The Pilatus Bank scandal: time to reconsider banking supervision, anti-money laundering and whistle-blower’s protection in the EU

By Dimitrios Kafteranis

On Monday 23 April 2018, the European Commission released its proposal on the protection of persons reporting on breaches of Union law. The proposal of the European Commission comes after pressure of the European Parliament and other organisations calling for a coherent protection of whistle-blowers at the EU level. This pressure results partially from different scandals that were revealed by whistle-blowers such as Panama Papers or the case of the Pilatus Bank in Malta. The Commission’s proposal aims to set common minimum standards to protect whistle-blowers when they report breaches of EU law. It has several legal bases and covers a wide-range of EU areas such as consumer protection, financial services and the protection of privacy and data. The reporting procedure follows the ‘classic’ three-tier model for whistle-blowing, that is reporting firstly internally, then to the designated authorities and as a last solution to the public. The text is innovative in the sense that it proposes a wide definition of the whistle-blower ranging from trainees to ex-employees. The European Commission regards whistle-blowing as an enforcement tool for the prevention, detection and prosecution of illegalities affecting EU law.

For the future, it is compelling to pursue the negotiations between the two co-legislators of the EU (European Parliament and Council) in order to follow the challenges on the question of whistle-blowing at the national and European level. These negotiations could take many years. This post aims to introduce the reader to the proposal for a Directive on the protection of whistle-blowers by cross-referring to the case of the Pilatus Bank where a journalist and a whistle-blower are involved. The purpose is to highlight that there is a need for an EU Directive on the protection of whistle-blowers and to demonstrate that the proposed EU Directive would have better protected the Pilatus Bank whistle-blower. Furthermore, this contribution will demonstrate the problematic nature of money laundering and banking supervision at the EU level. Following the creation of the Banking Union, the interconnectivity of banks is a fact and a problem in one country can create a domino effect to the others. For example, the Pilatus Bank scandal does not only concern Malta but the European banking system as a whole.

In the first part, the Pilatus Bank scandal will be explained, followed by the analysis of the legal situation of the whistle-blower in that case, Maria Efimova. In the next part, the role of different European and Maltese institutions on the issue will be scrutinized, followed by a study of certain problematic aspects of whistle-blowing, banking supervision and money laundering legislation. In the last part of this contribution, some concluding remarks will be made.

A. Explaining the Pilatus Bank scandal

Pilatus Bank is a Maltese-based bank that started its operations in January 2014. Its owner is the Iran-born Seyed Ali Sadr Hasheminejad, known as Ali Sadr. The Bank is accused, by the reporter Daphne Caruana Galizia and now the Maltese Authorities, of laundering funds from allegedly corrupt schemes on behalf of offshore companies and individuals. The release of the Panama Papers also revealed that the Bank facilitated suspicious transactions from Panama in the name of politically exposed persons.

The Pilatus Bank whistle-blower is Maria Efimova, who was a three months’ trainee at the Bank in Malta. She was promised that once her traineeship finished, she would have a permanent contract as a secretary. Despite this promise, Efimova was not promoted and was not even paid for her three months’ traineeship, and she initiated legal proceedings against the Bank for her salaries. The Bank, for its part, accused Ms Efimova of abusing the Bank’s funds for private purposes (it claimed that she paid airplane tickets for her family members with the Bank’s money). Maria Efimova was a secondary source of information, meaning that she was confirming the evidence that the reporter had already found, about illegal activities of the Pilatus Bank such as money laundering to the Maltese reporter Daphne Caruana Galizia, who highlighted the connections of members of the Maltese government with the Bank and their knowledge about money laundering activities. The reporter was killed in a targeted car bombing in October 2016.

Following this tragic event, Maria Efimova fled Malta and came to Greece. The Maltese authorities issued two European Arrest Warrants for her (one for defrauding Pilatus Bank and one for making false accusations and providing false evidence), but first the Court of Appeal of Athens and then the Greece’s Supreme Court refused the extradition because the warrants were vague and irregular (the two decisions are in Greek). The Court of Appeal of Athens refused the EAW for the following reasons. Firstly, the Maltese authorities had not issued, prior to the EAW, a national arrest warrant or another equivalent provision coming from a Maltese judicial authority, which is necessary for the enforcement of the present EAW. Secondly, the Court of Appeal of Athens stated that the facts, as described in the EAW, were vague and not precise and therefore it could not control the double criminality principle. Consequently, the Court of Appeal refused to execute the EAW. Following the decision of the Court of Appeal, the Deputy Public Prosecutor of Athens appealed the decision by bringing the matter in front of the Greece’s Supreme Court (Arios Pagos). The Supreme Court refused the execution of the EAW against Ms Efimova by confirming the reasons given by the Court of Appeal of Athens.

