The FIAU was wrong to inspect Pilatus Bank for a second time just months after it first raised red flags about the bank, its incoming chairman believes.

Kenneth Farrugia said the decision, taken in mid-2016 before he first joined the Financial Intelligence Analysis Unit, left inspectors with little room to manoeuvre against the now-shuttered Pilatus.

“When inspectors went [for a second time], they found that the things flagged in the initial report had been remedied. At that point in time, you end up at a crossroads,” he said.

Farrugia was speaking as he was being grilled by parliament’s Public Appointments Committee over his nomination to lead the FIAU board of governors. An accountant by profession, Farrugia previously led the FIAU’s executive arm as its director between February 2017 and April 2023. 

The committee approved his nomination with a 3-2 majority, with government members voting in favour of it and Opposition members against. Parliament’s approval paves the way for government to appoint Farrugia to the top FIAU role.

Once appointed, Farrugia will be in the unique position of leading the Malta Financial Services Authority in an executive capacity as its CEO, and the FIAU in a non-executive one as its chairman. 

Reluctance to criticise police

Over the course of almost three hours, Farrugia repeatedly parried questions from Opposition committee members Karol Aquilina and Adrian Delia about the police force’s repeated failures to act on FIAU intelligence.

“We provide intelligence. The police need to convert that to evidence before they can prosecute,” he told the committee. That process can “take time”, he admitted, saying that sometimes, delays were due to investigations requiring the cooperation of other countries.

As Delia pressured him to say whether he ever felt frustrated by the police’s failure to act on FIAU intelligence, Farrugia held firm and stuck to his line.

“So far, I don’t have any evidence that police have a locked-in case and did not prosecute,” he said. “When we don’t hear back, the assumption is that they are still investigating.”

At one point, Farrugia was moved to concede that “if the police have all the evidence in hand and do not prosecute, that cannot be justified. Even a single day’s delay is too long.”

Opposition MP Aquilina peppered him with questions about specific incidents related to the FIAU in recent years, from a leaked report concerning Yorgen Fenech’s offshore firm 17 Black to ‘Operation Green’, the codename police gave to an investigation into former OPM chief of staff Keith Schembri and Nexia BT managing partner Brian Tonna.

But Farrugia steadfastly declined to comment on specific cases, citing legal provisions which make it a crime for FIAU officers to discuss specifics of investigations.

How the FIAU handled Pilatus Bank

He was more loquacious when pressed on the FIAU’s course of action when tackling Pilatus Bank, saying he believed his predecessor Manfred Galdes had erred in ordering a second inspection of the bank, months after the first.

The FIAU first inspected Pilatus at the start of 2016 and found multiple anti-money laundering failings at the Ta’ Xbiex-based bank, which has since been shut down by regulators.

Farrugia said Galdes had met with bank officials in the middle of that year, after Pilatus had seen that FIAU report, and agreed for inspectors to visit the bank a second time.

Police cars parked outside Pilatus Bank's offices in Ta' Xbiex. Photo: Matthew Mirabelli

By then, Galdes had left the FIAU, which was being led by acting director Alfred Zammit.

When inspectors carried out that second visit, the bank produced documents that it was unable to provide during the initial visit. Farrugia said that left the unit in a quandary.

Ultimately, it would go on to say that failings at the bank "no longer subsist". 

Pilatus would end up being placed into administration six months later and was stripped of its banking licence in November 2021. 

“We’ve learnt from these experiences,” Farrugia said. “Nowadays, in such cases we take a snapshot of that entity at that point in time. So that if they remedy things later, we have a precise picture of how things evolved. When Pilatus remedied [its shortcomings], we didn’t have enough evidence to say when exactly it did so.”

'You could just copy the entire FIAU database'

When pushed to say what the FIAU did about Pilatus under his tenure, Farrugia pointed to the €4.9 million fine it levied on the bank in 2021 and said that was the result of an in-depth probe that started in early 2018. 

Farrugia said the FIAU had come a long way from when he first joined. Staff numbers had multiplied, he said, and IT systems bolstered to ensure full audit trails.

Pilatus Bank owner Ali Sadr Hasheminejad. Photo: Mark Zammit Cordina

“When I joined, you could just copy the entire database and take it,” he told the committee, telling members at another stage during his grilling that he had to contend with a “four-year backlog of supervisory reports” upon joining.

Farrugia denied being part of a “secret deal” with the US government regarding Pilatus Bank owner Ali Sadr Hasheminejad, who was charged in the US in 2018 in connection with violating sanctions against Iran. Prosecutors dropped the case against him two years later in mysterious circumstances. 

Delia and Aquilina spent almost three hours questioning the witness. Labour MP Andy Ellul interjected at some stages to complain about their line of questioning. His colleagues Chris Agius and Amanda Spiteri Grech sat silently throughout.

At the end of the grilling, members deliberated briefly before voting on Farrugia’s nomination, which was approved by three votes to two.