As MEPs resoundingly endorse the PANA committee’s recommendation of an investigation into Pilatus Bank, Godfrey Leone Ganado analyses in-depth the multiple FIAU reports into the institution widely believed to be a money laundering engine for the Azerbaijan regime and Maltese political figures. He starts by providing extracts from relevant reports in order to pave the way for his cogent analysis and pertinent questions. It’s complicated so go along on this ride:
PILATUS BANK – FINANCIAL INTELLIGENCE ANALYSIS UNIT (FIAU) – FINAL REPORT
L-illum newspaper published under the title of ‘Esklussiva’, what it calls the conclusive documents of the FIAU regarding Pilatus Bank which indicate that, while there was an investigation by the FIAU on the Bank, there was not one fact which was incriminating.
The write up also states “l-attrazzjoni lejn il-bank kienet minħabba l-preżenza ta’ numru ta’ persuni esposti politikament (PEP’s) fosthom mill-Azerbajġan, u kif ukoll kontijiet ta’ nies fil-Gvern u allegazzjonijiet qatt ippruvati rigward il-mara tal-Prim Ministru”.
“The case is now closed”. – FIAU 2016
The authors of this article, Saviour Balzan and Liam Carter, introduce the subject by underlining the fact that it was Minister Tonio Fenech who before 2013 enticed the bank to come to Malta. However, it is enough to highlight that the bank was registered with the Registry of Companies on 6 December 2013 that is, nine months after the Labour Government took office, and the licence was issued on 3 January 2014, well into the Labour Government.
L-Illum did not actually publish the FIAU report, but just what it calls the conclusive documents, which include the opinion page of a compliance report compiled by KPMG, and Camilleri Preziosi Advocates.
Other extremely important documents for public consumption that are missing, are what is referred to as Appendix 1 in the FIAU letter dated 21 July 2016 which lists the customer files that were selected for the follow-up review, and Section 2.3 of the KPMG report which is referred to in its report conclusion as a detailed analysis of the findings for Source of Wealth and Source of Funds for each of the clients reviewed.
The published documents are made up of:
- a letter dated 8 June 2016 sent by the bank to Dr Manfred Galdes, as Director of the FIAU, regarding the compliance visit to Pilatus Bank plc made by the FIAU/MFSA between 15 March 2016 and 21 March 2016;
- a letter dated 21 July 2016 sent to the bank by Mr Alfred Zammit, Acting Director of the FIAU in reply to the above letter dated 8 June 2016;
- a letter dated 26 September 2016 sent to the bank by the Acting Director, reporting on the results of the follow-up on-site examination which was carried out between 8 August 2016 and 10 August 2016;
- the conclusion of a report by KPMG, to carry out an independent and rigorous compliance review of the Bank, and
- the conclusion of a report by Camilleri Preziosi, to carry out an independent and rigorous compliance review of the Bank.
Point 1 – letter dated 8 June 2016
The Bank states that its conduct and implementation of its Anti-Money Laundering and Counter Funding of Terrorism Policy and Procedures (“Policy and Procedures”) are greatly different from the findings, concerns, and conclusions voiced by the FIAU in their letter dated 17 May 2016, and that it immediately, upon the receipt of the FIAU Letter, engaged both KPMG and Camilleri Preziosi Advocates to independently and rigorously review the Bank on the same scope that the FIAU had inspected the Bank during the visit. The Bank further states that patently, both of their findings, accounts of the facts, and conclusions are starkly different from the one presented in the letter.
Point 2 – letter dated 21 July 2016
The Acting Director, Mr Alfred Zammit, writes that, at the outset the FIAU refutes the allegations made by Pilatus Bank Limited that the FIAU has not understood the business model of the Bank and that officials did not ask for all the relevant information at the time of the on-site examination.
Mr Zammit then states that, nonetheless, following a thorough review of the salient information provided in your letter, the Compliance Monitoring Committee has determined that due to a possible misunderstanding between the officials carrying out the examination and the Bank not all the information requested had been provided by the Bank during the on-site examination.
