Malta’s financial watchdog is expected to come under scrutiny over its due diligence checks on the initial €8 million in capital used by Iranian national Ali Sadr to set up Pilatus Bank.

The European Banking Authority last month confirmed it had opened a preliminary inquiry into the Malta Financial Services Authority’s supervision of the bank.

Mr Sadr is facing up to 125 years in jail after being arrested in the United States on Monday. He was held over charges of money-laundering and sanction busting.

Mr Sadr is accused of evading US sanctions against Iran by filtering $115 million through front companies and foreign bank accounts, to mask Iranian business dealings in Venezuela between April 2011 and November 2013.

In December 2013, Mr Sadr registered Pilatus Bank in Malta. The €8 million in capital was deposited that same month.

At the time Pilatus was granted its licence by the MFSA in January 2014, Mr Sadr was already under investigation by the FBI, the US indictment documents show.

Read: FIAU was aware Pilatus chairman was being investigated abroad

Malta was not mentioned in the indictment.

No replies were received to questions sent by the Times of Malta yesterday, asking the MFSA whether it could confidently say no illicit funds were used for the initial €8 million in capital provided by Mr Sadr for Pilatus Bank. 

The EBA was requested by the EU Commission as well as MEPs to look into whether the MFSA had fulfilled its obligations as a regulator.

It has also been requested to see if the fact that Pilatus Bank continued to hold a licence to operate within the EU warranted its intervention along with that of the European Central Bank.

A leaked FIAU document, passed on to the police in 2016, made reference to intelligence it had about a criminal investigation into Mr Sadr in a “foreign jurisdiction”.

The police said on Wednesday that a delegation from the US should be arriving in Malta in the coming weeks after Maltese police offered assistance in the Sadr case.

The Times of Malta is informed that the initial capital for Pilatus Bank was provided solely by Mr Sadr.

The capital was later increased by a further €2 million to reach €10 million in total.

A 2016 inspection by the FIAU found “glaring, possibly deliberate disregard” for money-laundering controls at the bank.

Pilatus denied any wrongdoing, and a subsequent FIAU visit found that the issues it had identified “no longer subsist”.

The MFSA on Wednesday afternoon announced it had decided to order the removal of Mr Sadr as bank director, suspend his voting rights as a shareholder of the bank and order him to refrain from exercising legal and judicial representation of the bank. 

The MFSA’s supervisory council also ordered Pilatus Bank to suspend any banking activity related to any of its shareholders, directors, senior managers and anyone connected to them. 

Pilatus Bank has also been told to get MFSA clearance before moving any of its assets and warned that the regulator is considering introducing further measures. 

In another statement issued later that same day, the MFSA “clarified” that its directive meant all transactions by the bank were being suspended.

The MFSA has long defended its decision to grant a licence to Pilatus, arguing that all the necessary due diligence checks had been carried out.

KPMG acted as consultants to Pilatus Bank during the licensing process. Last December, the international audit firm faced questions from MEPs investigating the rule of law in Malta.

Asked if Mr Sadr’s Iranian origins and use of a St Kitts & Nevis passport were obstacles during the licensing process, KPMG’s Juanita Bencini told MEPs she could not answer due to client confidentiality obligations.  

MFSA makes bank appointment

The Malta Financial Services Authority late Thursday evening announced it had appointed Lawrence Connell to take charge of all Pilatus Bank Limited assets. It said the assets also includes any assets related to investment services business.

He will assume control of the bank’s banking and investment services business and will “continue carrying on that business until such time as the MFSA may direct”.

The MFSA furthermore directed the bank not to dispose, liquidate and transfer or otherwise deal with clients’ assets and monies.

These measures will remain in place until such time as the MFSA may direct otherwise.

It said that any communication in relation to the bank should be addressed to the bank on the following number: 2779 9999.