27 Apr 2018
Last April, a Maltese journalist published stories saying a private bank on her island was serving high-ranking customers in Azerbaijan, and alleging it was processing corrupt payments.
Six months later the journalist, Daphne Caruana Galizia, was murdered.
Many of her claims, including the one about corrupt payments, remain unproven.
There is also nothing to link her death to the reports she wrote about the bank or its staff. But one of her key findings has held up: The bank, called Pilatus Bank, did depend for much of its business on the Azeri elite.
Two sources briefed in detail on the bank’s transactions told Reuters that by 2016 more than 50 accounts at Pilatus, holding the majority of the bank’s more than 250 million euros ($307 million) of deposits, were operated for the ultimate benefit of Azeris with close ties to Azerbaijan’s leadership.
The biggest clients were companies ultimately controlled by two children of Ilham Aliyev, the country’s president, the sources said. Aliyev and the children involved, Leyla and Arzu Aliyeva, did not respond to questions.
The Azeri clientele’s role was underlined in a confidential regulatory report, written in 2016 and leaked to Maltese journalists last year.
The report, sent by Malta’s anti-money laundering watchdog the Financial Investigation and Analysis Unit (FIAU) to Pilatus, showed that the bank ranked at least two of its principal clients as “politically exposed people” (PEPs), which under European Union rules means politicians, senior government officials, or their close family and associates. Both were from Azerbaijan.
There is no evidence the Azeri customers were doing anything illegal; under EU rules their PEP status means their business should be handled with special vigilance to prevent financial crime.
The report added that Pilatus’ profitability depended to a large extent on a few select PEPs, the majority of whom were Azeris.
But in what has become a politically charged issue both in Malta and the EU, this and other reports by the FIAU have raised questions about how the island managed these risks.
Pilatus was granted a licence under the current Maltese administration, led by Prime Minister Joseph Muscat. Keith Schembri, Muscat’s chief-of-staff, has confirmed opening an account at Pilatus.
After a visit to Pilatus in March 2016, FIAU inspectors wrote of “systematic issues of grave concern” about the bank, citing a lack of documentation and other problems which suggested its business model “concentrates on accommodating clients who value their secrecy above everything else.”
In other reports, they raised concerns about payments made to Schembri, Muscat’s chief-of-staff. The inspectors sent these to police on the island, who did not investigate.
Six months later, the FIAU inspectors said they had seen the documentation they needed and no longer had major concerns.
The bank operated freely until last month, when its founder, an Iranian national called Ali Sadr Hashemi Nejad, was arrested and denied bail in the United States on money-laundering and sanctions violation charges.
After that, Malta froze Pilatus’ operations.
Pilatus did not respond to requests for comment and Sadr’s lawyers declined to make any comment.
At issue for Europe is the effectiveness of financial regulation in Malta, and by extension in Europe: A banking licence in any EU country is valid in all other member states. At the time Pilatus’ operations were frozen, it was preparing to open a branch in London.
The European Banking Authority (EBA) launched a “preliminary inquiry” into two Maltese financial supervision agencies in November 2017, after the EU Parliament asked for clarification on how Pilatus got its license and the EU Commission requested a probe of “alleged incorrect or insufficient application of EU law pertaining to the prevention of money laundering” in Malta. That is ongoing, an EBA spokesman said.
The FIAU is one of two agencies under scrutiny. The other is Malta’s Financial Services Agency (MFSA) – which awarded Pilatus its license.
Asked why they let Pilatus stay in business, the MFSA said last week it did not have enough evidence to act against the bank. “Any action at law needs to be based on evidence,” said a spokesman.
The FIAU said in a statement Pilatus had responded to many of its inspectors’ criticisms but the agency had kept the bank under review because inspectors were still concerned.
“We disagree that the Pilatus case is an illustration of weak AML (anti-money laundering) controls in Malta,” it said. “One shouldn’t look at a single case to reach such generic conclusions.”
– Reporting by Francesco Guarascio in Brussels and Stephen Grey in Valletta, Reuters, 26 April 2018.
This story is part of the Daphne Project, coordinated by Forbidden Stories, a Paris-based group that continues the work of journalists silenced through murder or imprisonment.
Link to Reuters.
You can claim CPD minutes for this content, by signing up to our CPD WalletFREE CPD Wallet