Issue link: https://maltatoday.uberflip.com/i/998504
13 maltatoday | WEDNESDAY • 27 JUNE 2018 OPINION BUSINESS gmm@pkfmalta.com George Mangion A curse of money laundering hobgoblins hit Latvian banks LAST month the media re- ported that a delegation of US banking supervisors will be visit- ing us after the local police force offered its assistance concerning the dealings of Pilatus Bank's chairman Ali Sadr Hashemine- jad. The latter was arrested and released on bail in New York following an investiga- tion launched on his bank by Geoffrey S. Berman, United States Attorney for the South- ern District of New York. This probe, that commenced in 2013, had discovered inter alia that Hasheminejad was implicated in an illicit scheme to funnel millions of dollars from Ven- ezuela to Iranian-controlled entities. Hasheminejad pleaded not guilty. In 2012, KPMG, acting as pro- moters of Pilatus bank in Malta, started to apply with MFSA for a banking licence, which after an extensive due diligence exercise on the underlying Iranian bene- ficiary and its source of funding, the regulator issued the licence two years later. KPMG acted as advisers and auditors to the pri- vate bank up to the day when its licence was suspended by MFSA and placed under supervision of an independent controller. So far, the controller has neither disclosed the identity of depositors nor submitted a statement of affairs. Moving on to Latvia, it is currently awash with allegations of money laun- dering and corruption arising out of the illicit flow of Russian funds. This activity is certainly something that is being watched very closely by Moneyval - an EU watchdog. At present, there are three banks in Latvia under the microscope and the larg- est one, ABLV, was declared insolvent. The other two are Rietumu Banka, and Norvik Banka. ABLV was wound up together with its subsidiary ABLV Bank Luxembourg. The two other banks were also under investiga- tion. Quoting Moody's it stated that "Rietumu Banka's business model is geared toward affluent international individuals such that in 2016 it reported that 62% of its total lending was to bor- rowers in countries that are not part of the OECD, while "Nor- vik Banka's high non-resident deposits were 57.8% also from non-OECD countries, including 25.3% originating from Russia". It is interesting to note how the volume of deposits in Ri- etumu Banka fell by almost one billion euros or 37.5% when the news about the probe broke out. Yet thanks to its high liquidity status the massive haemorrhage of cash did not materially de- grade its operational abilities. In a smart move, in the aftermath of ABLV's closure, Rietumu Banka decided to change the base currency from the dollar to the euro. It also took immediate ac- tion to freeze the accounts of offshore companies, commis- sioning KPMG (the auditors) to undertake an in-depth inspec- tion of its clients. The auditors started a thorough review to discover the true beneficiaries of various account holders in the bank's registers. In the process, Rietumu Banka had closed over 4,000 accounts of which two thirds were of non-Latvian origin. With hindsight, some contend that ABLV had experienced a bank run which drained it of money partly due to the stance taken by ECB to refuse to bail it out. Readers may ask what really caused the collapse of ABLV? The answer is plain and simple – the United States accused the bank of money launder- ing and breaking sanctions on North Korea. This prompted its closure and, in the process, triggered the Baltic state's worst financial crisis in a decade. One may stop and reflect how pow- erful the dominance of the US is, such that if the US authorities show sufficient cause to take corrective action then the US can order correspondent banks not to have dollar dealings with the abusing bank. This is tanta- mount to shutting it out of the global financial network. With hindsight, one may com- ment that this corrective action by the United States has exacer- bated the scale of the scandal and pitched Latvia (a small country of two million people) in the mid- dle of a power struggle between Russia and the United States. It also fuelled a debate over the ef- fectiveness of European money- laundering controls. One may be tempted to draw a parallel with Pilatus Bank in Malta which, as it happens, was unceremoniously closed down, following US action taken against its subsidiary in New York when the latter was accused of aiding and abet- ting in Iran sanction-busting activities. Is it a coincidence that both instances closure followed allegations of money laundering and terrorist financing probes carried out by US authori- ties. Certainly, Pilatus Bank in Malta was active for a few years notwithstanding allegations involving money laundering transactions activated by certain politically exposed persons following disclosures by an em- ployee turned whistleblower. All allegations were vehe- mently denied by the so-called perpetrators who took remedial action by asking the court to in- vestigate the case to prove their innocence. It was about two years ago that such incidents, involving powerful persons in government, were highlighted in a series of blogs posted by a journalist. Tragedy hit the head- lines when eight months ago the blogger was surreptitiously assassinated in a car bomb. So far, the prosecution has accused three persons of this heinous crime - they all pleaded not guilty. Allow me to refer back to Latvia, and there the media was alive with criticism concerning ECB's accusing it of taking too long to investigate suspect deal- ings of ABVL. Critics said ECB's actions were just a knee-jerk reaction focused on urgent capital and liquidity concerns and didn't take into account all the different circum- stances which caused so much harm to Latvia's banking reputa- tion. One observes how the ECB was quick to avoid responsibility over the ABLV case arguing that it was not responsible for moni- toring money laundering. In fact, Danièle Nouy, chair of the ECB's supervisory board, recently said: "Breaches of anti-money laundering can be symptomatic of more deeply rooted governance deficiencies within a bank but the ECB does not have the investigative powers to uncover such deficiencies". With hindsight, as can be expected, this declaration did not convince critics, especially when one reflects it was the US authorities that discovered and acted on the irregularities. On the other hand, the plot takes a new twist. ABLV is principally owned by two wealthy Latvian bankers Ernests Bernis and Olegs Fils and they recently filed legal ac- tion with the Court of Justice of the European Union against the ECB's role in its collapse. The saga continues - in the interim welcome the ballad of banking hobgoblins which snub US authorities in their quest to punish 'sanction-busting' institutions. George M. Mangion Gmm@pkfmalta.com The writer is a partner in PKF; an audit and business advisory firm Latvia is currently awash with allegations of money laundering and corruption arising out of the illicit f low of Russian funds