A “dual filing system” at the shuttered Pilatus Bank meant key documents may have been withheld from the MFSA and FIAU during a 2016 review of the bank’s operations.

The existence of this ‘hidden’ filing system was revealed to the Egrant inquiry during testimony by Pilatus auditors KPMG.

KPMG managing partner Antonio Zarb told inquiring magistrate Aaron Bugeja that the bank had informed them about a dual file system, whereby certain information was kept in the operative file and then more confidential information was kept in another file.

He speculated that officials from Malta’s anti-money laundering unit might not have asked for or were not given the confidential files during their initial inspection.

An FIAU report following the visit had blasted the bank for failing to hold important documentation on certain large transactions reviewed during the inspection.

KPMG was subsequently engaged by Pilatus Bank to carry out its own audit on the files reviewed by the FIAU. It found the “missing” documentation flagged by the FIAU.

Mr Zarb admitted during the inquiry that there was no way of knowing whether the “missing” documentation was there during the FIAU visit.

He said KPMG could only vouch for the fact that the documents had been produced during its own audit.

The KPMG managing partner said Pilatus wanted a “perfect report”, but no bank ever gets such a report as shortcomings will be found at even the best prepared bank.

He admitted the dual filing system was “obviously not the norm”, but he had come across situations where confidential information was kept in separate files.

Mr Zarb was informed by Pilatus that the FIAU inspectors had just looked at the files presented to them but did not question whether any more files existed.

This explanation did not seem to impress inquiring magistrate Aaron Bugeja, who pointed out that the FIAU could hardly ask for files it did not even know existed.

“If they gave them the open file and kept under wraps the confidential one, you cannot expect the FIAU to go there and ask for the confidential file if they did not know about the confidential file in the first place,” Dr Bugeja pointed out.

Forensic accountant Miroslava Milenovic appeared to be similarly unimpressed by this dual filing system.

She pointed out that the bank’s money laundering reporting officer Antoniella Gauci was a former KPMG employee who would have been “completely aware” about what was expected during the inspection by the authorities.

Veil of secrecy

“So, what are you saying? That actually they gave one part of the files and they did not give another part of the files just because they [the FIAU] did not ask?”, Ms Milenovic questioned.

Mr Zarb said in response that it was only speculation on his part that certain files may have been withheld during the inspection.

“Why the files were not given in full or, indeed, if there was missing documentation, which was then prepared in between the FIAU visit… this is what I was trying to say, we can only vouch for what we saw in May [during KPMG’s own internal audit in 2016 following the FIAU inspection],” Mr Zarb said.

Why is this significant?

The FIAU has faced accusations of whitewashing its initial scathing report about missing documentation and lax anti-money laundering controls at the bank.

During a follow-up visit by the FIAU in the summer of 2016, Pilatus Bank was able to present the missing documentation.

This led the FIAU to refrain from imposing any penalties on the bank for the shortcomings found during the initial visit.

Former Pilatus Bank employee Maria Efimova, who was behind the Egrant claims, has in the past said she resisted pressure to retroactively fill in certain gaps in the documentation held by Pilatus. 

KPMG’s managing partner raised the possibility during his testimony that Pilatus Bank could have carried out a legitimate remediation exercise in between the two FIAU inspections.

He again clarified in his testimony that KPMG could only vouch for the files seen during its own audit.

“When we saw the files, we saw the files at a date and we did not see the files when the FIAU saw the files,” he said.

Swiss-style secrecy

The dual filing system was not the only layer of secrecy in Pilatus’ operations.

KPMG head of audits Noel Mizzi told the inquiry that Pilatus used a Swiss system of referring to numbered accounts rather than identifying an account owner by name.

The FIAU’s inspection had picked up on the culture of secrecy at the bank.

“Banking secrecy is not an absolute value and for the purpose of prevention of ML/FT [money-laundering and terrorism financing prevention], banks are expected to document the source of the wealth of their clients and they are required to determine and record the source of funds of the transactions on an ongoing basis,” the FIAU had noted in its initial assessment.

The FIAU said the “veil of secrecy” that had been created at the bank made it easier for transactions to be carried out by politically exposed persons, their family members and their close associates, without the level of scrutiny required by law.

What happened after the FIAU’s inspection?

No penalties were ever imposed on Pilatus Bank by the FIAU. 

In February 2018, the FIAU carried out a surprise visit at the bank, during which it seized all data, including audio communications between bank employees and their clients.

Just one month later, the bank’s chairman Ali Sadr was arrested in the US on money-laundering and sanction-busting charges linked to a Venezuelan construction contract.

Investigators have analysed all transactions carried out by the bank.

In parallel, the Egrant inquiry concluded that certain transactions linked to Azerbaijan warranted an international investigation into potential money-laundering.

A separate inquiry was launched into the bank’s operations, with particular focus on the actions of the employees. The inquiry has not yet concluded. Meanwhile, the European Banking Authority found the FIAU had breached EU anti-money laundering regulations over its failures to sanction Pilatus after the findings uncovered in its initial inspection of the bank.