“Given the circumstances and in order for the FIAU to ascertain that all the relevant documentation and information had been obtained by the bank, the FIAU has therefore decided to carry out a follow-up on-site examination to review such documentation prior to reaching its final determinations. In this respect, please find attached (Appendix 1) the list of customer files that will be reviewed”.
Point 3 – letter dated 26 September 2016
The Acting Director wrote that, “in line with the FIAU’s internal procedures, the findings of the follow-up on-site examination were brought to the attention of the Committee. During deliberations the Committee was informed that during the follow-up visit, a significant amount of information and documentation which had not been made available during the March examination was provided to the FIAU and MFSA officers. Upon review of the information and documentation provided, the Committee had determined that the shortcomings that had been identified and communicated in our letter of 17 May 2016, no longer subsist.
“The FIAU confirms that the issues raised in our letter of the 17 May 2016 are now closed. However, the FIAU has taken note of the fact that the Bank only provided information and documentation during the follow-up examination and is disappointed and concerned at this course of action”.
Point 4 – conclusion of follow-up independent review by KPMG
“In relation to PEP’s (Politically Exposed Persons), the PMLTR (Prevention of Money Laundering and Funding of Terrorism Regulations and the Implementing Procedures require the following are carried out:
- Obtain senior management approval;
- Take adequate measures to establish the source of wealth and funds involved, and
- Conduct enhanced ongoing monitoring. Such monitoring should be conducted more regularly and more thoroughly.
“Sub point a – the bank has adopted a policy that a member of senior management must meet physically with the UBO’s before that individual or one of their connected entities is accepted as a client.
“From our reviews of the selected client files, and review of the KYC (Know Your Client) forms for such clients, it appears that all the clients were met physically by the CEO (Chief Executive Officer) himself, in his capacity as Head of Private Banking. We have sighted the travel log of the CEO and noted that he has travelled on average once a month during 2015 to jurisdictions such as London, Baku, and Dubai. A face to face meeting is considered to be one of the best ways of reducing risk in the context of money laundering.
“Sub point b – the second requirement is for adequate measures to be taken to establish the source of wealth and source of funds. The Bank has where possible, obtained audited financial statements as proof of the source of wealth. All clients had substantiated sources of wealth except for one case considered to be not material.
“Similarly, the type of transactions passing through the accounts were, for some of the clients reviewed as part of this engagement, in line with the business rationale captured at account opening stage. Where there was insufficient documentary evidence of the inflows and outflows senior management could provide an explanation.
“A detailed analysis of the findings for the Source of wealth and Source of Funds for each of the clients reviewed is to be found in Section 2.3 of this Report.
“Sub point c – With regards to ongoing monitoring the Bank has subjected the identified PEP’s to frequent monitoring, typically at eight monthly intervals which is considerably shorter than the 18-month recommendation for high risk clients in the Banking sector Guidance.
“Point 5 – conclusion of follow-up independent review by Camilleri Preziosi
“We conclude that we have found no evidence to suggest that the Bank has not complied with its obligations under Regulation 11(6) of the Prevention of Money Laundering and Counter Funding of Terrorism and the relevant sections of the Internal Procedures. Indeed, our review reveals that the Bank has pursued policies and followed procedures that allow it to identify PEP’s as required by Regulation 11(6)”.
Godfrey Leone Ganado’s observations and comments
The above extracts from the Final FIAU report and annexed documentation, may seem rather technical, however it should help in understanding the background of my comments.
Wherever I make reference to transactions and ultimate beneficial ownerships, I am basing these on published allegations and leaked FIAU reports.
The Bank dictated the investigators’ report.
It is good practise that the Bank commissioned KPMG and Camilleri Preziosi to carry out a rigorous and independent review of the bank’s compliance procedures, to enable it to redress the shortcomings highlighted by the FIAU and to ensure that in the follow-up review by the FIAU/MFSA, information and documentation found incomplete or missing in the first FIAU report would be brought up to scratch. This would ultimately make them more comfortable to face a future compliance visit as well as in avoiding negative observations in their subsequent internal audits and the annual statutory audit.
However, I am very surprised that these reports, which were internal to the Bank, were referred to in the Final FIAU report and seemingly attached to this report.
