The recent arrest in the United States of Pilatus Bank chairman Ali Sadr Hasheminejad didn’t only deal a major blow to Malta’s most controversial bank, but could well have ripple effects that extend far beyond our shores.
This is because Ali Sadr’s arrest did not occur in isolation but formed part of a wider clampdown by US authorities on Iranian nationals who devise elaborate loopholes to evade US sanctions on their home country.
Critical in all of this was Henley & Partners, the global citizenship planning firm with programmes in a few countries including Malta, whose sale-of-citizenship scheme in the Caribbean allowed Iranians to hide their ‘true nationality’ from the US authorities.
Let’s break it down.
Why was Ali Sadr arrested in the first place?
Ali Sadr’s father is one of the wealthiest businessmen in Iran and his massive conglomerate is a shareholder of a construction firm called Iranian International Housing Corporation. In 2007, this construction firm entered into a $476 million contract with Venezuela’s state-owned oil company to build thousands of housing units in the South American country. Since the deal was in dollars, sanctions imposed by the US on Iran in 2010 prevented American banks from clearing future payments to IIHC.
As alleged by US prosecutors, Ali Sadr, his father and other associates managed to dodge these sanctions by purchasing passports from St Kitts and Nevis and declaring their address as Dubai. They then used these passports to set up two companies in Turkey and Switzerland, which together received $115 million through Swiss bank accounts from Venezuela’s oil company between 2011 and 2013. As reported by The Financial Times, these payments were cleared through US banks including JPMorgan and then transferred to Sadr’s British Virgin Islands company.
Ali Sadr has pleaded not guilty and his father insisted that IIHC didn’t violate US sanctions as it never transferred any money to the Iranian government.
But Pilatus Bank itself isn’t involved, is it?
The US indictment doesn’t mention Pilatus Bank and states Ali Sadr’s alleged sanction-dodging scheme lasted from 2006 till 2014 (Pilatus was given a Maltese banking license on 3rd January 2014). However, the indictment does reveal that Sadr was still involved in the scheme and was already under investigation by US authorities when he started the process of applying for a Maltese banking license in 2012. Moreover, the Financial Times reported that another non-executive director of Pilatus Bank, a certain Mustafa Cetinel, was also investigated in the same probe, although he has not been charged. Cetinel was a director of the Turkish company involved in the scheme, and prosecutors say he had recommended a name change for IIHC to remove reference to Iran.
Could the Maltese authorities have seen this coming?
In March 2014, assassinated journalist Daphne Caruana Galizia flagged a Caribbean News Now report into how Iranians are purchasing passports from St Kitts and Nevis to dodge US sanctions. Pilatus Bank was still a few years away from hitting the headlines but Caruana Galizia wrote her story in the context of the sale-of-citizenship scheme that had just launched in Malta.
A few months later, the US Treasury’s Financial Crimes Enforcement Network (FinCEN) published a notice to warn American financial institutions that Iranians are using St Kitts and Nevis’ citizenship programme to dodge US sanctions.
“While many countries offer programs similar to the SKN Citizenship-by-Investment program, the SKN program is attractive to illicit actors because the program, as administered, maintains lax controls as to who may be granted citizenship,” FinCEN’s statement reads. “While the SKN government has publicly pledged to improve these controls, FinCEN believes that they remain ineffective.”
FinCEN advised financial institutions to increase their due diligence on holders of St Kitts passports by verifying their original country of origin and to file suspicious activity reports if they get a whiff that these passports are being used by Iranians to dodge US sanctions or to launder money.
But why should Malta even take sides between the US and Iran?
There is an argument to be made that Malta shouldn’t meddle in international relations between the US and Iran and that it should be free to give out banking licenses to Iranian nationals if it wants to. Yet doing so risks mightily pissing off the United States, at the cost of the US shutting off correspondent banking relationships with Maltese banks.
The video below sums up the concept of correspondent banking well. Essentially, they are banking relationships that small banks set up with larger ones at a fee to manage the small bank’s clients’ foreign currency transactions.
When money gets sent to a correspondent bank, it is subject to the laws of the land of that bank - which means US sanctions will apply as law to all American banks. Financial experts who spoke to Lovin Malta said US banks already apply very strict due diligence methods to ensure correspondence systems aren’t being abused by sanctions-dodgers. If the US banks uncover one sanctions-dodger, they could very well react by applying stronger due diligence measures to all companies and banks from that country - which would make it much tougher for people and companies based in Malta to conduct dollar transactions.
