives are indeed qualified and experienced, could it be that they suffered from ‘fear of retribution’ if they insisted on acting independently of the desires of politically exposed persons who may have had an interest in promoting the operations of institutions like Pilatus Bank?

Who are the local and foreign politically exposed persons who had accounts with Pilatus Bank? The top brass of regu­latory agencies needs to have a tough skin to resist the nudging of politicians and should seek other career openings if they want to lead a peaceful life.

The unorthodox practices of Pilatus Bank were made public by murdered journalist Daphne Caruana Galizia. The Financial Times reports that “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 Bank a clean bill of health”.

These systemic control failures undermine the effectiveness of the checks and balances that should be the foundation of any financial services centre. They call for a root and branch reform of this sector.

Repeating the mantra that all our political parties should reach consensus to safeguard the financial services industry may prevent a much needed honest discussion on the reforms that will define the way regulators like the Malta Financial Services Authority and the FIAU should operate in order to be genuinely independent of the political administration.

So far, no one has assumed administrative or political responsibility for the failures identified in the EBA’s damning report. Finance Minister Edward Scicluna insists that he never interfered with the regulatory agencies that report to him. But surely politicians are ultimately politically responsible for gross control failures of regulators that affect the reputation of the country.

Moneyval will now be investigating the MFSA’s role in the Pilatus Bank debacle. The IMF is likely to follow with its investigations. The government can no longer pretend that the country is in a business-as-usual mode when the collapse of public governance standards have become so obvious.

An independent accountability audit of the political and regulatory protagonists in the Pilatus Bank saga is long overdue.

This is a Times of Malta print editorial

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