B. The legal situation of Maria Efimova as a whistle-blower

Firstly, under Maltese law, the whistle-blower should be an employee or an ex-employee, either in a private or in a public institution, who comes across information concerning illegal activities and decides to report them. Maria Efimova was working in Pilatus Bank and she found out that the Bank was implicated in different scandals such as money laundering. Under Maltese law, she was required to first report internally and, if this was not possible, to address herself to the authorities. In the case at hand, it seems that she could not report internally because the Head of the Bank was the person behind the different scandals.

If the whistle-blower cannot report internally, he or she can report to the authorities. These authorities are designated in the first schedule of the Maltese Law on whistle-blowing. For the present case, the designated authorities were the Financial Intelligence Analysis Unit (FIAU – receiving information about suspicious money laundering activities) and the Malta Financial Services Authority (MFSA – responsible for banks and financial institutions). Despite the possibility to report to these authorities, there were serious concerns, not only expressed in journal articles but also in official reports, about the unwillingness of those authorities to take action. Therefore, Ms Efimova decided to share the information with the reporter Daphne Caruana Galizia.

It is noteworthy that, in addition to the above options for whistle-blowing at the national level, there is also the option to report to the European Central Bank (ECB) under articles 23 and 36 of the SSM Regulation and the SSM Framework Regulation. Under the Single Supervisory Mechanism (SSM), the ECB is supervising the Significant Institutions directly whereas the Less Significant institutions are supervised by the relevant national financial authorities. Reports can be made to the ECB for breaches of relevant EU banking and financial law, but not for money laundering concerns. Nevertheless, in the present case, Pilatus Bank is a Less Significant Institution directly supervised by the MFSA and the ECB could not accept Ms Efimova information about money laundering activities – such information should be referred to the competent national authority.

In sum, since Mrs Efimova did not respect the conditions imposed by Maltese law, she could not rely on the legal protection offered to whistle-blowers and would be criminally liable of revealing confidential information of the Bank to the public.

C. The role of the European Parliament, the European Central Bank, the European Banking Authority and the Maltese financial authorities

The case of Pilatus Bank is not only interesting because of the whistle-blower concerns it raises but also in relation to the supervision of banking institutions in the EU area. Many questions arise on the work of the MFSA, the role of the ECB and the European Banking Authority (EBA) on this issue. Before entering into the details of the Pilatus Bank supervision, it is necessary to briefly explain the role of the above institutions.

The European Banking Authority (EBA) is a policy coordinator for the EU banking sector, enhancing cooperation between eurozone and non-eurozone Member States. Its powers are to issue guidelines on, mostly, technical issues related to the banking sector. The EBA may also investigate alleged incorrect or insufficient application of EU law by national authorities or take decisions in emergencies on individual competent authorities. For its part, the ECB has, following the adoption of the Single Supervisory Mechanism (SSM) in 2014, important powers on the supervision of significant institutions of the Eurozone. The MFSA, as the national supervisor of Maltese banks, has the obligation to cooperate with the ECB and the EBA. The European Parliament, following the Lisbon Treaty, has more powers and a proactive role in protecting values and different interests. Concerning the Pilatus Bank case, the European Parliament has taken different initiatives and adopted different texts where it was exposing the problems relating to the Maltese Bank urging the ECB and the EBA to act.