1/ #Malta Finance Minister @edward_scicluna joins the rest of @MaltaGov (and #SaviourBalzan) in playing down the #AliSadr arrest & resuming in their defence of #PilatusBank (whilst hedging bets, in a splendid example of DoubleThink, by blaming @PNmalta).— BugM (@bugdavem) March 25, 2018
BugM, an anonymous Twitter user breaks down the issue in bite-sized tweets
So is this happening in Malta?
That’s the big question. Last year, Caruana Galizia stunned Malta with a report that the Prime Minister’s wife Michelle Muscat owned the secret Panama company Egrant and that this company had two bank accounts - at Pilatus Bank and at an unnamed Dubai bank. According to the story, Leyla Aliyeva - daughter of Azerbaijan’s ruler Ilham Aliyev - used a Pilatus Bank account to transfer several payments, including one of $1 million, to Egrant’s Dubai account. The Muscats have vehemently denied the Egrant story as "the biggest lie in Malta's political history" and a magisterial inquiry into it has been ongoing for around a year.
This article contains a tidbit of information that went largely unnoticed. Caruana Galizia said that Pilatus Bank used to have two US correspondent banks at the time of the transaction and that one of them had initially blocked the $1 million payment. If the story is true, then it would mean something must have happened to end this correspondence.
Pilatus Bank has an account at Bank of Valletta which, according to Caruana Galizia, it had used to route transactions through BOV’s own correspondent banks. It is unknown whether it had used BOV as a Plan B after its direct connections with US banks collapsed, but Opposition leader Adrian Delia recently pounced on this link to question whether the government had pressured BOV into offering services to Pilatus Bank.
In November 2016, Caruana Galiza wrote that Prime Minister Joseph Muscat had travelled to New York along with Finance Minister Edward Scicluna, MFSA chief Joe Bannister and the Central Bank's deputy governor Sandro Demarco in a last-ditch attempt at persuading US banks to set up, re-open or retain correspondent banking relationships with Malta’s banks.
She said that American banks - including JP Morgan and Wells Fargo - had over the past year been systematically shutting down their correspondent banking business with banks in Malta, and that BOV had been reduced to just one US correspondent bank. Ali Sadr had used JP Morgan in his alleged sanctions-evasion scheme and last year specifically criticised Wells Fargo for its "lack of innovation".
BOV’s website actually shows that it has actually no US correspondent banks but only manages to process payments for customers in dollars by virtue of its relations with two European banks - namely ING Bank Belgium and Banco Popolare di Sondrio in Lombardy.
It used to have a similar relationship with Deutsche Bank but the German giant decided to end this relationship a week after the 2017 election.
BOV and Finance minister Edward Scicluna brushed off concerns that Deutsche Bank’s departure had anything to do with Pilatus Bank or the Panama Papers and said it was curtailing its correspondence with smaller banks around the world. What they failed to mention was that Deutsche Bank maintained its correspondence with another Maltese bank - ie FIMBank.
BOV's correspondent banks for USD transactions
Deutsche Bank has maintained correspondence with FIMBank
Questioned by Lovin Malta how many US banks have shut off correspondence with BOV in the past five years, a bank spokesperson said: “We are not aware that US banks have shut down correspondence with BOV…in fact we are processing payments for our customers in US dollars in the usual manner.”
Asked what due diligence had been carried out on Pilatus Bank prior to it opening a BOV account, BOV’s spokesperson said it has “a strict policy of due diligence which it applies to all accounts opened by the bank.”
Questioned whether it had taken any action in light of the 2014 US warning letter, the spokesperson responded that the Bank “takes appropriate action as required by all laws, regulations, directives and notifications which are applicable to it”.
The MFSA did not respond to a request for comment as of the time of writing.
What will this all mean for Malta?
If the US grows wary of the Maltese banking system, the upshot of it will be that it will become impractical for Malta-based citizens and companies to conduct dollar transactions. The implications will be diverse - for example, companies will no longer be able to pay for oil, igaming companies will no longer be able to accept dollar deposits and other banks might decide to leave Malta if they fear their prolonged stay could threaten their US licenses.
There could be other unexpected consequences too and, make no mistake about it, they have already started bubbling up. Lovin Malta today spoke to a man who recently tried to purchase an item from a "very large" US company through BOV Visa card.
"My payment got declined, and when I informed the company it told me it had stopped accepting payments from Malta due to money laundering concerns," he said.
A sign of things to come? For now, all we can do is wait and see.