MALTA AGREES TO DENY REQUESTS BY IRANIAN BANKS TO

S E C R E T VALLETTA 000517


NOFORN

E.O. 12958: DECL: 12/11/2018
TAGS: PARM PREL EFIN KNNP MT IR
SUBJECT: MALTA AGREES TO DENY REQUESTS BY IRANIAN BANKS TO
ESTABLISH SUBSIDIARIES IN MALTA

REF: A. SECSTATE 115523

B. VALLETTA 485

Classified By: DCM Jason L. Davis for reasons 1.4 (b) and (d)


1. (U) On December 11, DCM called on MinFin Head of
Secretariat Alan Caruana to get the GoM's formal response to
Ref A demarche, which asked that Malta agree to adopt "at
least one" of several proposed "preventative measures to
address the specific risks posed by Iran."


2. (C) The text of the GoM's response, drafted by Malta's
Financial Intelligence Analysis Unit (FIAU),appears at
paragraph 5, below. One highlight is a firm commitment by
Malta to deny requests by Iranian banks to establish a
subsidiary, branch, or representative office in Malta. The
mechanism for denial is based on a determination by the Malta
Financial Services Authority (MFSA) that "nationals or
institutions from Iran would not be considered by the MFSA as
being fit and proper persons for the purposes of MFSA's
licensing criteria." In fact, the FIAU report noted, MFSA
had recently discouraged a potential request for the
establishment in Malta of a representative office of an
Iranian credit institution.


3. (C) The FIAU report also noted that Malta was already
implementing several of the other measures proposed in the
demarche, including requiring Maltese financial institutions
to identify clients and beneficial owners before establishing
business relationships with individual companies from Iran,
reviewing existing account relationships based on risk
assessment, and imposing enhanced reporting requirements for
financial transactions involving Iran.


4. (S) One disappointing element to the report was the
response to our proposal that Malta deny requests by Iranian
institutions to enter into joint ventures with or purchase a
controlling stake in any local financial institution. On
this point there was no firm commitment to prevent it, only
an assertion that the MFSA did have the authority to deny
such requests, and that existing statutory criteria were
robust enough to enable the MFSA to adequately verify the
risks to the local financial system posed by such requests.
DCM asked Caruana whether he thought the FIAU had
deliberately left the door open to such acquisitions, and if
so why. Caruana recommended that he, Ambassador Bordonaro,
and DCM meet with the FIAU leadership to ask this question
and to push for improved language. A meeting is being
scheduled for early January, in order to accomodate the
travel schedules of the relevant officials.


5. (SBU) Following is the text of the GoM's response to Ref A
demarche:

Begin Text

JOINT NOTE PREPARED BY THE FINANCIAL INTELLIGENCE ANALYSIS
UNIT AND THE MALTA FINANCIAL SERVICES AUTHORITY

Preventive measures adopted by the Financial Intelligence
Analysis Unit (&FIAU8) and the Malta Financial Services
Authority (&MFSA8) pursuant to the FATF Statement issued on
the 16th October 1008 (&the October Statement8) and the
FATF Guidance on the implementation of financial provisions
of UN Security Council Resolution 1803 issued on the 17th
October 2008 (&the Guidance8).

FATF October Statement

The FIAU, as the entity responsible in Malta inter alia for
the dissemination of information with a view to combating
money laundering and the financing of terrorism, took
immediate steps to ensure that the October Statement be
brought to the attention of all subject persons in terms of
the Prevention of Money Laundering and Funding of
Terrorism Regulations, 2008 ("the 2008 Regulations").

Indeed, the approach adopted by the FIAU was similar to that
taken with regard to the previous Statement issued by the
FATF on 28th February 2008. The October Statement was in fact
prominently placed on the FIAU,s website and circulated to
all credit and other financial institutions individually with
a note to take measures to ensure compliance thereto.

As to the other persons falling within the scope of the
Maltese AML/CFT laws, the FIAU forwarded the October
Statement to all the representatives of subject persons
sitting on the Joint Committee for the Prevention of Money
Laundering and Funding of Terrorism. This Committee is
composed of associations and bodies representing subject
persons, together with the Police, the Attorney General's
Office, the MFSA and the Central Bank of Malta. The members
of the Committee were asked to circulate the October
Statement and to bring its contents to the notice of all
their members.

FATF Guidance re UNSCR 1803

In the case of the Guidance, the FIAU took similar measures
to bring this document to the attention of the industry
whilst making sure that it itself applies that guidance
related to the authorities. Thus the FIAU has notified all
credit institutions individually with respect to the Guidance
and encouraged them to examine and apply all the measures
laid out therein. The Guidance has also been prominently
placed on the FIAU,s website.