When the Pilatus bank started its business in Malta on 2014, its chairman and owner, Seyed Ali Sadr Hasheminejad, was under investigation in the US for evading US economic sanctions and defrauding US banks by concealing the role of Iran and Iranian parties in US dollar payments sent through the US banking system. In that respect, it is surprising that MFSA gave him the permission to conduct banking activities in Malta while he was still under investigation in the US. Subsequently, in March 2016, the reporter Ms Caruana Galizia started to raise concerns about the Bank and the fact that it was conducting illegal activities. In particular, serious concerns were raised about the Bank’s AML/CFT policies. Following these revelations, nothing happened, despite the fact that the Bank was controlled by the Financial Intelligence Analysis Unit (FIAU) of Malta, an independent agency responsible for the anti-money laundering policy, and the Bank simply continued its activities. When the FIAU investigated the Pilatus Bank, members of the MFSA were also present. Yet, the only step taken by the MFSA against Pilatus Bank was the freezing of the Bank’s operations after the arrest of its chairman by the US authorities.

It is remarkable that, following the evidence the reporter gave, the reactions did not stop at the national level but they became vivid at the European level. The Green Party of the European Parliament addressed the European Commission on 14 June 2017 in order to intervene and, if necessary, to open an infringement procedure against Malta about the allegations of violating AML/CFT rules and other illegalities happening at Pilatus Bank. In addition to that initiative, members of the European Parliament wrote to the EBA, in February 2018, asking it to take further action against Pilatus Bank given the fact that the EBA had begun already a preliminary inquiry under its powers resulting from the Regulation No 1093/2010 and the EBA Decision EBA/DC/2016/174 of 23 December 2016 related to the rules of procedures for investigation of breach of Union law. The next effort came, again, from some members of the European Parliament asking the ECB in March 2018 to intervene and withdraw the license of Pilatus Bank. The letter is detailed and the members of the European Parliament are legally arguing that the ECB has the power to intervene under its powers given by the Single Supervisory Mechanism (SSM) and its relevant directives and regulations. The ECB, indeed, has the power under article 82 of the SSM Framework Regulation to withdraw the license of a bank, in cooperation with the national relevant authorities, when the bank in question does not meet the criteria for holding its license.

D. Analysing the legal issues: banking supervision, money laundering and protection of whistle-blowers

a. Banking supervision and money laundering

The Pilatus Bank scandal demonstrates the problematic relation of coordinating banking supervision and money laundering concerns between the EU and national level. The ECB eventually withdrew the license of Pilatus Bank in November 2018 while concerns about its obscure practices were already raised in 2016 (i). Concerning money laundering, the case highlights that the powers of the EU institutions are limited when it comes to combatting this phenomenon.

i. Banking supervision and the Pilatus bank scandal

The new model of banking supervision at the eurozone level, adopted under the SSM Regulation, is still in its infancy. Following the Pilatus bank scandal, the problematic relationship between EU and national banking supervisors came in surface. This problematic relationship may influence, in a negative way, the banking and financial sector. The ECB is vested with significant powers but the enforcement of these powers stays at the national level, especially for the Less Significant Institutions. The concerns raised by the Maltese journalist and by different members of the European Parliament were not immediately taken into consideration. These concerns demonstrated that it is problematic that the ECB does not have the power to control banking and financial institutions for money laundering too. Even when the ECB has the necessary legal powers, such as the case of banking supervision, there is another issue: the enforcement of these powers. The cooperation of European and national authorities and the lack of a central European enforcement agency make the enforcement of the legal provisions complex and, often, not effective.

In the author’s view, the banking supervision system needs to be reformed and become less bureaucratic in order to be able to react more quickly and in a more effective way. The present situation involves 19 countries either with one or two supervisory authorities, which all have to cooperate with the ECB. Maybe the ECB should not have both powers: monetary and supervisory but be reorganised in a different way. By assigning monetary policy and prudential supervision to separate institutions would avoid conflicts of interest that can endanger price or financial stability. Furthermore, the role of the EBA should be more active as, for the moment, its role and position is under discussion in the legal doctrine. Nevertheless, the role of these EU institutions is even more critical when it comes to the fight against money laundering.

ii. Tackling money laundering

The fight against money laundering and terrorist financing is important at the EU level, where so far five Directives have been adopted. Despite the EU legislation on this legal issue, the enforcement of these rules stays on the national level and with the relevant authorities. This became apparent in the Pilatus Bank scandal where the ECB could not handle this issue and the EBA has limited powers as it is bound by the national anti-money laundering authorities. In September 2018, the Chairman of the EBA raised his concerns about this problematic aspect of anti-money laundering policies in response to the members of European Parliament relating to the Pilatus Bank. He stated the following:

The interaction between prudential and AML supervision is left to national implementation. The level of cooperation and of information exchanged can therefore vary between Member States, and there are no specific triggers for such information exchange or particular forms of supervisory action AMLD5 [Anti-Money Laundering/ Counterterrorism Financing EU Directive 2018/843] assists in removing barriers to information exchange, but it does not establish positive obligations regarding cooperation. While EBA or joint ESA guidelines could assist here, there are likely to be limits on what can be achieved without a more specific framework in Union legislation.”

