News & Events

- 06/27/2018

A curse of money laundering hobgoblins hit Latvian banks

Last month the media reported that a delegation of US banking supervisors will be visiting us after the local police force offered its assistance concerning the dealings of Pilatus Bank’s chairman Ali Sadr Hasheminejad.

The latter was arrested and released on bail in New York following an investigation launched on his bank by Geoffrey S. Berman, United States Attorney for the Southern District of New York. This probe, that commenced in 2013, had discovered inter alia that Hasheminejad was implicated in an illicit scheme to funnel millions of dollars from Venezuela to Iranian-controlled entities. Hasheminejad pleaded not guilty.

In 2012, KPMG, acting as promoters of Pilatus bank in Malta, started to apply with MFSA for a banking licence, which after an extensive due diligence exercise on the underlying Iranian beneficiary and its source of funding,  the regulator issued the licence two years later. KPMG acted as advisers and auditors to the private bank up to the day when its licence was suspended by MFSA and placed under supervision of an independent controller.

So far, the controller has neither disclosed the identity of depositors nor submitted a statement of affairs. Moving on to Latvia, it is currently awash with allegations of money laundering and corruption arising out of the illicit flow of Russian funds. This activity is certainly something that is being watched very closely by Moneyval – an EU watchdog. At present, there are three banks in Latvia under the microscope and the largest one, ABLV, was declared insolvent.

The other two are Rietumu Banka, and Norvik Banka. ABLV was wound up together with its subsidiary ABLV Bank Luxembourg. The two other banks were also under investigation. Quoting Moody’s it stated that “Rietumu Banka’s business model is geared toward affluent international individuals such that in 2016 it reported that 62% of its total lending was to borrowers in countries that are not part of the OECD, while “Norvik Banka’s high non-resident deposits were 57.8% also from non-OECD countries, including 25.3% originating from Russia”.

It is interesting to note how the volume of deposits in Rietumu Banka fell by almost one billion euros or 37.5% when the news about the probe broke out. Yet thanks to its high liquidity status the massive haemorrhage of cash did not materially degrade its operational abilities. In a smart move, in the aftermath of ABLV’s closure, Rietumu Banka decided to change the base currency from the dollar to the euro.

It also took immediate action to freeze the accounts of offshore companies, commissioning KPMG (the auditors) to undertake an in-depth inspection of its clients. The auditors started a thorough review to discover the true beneficiaries of various account holders in the bank’s registers.

In the process, Rietumu Banka had closed over 4,000 accounts of which two thirds were of non-Latvian origin. With hindsight, some contend that ABLV had experienced a bank run which drained it of money partly due to the stance taken by ECB to refuse to bail it out. Readers may ask what really caused the collapse of ABLV?

The answer is plain and simple – the United States accused the bank of money laundering and breaking sanctions on North Korea. This prompted its closure and, in the process, triggered the Baltic state’s worst financial crisis in a decade. One may stop and reflect how powerful the dominance of the US is, such that if the US authorities show sufficient cause to take corrective action then the US can order correspondent banks not to have dollar dealings with the abusing bank. This is tantamount to shutting it out of the global financial network.

With hindsight, one may comment that this corrective action by the United States has exacerbated the scale of the scandal and pitched Latvia (a small country of two million people) in the middle of a power struggle between Russia and the United States. It also fuelled a debate over the effectiveness of European money-laundering controls.

One may be tempted to draw a parallel with Pilatus Bank in Malta which, as it happens, was unceremoniously closed down, following US action taken against its subsidiary in New York when the latter was accused of aiding and abetting in Iran sanction-busting activities. Is it a coincidence that both instances closure followed allegations of money laundering and terrorist financing probes carried out by US authorities. Certainly, Pilatus Bank in Malta was active for a few years notwithstanding allegations involving money laundering transactions activated by certain politically exposed persons following disclosures by an employee turned whistleblower.

All allegations were vehemently denied by the so-called perpetrators who took remedial action by asking the court to investigate the case to prove their innocence. It was about two years ago that such incidents, involving powerful persons in government, were highlighted in a series of blogs posted by a journalist. Tragedy hit the headlines when eight months ago the blogger was surreptitiously assassinated in a car bomb. So far, the prosecution has accused three persons of this heinous crime – they all pleaded not guilty. Allow me to refer back to Latvia, and there the media was alive with criticism concerning ECB’s accusing it of taking too long to investigate suspect dealings of ABVL.

Critics said ECB’s actions were just a knee-jerk reaction focused on urgent capital and liquidity concerns and didn’t take into account all the different circumstances which caused so much harm to Latvia’s banking reputation. One observes how the ECB was quick to avoid responsibility over the ABLV case arguing that it was not responsible for monitoring money laundering.

In fact, Danièle Nouy, chair of the ECB’s supervisory board, recently said: “Breaches of anti-money laundering can be symptomatic of more deeply rooted governance deficiencies within a bank but the ECB does not have the investigative powers to uncover such deficiencies”.

With hindsight, as can be expected, this declaration did not convince critics, especially when one reflects it was the US authorities that discovered and acted on the irregularities. On the other hand, the plot takes a new twist.

ABLV is principally owned by two wealthy Latvian bankers Ernests Bernis and Olegs Fils and they recently filed legal action with the Court of Justice of the European Union against the ECB’s role in its collapse.

The saga continues – in the interim welcome the ballad of banking hobgoblins which snub US authorities in their quest to punish ‘sanction-busting’ institutions.

George Mangion

Author: George Mangion 
Published on MaltaToday 27th June, 2018
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