Other Measures

Other measures adopted in relation to the October Statement
and the Guidance by the FIAU as the regulatory authority on
money laundering and financing of terrorism issues, and by
the MFSA, as the regulatory authority responsible for the
supervision of credit and financial institutions in Malta,
are highlighted in the paragraphs below in sequence to the
request.

(A) Client and beneficial owner identification before the
establishment of business relationships with individuals or
companies from Iran

In line with the FATF 40 Recommendations and the relevant EU
Directives, Maltese financial institutions are prohibited by
the 2008 Regulations from forming a business relationship
with a person unless the financial institution adopts
adequate customer due diligence measures and maintains
adequate records. Such measures include among other things
the identification and verification of the identity of the
individual seeking to establish a business relationship and,
where relevant, that of the beneficial owners. Additionally,
as part of its ongoing monitoring obligations, the financial
institution must keep its information up to date. These
obligations exist irrespective of the nationality of the
client.

Moreover, subject persons are required to apply, on a
risk-sensitive basis, enhanced customer due diligence
measures in situations which, by their nature, can present a
higher risk of money laundering or the funding of terrorism.
Consequently, in view of the issuance of the above-mentioned
Statement and previous similar statements, subject persons
are expected to apply enhanced due diligence measures where
applicants for business are Iranian nationals, Iranian
companies or have close connections with Iran.

Subject persons who breach the obligations of identification
and verification of the person seeking to establish a
business relationship or who do not apply the customer due
diligence requirements established by the 2008 Regulations
may be subjected to the imposition of administrative
penalties by the FIAU.

(B) Review of existing correspondent account relationships
based upon a risk assessment in order to determine whether
the respondent Iranian financial institutions are complying
with relevant requirements.

Notwithstanding that EU Regulations are binding on member
states without the need for transposition into national
legislation, the Malta Financial Services Authority
(&MFSA8) in June 2008 issued a circular to licensed credit
institutions drawing attention to the EU Commission
Regulation (EC) No 219/2008 of 11 March 2008 amending Council
Regulation (EC) No 423/2007 concerning restrictive measures
against Iran and on Council Decision (2008/475/EC)
implementing Article 7(2) of Regulation (EC) No 423/2007.
Credit institutions are therefore required to undertake
correspondent banking relationships in line with the
requirements of the afore-stated EU Regulations.
Additionally, during on-site reviews conducted at local
banks, supervisory inspectors acting also as agents of the
FIAU, undertake the necessary analyses to verify that the
institutions are abiding with these (and other) statutory
requirements and check as part of their oversight that no
relationship would have been entered into with the
individuals/persons mentioned in the Regulations.

Moreover, Regulation 11(3) of the 2008 Regulations provides
that credit institutions and electronic money institutions
establishing cross-border correspondent banking and other
similar relationships with respondent institutions from a
country other than a Member State of the European Community
are required to ensure that they fully understand and
document the nature of the business activities of their
respondent institution, including, from publicly available
information, the reputation of and the quality of supervision
on that institution and whether that institution has been
subject to a money laundering or funding of terrorism
investigation or regulatory measures. In such circumstances,
the credit institutions and electronic money institutions
would also be required to assess the adequacy and
effectiveness of their internal controls for the prevention
of money laundering and the funding of terrorism, to obtain
the prior approval of senior management for the establishment
of new correspondent banking relationships, to document their
respective responsibilities for the prevention of money
laundering and the funding of terrorism and, in the case of
payable-through accounts, they are expected to be satisfied
that the respondent credit institution has verified the
identity of and performed on-going due diligence on the
customers having direct access to the accounts of the
respondent institution and that it is able to provide
relevant customer due diligence data to that subject person
upon request.

(C) Enhanced reporting requirements for financial
transactions involving Iran

Subject persons are required by Regulation 15(1) of the 2008
Regulations to examine with special attention, and to the
extent possible, the background and purpose of any complex or
large transactions, including unusual patterns of
transactions, which have no apparent economic or visible
lawful purpose and any other transactions which are
particularly likely, by their nature, to be related to money
laundering or the funding of terrorism, to establish their
findings in writing and to make such findings available to
the FIAU and to the relevant supervisory authorities in
accordance with applicable law.

In addition, subject persons are required, pursuant to
Regulation 15(2) of the 2008 Regulations, to pay special
attention to business relationships and transactions with
persons, companies and undertakings carrying out their
activity from a jurisdiction that does not meet the criteria
of a &reputable jurisdiction8 i.e. a country having
appropriate legislative measures for the prevention of money
laundering and funding of terrorism and that complies with
internationally accepted standards for the prevention of
money laundering and for combating the funding of terrorism.
In this regard, the October 2008 Statement and other similar
FATF statements are seen to constitute valid tools in
determining whether a jurisdiction is to be considered
reputable or otherwise.