The Chairman of the EBA highlighted the need for a more specific legal framework in terms of EU law in order to combat money laundering. The Pilatus Bank scandal, along with other scandals such as the Danske Bank or Panama Papers, have influenced the EU policy on money laundering in a positive way. The European Commission announced in September 2018 that stronger anti-money laundering supervision is needed and to that end, it proposes to amend the Regulation establishing the EBA in order to reinforce its role in anti-money laundering supervision. It remains to be seen whether this announcement will receive a follow-up in the near future.

b. The proposal for a Directive on the protection of whistle-blowers: what would be different for the Maltese whistle-blower and journalist?

As said in the beginning of this blog post, the European Commission published in April 2018 its proposal for a Directive on the protection of persons reporting on breaches of Union law. The aim of this part of the post is to examine what would have been the situation of Maria Efimova and Daphne Caruana Galizia if that text had been adopted when they found out about the illegal activities of Pilatus Bank.

The proposal for a Directive adheres to the principles established by the Council of Europe and the European Court of Human Rights on the protection of whistle-blowers (recital 23 of the proposed text). The whistle-blower is considered as an enforcement tool which will enhance the enforcement of EU law.

As regards Maria Efimova, her legal situation would definitely have been different if the proposed text had been adopted. As seen above, it was difficult for her to report internally and, in the author’s view, reporting to the authorities would have been futile. Under Maltese law, she did not have the possibility to report to the public (such as to the media). At this point lies the difference with the proposed Directive. Under certain circumstances enumerated in Article 13, the reporting person can report externally. In particular for Ms Efivoma’s case, Article 13(4)(b) is applied where the reporting person can report externally if she considers that she cannot use internal reporting channels due to the particular circumstances of the case. As was demonstrated above, the case of Pilatus Bank was delicate and political persons were also involved. In that scenario, Ms Efimova would thus have had the right to report externally – as she did by providing information to the journalist.

Furthermore, Maria Efimova would have had sufficient protection against the charges of her employer under Articles 13-16 of the proposed Directive. She could also have used the status of whistle-blower as a possible defence against the criminal charges brought against her.

Moving to the journalist, Ms Caruana Galizia, she would also have had the possibility to better protect her sources and thus to provide a more effective protection to the whistle-blower. This point is discussed in Recital 33 of the proposed Directive.

Finally and more generally, the adoption of the proposed Directive would also change the general public’s attitude towards whistle-blowers and investigative journalists, which today still tends to be negative. New EU legislation may, indeed, change the perception of whistle-blowing, and demonstrate its benefits for the society and the public interest. This cultural change might have prevented acts of violence such as the killing of the journalist or would have provided more protection to vulnerable persons such as the whistle-blower and the journalist in question.

E. Conclusion

The Commission’s Proposal was published some months ago but it is still a long way to adopt comprehensive legislation towards an effective protection of whistle-blowers. Furthermore, it is time to reconsider the role of the ECB and EBA in the EU banking and financial sector. The story of Maria Efimova and the murder of the reporter Daphne Caruana Galizia show how difficult it is to be a whistle-blower and an investigative journalist. In that respect, it is remarkable that some members of the European Parliament are urging the Greek authorities to provide asylum to Ms Efimova in order not to be sent back to Malta if that would be the case in the future.

To conclude, it became evident from the above analysis that Ms Efimova was in a delicate situation as to where she should address her concerns. Stories like these resulted in the proposal of the European Commission to enact legislation on the protection of whistle-blowers reporting breaches of EU law. In the light of this Proposal, the need for a common European solution is important and long awaited. Apart from the European response to whistle-blowing, the need for an international solution (maybe a Treaty or a Convention) is becoming more and more an urging need especially for the globalised banking and financial sector.