The news of the Pilatus bank chairman's arrest has led to calls for the revocation of the bank's licence by the Nationalist Party and activists.
However, such a process can be somewhat complicated.
Who can take action?
Pilatus Bank is supervised by the Malta Financial Services Authority, and was given its licence before the European Central Bank's Single Supervisory Mechanism was introduced in 2015. The ECB has no supervisory role over its day-to-day operations.
The MFSA can take action if there are breaches to the Banking Act or money-laundering rules. So far, Pilatus Bank has no connection at all with the sanctions-busting allegations which resulted in its chairman’s arrest.
Sources involved in combating economic crime told Times of Malta that in situations like this, the authorities "can’t simply shut down a bank".
They said investigation into the Ta’ Xbiex institution had been ongoing for “quite some time” systems in place had to be followed by the authorities.
The FIAU was already aware that Ali Sadr was being investigated by an overseas jurisdiction, and its report was passed on to the police in July 2016.
The licence could be suspended very quickly if the MFSA found valid reasons. However, the revocation process would take months.
Can action be taken against Ali Sadr?
The chairman – and directors – of any bank need to pass a ‘fit and proper test’, so if Ali Sadr were convicted, the MFSA would certainly have reason to ask for him to be replaced. But so far, he has only been charged.
Having said that, while the presumption of innocence prevails in a court of law, when it comes to banking, if there is reasonable doubt that his position is being abused in any way, the supervisor can take action and suspend him.
Press reports are not usually enough to trigger action by the supervisory authorities, usually requiring more investigation. Of course, if facts do emerge which would impact the original “fit and proper” test, then a re-assessment of the board member could very well be instigated.
What about his links with the bank?
The investigation into Ali Sadr could uncover information about the source of the wealth used to set up the bank.
Pilatus Bank is owned by Pilatus Holding (9,999,999 shares) and Hong Kong company Alpene (1 share) while Pilatus Holding is in turn owned by Alpene (9,999,999 shares) and Ali Sadr (1 share).
So unless Ali Sadr has any shareholding in Alpene, or there is some link between Alpene and the alleged crime in the US, his removal as chairman would not have any impact on the bank.
According to the MFSA Act, the Maltese authorities are empowered to restrict or withdraw a banking licence if it finds that this had originally been obtained through “false statements or any other irregular means”.
If the MFSA takes no action now, what could happen in the future?
The board could decide to increase the number or frequency of on-site inspections, and could insist on having a permanent presence at Pilatus. It could also call for additional or more frequent reporting by the bank. It could also decide to rope in the European Banking Authority, which has powers of its own.
What are the implications of doing nothing?
The arrest adds fuel to previous allegations about Pilatus – which have already hurt the country’s reputation for financial services, according to the PN.
Sources familiar with the MFSA told Times of Malta that the best course of action would be to clear any doubts about the process leading to the award of the licence by publishing all the relevant minutes and documentation.
“This is the only way to prove that everything was done properly and without any political interference,” the sources said.