It is important to point out that, as the US Authorities had
already been informed in April 2008 in a meeting with Mr
Stuart Levey, US Under Secretary of the Treasury for
Terrorism and Financial Intelligence, a credit institution
which had in the past carried out transactions with Iranian
entities and individuals was asked by the MFSA to submit
detailed information relating to its exposures to these
entities. The information is being actively monitored and
this credit institution is in regular contact and updating
the authorities with developments in this area.

(D) Restrict financial transactions with Iran or persons in
Iran;

In accordance with Regulation 15(3) of the 2008 Regulations,
where a jurisdiction which is deemed non-reputable continues
not to apply measures equivalent to those laid down by the
2008 Regulations, subject persons are required to inform the
FIAU. In such cases the FIAU, in collaboration with the
relevant supervisory authority, may require such business
relationship not to continue or a transaction not to be
undertaken or apply any other counter-measures as may be
adequate under the respective circumstances.

Additionally, as noted in the comment to point (B),all
credit institutions are required to operate within the
parameters set by the EU Council Decision (2008/475/EC) and
Commission Regulation (219/2008) with respect to the
undertaking of financial transactions with Iran or persons in
Iran.

(E) Deny any requests by Iranian banks to establish a
subsidiary, branch, or representative office in Malta;

The establishment of a subsidiary, branch or representative
office in Malta by a foreign institution is governed by
Banking Rule BR/01/2008.02 issued by the MFSA and the
criteria under the Banking Act, Cap. 371. Banking Rule BR/01
establishes the criteria for licensing purposes which, inter
alia, includes the &fit and proper8 and due diligence
tests.

More specifically, clause 20 of BR/01 states that an
applicant for a banking licence must satisfy the MFSA that
all qualifying shareholders, controllers and all persons who
will effectively direct the business of the bank are
suitable, fit and proper persons. These criteria go beyond
questions of the suitability of particular individuals but
entail the observance by the institution as a whole of the
highest professional, ethical and business standards in
conducting its activities in a prudent manner. In this
respect the MFSA draws the attention of an applicant for a
licence to article 32 of the Banking Act. Article 32
prohibits persons who, among other things, are interdicted or
incapacitated or who have been involved in money laundering
or found guilty of a crime affecting public trust, theft,
fraud, extortion or of knowingly receiving property obtained
by theft or fraud, from holding office within a bank.

Clause 20 similarly applies to subsidiaries and branches. In
considering whether to authorise the establishment of a
subsidiary or branch the MFSA will take into consideration
the nationality of the applicant to determine whether it is a
suitable person. In the light of the FATF statements,
therefore, nationals or institutions from Iran would not be
considered by the MFSA as being fit and proper persons for
the purposes of the MFSA,s licensing criteria. In fact the
MFSA has recently discouraged a potential request for the
establishment in Malta of a representative office of an
Iranian credit institution.

(F) Deny requests by Iranian FIs to enter into joint ventures
with or purchase a controlling stake in any local financial
institution;

Further to the conditions laid down by Article 20 of
BR/01/2008.02 as detailed in item E above, Article 13 of the
Banking Act establishes the criteria for participation in a
credit institution. The consent of the MFSA is required for a
person or entity to acquire or divest of a qualifying or a
significant shareholding in a credit institution. A
significant shareholding is defined as a holding of at least
5% of an entity,s equity while a qualifying shareholding is
at least 10%. Moreover, if as a result of an acquisition of
shares in a credit institution, that institution becomes a
subsidiary of the person or entity acquiring the shares, and
that person is a credit institution authorized in another
country, the MFSA needs to consult with the relevant
authorities of the country concerned. Article 13 further
provides the MFSA with the authority to deny such
applications. Similar provisions are found in other financial
legislation governing the non-bank financial sector.

The MFSA is therefore confident that the above statutory
criteria are sufficiently robust to enable it to adequately
verify the risks that such potential venture/acquisition
would place on the target institution itself and on the local
financial system in general.

(G) Warn those commercial sectors with significant business
ties with Iran that transactions with individuals or entities
from Iran have a heightened risk of money laundering or
terrorist financing.

As explained above, the FIAU places the FATF statements and
other similar communications in this regard on its website
and, in certain cases, opts to inform credit and financial
institutions individually about specific documents issued in
relation to this matter. Similarly, sanctions imposed by the
European Union and by the United Nations Security Council are
posted on the MFSA website. Furthermore the FIAU and the MFSA
ensure that the matters discussed in this paper feature
prominently during any seminars, conferences or other
training programmes in which they participate.

End Text

BORDONARO