This, to me, may be interpreted as influence of the FIAU/MFSA by the Bank to direct them towards the same or similar intended conclusions to safeguard the bank’s reputation and to ensure that the bank licence is renewed.
In fact, it is rather difficult to reconcile the tone of the Assistant Director of the FIAU in his letter to the bank dated 21 July 2016 strongly refuting allegations made by the Bank that the FIAU had not understood the business model of the bank and that officials did not ask for all relevant information at the time of the on-site examination, and then in the next paragraph of the same letter, he attributes the problem to a possible misunderstanding between the officials carrying out the examination, and ends up proposing a follow-up site-visit in order for the FIAU to ascertain that all relevant documentation and information had been obtained by the Bank.
This is like saying that once an audit is signed and sealed by the auditors with a reserved opinion, the client would be given the option to come in line to enable the first audit to be annulled together with the reserved opinion, and to replace it with a clean audit opinion.
Have the Panama Gang’s accounts been investigated at all?
The reference to a list of client files to be reviewed in the follow-up on-site inspection raises a curiosity as to whether the clients listed are the same clients that the Russian bank employee turned whistle-blower, referred to in her interview with the Malta Independent (published on 30 April 2017) in which she said that she had been given by the bank, a list of companies, maybe eight or ten names, and told that these were to be given special attention for payment transactions, and that for anything to do with them, she would have to speak to the Maltese executive director. These companies included Willerby Inc. (Brian Tonna), Tillgate Inc. (Keith Schembri), Hearnville Inc. (Konrad Mizzi), Egrant Inc. allegedly owned by Michelle Muscat and Al Sahra FZCO (Leyla Aliyeva, the daughter of the president of Azerbaijan).
It would also be interesting to know whether these are the clients for whom documentation was either missing or incomplete, and also whether these are the clients for whom KPMG, in their compliance review, made a detailed analysis of the findings for Source of wealth and Source of Funds.
Is the FIAU really convinced all is well at Pilatus?
While confirming that the issues that had been raised in the first FIAU report are now closed, the Acting Director states that ‘however, the FIAU has taken note of the fact that the Bank only provided information and documentation during the follow-up examination and is disappointed and concerned at this course of action.
This statement, in my opinion, shows doubts as to whether the FIAU was really convinced when stating that the issues raised no longer subsist.
The trail that does not go away.
I would now like to highlight that, whereas compliance issues on shortcomings in procedures and incomplete documentation can easily be rectified, this is not the same with the transactions that have allegedly been carried out with the bank and through the bank.
I quote here from the same interview by the Malta Independent with the Russian employee turned whistle-blower.
“Payment transactions involving hundreds of thousands of dollars from Al Sahra FZCO, always marked as loan payments, were not made to their accounts (the companies mentioned above) at Pilatus Bank but to accounts they had at a bank in Dubai. One of the payments was so large, at over $1 million, that it caused problems when the US correspondent bank stopped it and queried it.
“One evening, I was instructed to open a bank account immediately for the Chairman’s sister who has a fashion company, and to immediately process a loan of $1 million. Immediately the account was opened, I was instructed to transfer around $400,000 to a Maltese woman who lives in New York and who has a jewellery business called Buttardi. It had to be marked as a loan payment”.
Payments of this nature can never be reversed as they leave third-party audit trails with independent financial institutions.
Loan agreements to cover kickbacks
Loan agreements, verbally or written, are one of the major tools as to how money launderers justify their transactions.
A loan agreement, once it is a private document, can be drawn up whenever and can be freely backdated. The loan can be received as a source of funds and paid out to anyone, in whole or in part, as disguised kickbacks.
The widespread use of loans was mentioned recently in the Paradise Papers which exposed 7 million loan documents.
The real purpose of the investment
My final comment, to highlight my scepticism on the follow-up FIAU report, is that the first FIAU report had mentioned that, in most of the cases examined by the inspectors, the intended purpose indicated by the applicant for business was to invest in and hold immovable property in specific parts of the world. However, a review of the bank statements revealed that in the majority of cases, the final purchase of property had not yet been carried out. Proof of actual purchase was rarely, if ever, obtained.
I wonder how the bank managed in a few months between March and August to validate these transactions with public deeds.