Ali Sadr exonerated, but Pilatus Bank closed down

Dollar Handcuffs

The US Sanctions case United States v. Sadr against Ali Sadr Hasheminejad was thrown out by the Southern District of New York (SDNY) in extraordinary fashion after a guilty verdict had been obtained. Egregious Brady violations revealed post-trial led to a vacated verdict and dismissal with prejudice in the US sanctions case. The US Attorney for the Southern District of New York determined ‘it would not be in the interests of justice to further prosecute this case.’ This was an extraordinary development after obtaining a guilty verdict and followed six years where US prosecutors pursued Ali Sadr. Despite this exoneration, the ramifications of the Ali Sadr affair from a US Sanctions perspective are worth noting. This is certainly a welcome result for those who have challenged the approach of the aggressive US sanctions regime, but the collateral damage to Ali Sadr and his former Pilatus Bank has been immeasurable.

Iranian Ali Sadr Hasheminejad’s was Chairman of Pilatus Bank, Malta, which was closed down by the European Central Bank (ECB) in 2018, months after he was charged in the US on counts of fraud, money laundering and sanctions breaches. Ali Sadr Hasheminejad participated in a scheme to process $115m (£88m) in payments for a Venezuelan construction project to Iranian individuals and companies, in a project size of c. $475m and a total of 7,000 housing units.

The project followed a Memorandum of Understanding (MoU) between the Iranian and Venezuelan governments. The Venezuelan housing infrastructure project was led by Ali Sadr’s own Stratus Group, an Iranian conglomerate owned by Ali Sadr and his family. The construction company was privately-owned. Ali Sadr, his father and the companies involved had no link to the Iranian government, neither were they designated as a Specially Designated National (SDN) by the US Treasury Department’s Office of Foreign Assets Control (OFAC). The project payments were sent from Venezuela’s foreign banks to bank accounts in Switzerland, and no money was ever transferred to or through Iran.

US prosecutors argued that Ali Sadr caused sanctioned exports of financial services from the US to Iran based solely on correspondent banking transactions. In other words, the electronic “clearing” by US intermediary banks of foreign bank-to-foreign bank wire transfers, which they alleged benefited companies and individuals in Iran. Sadr testified that he understood that the sanctions applied to the Iranian government, SDNs, and certain military, nuclear or petroleum-related transactions. He also asserted that he did not think that this applied to private businessmen doing business outside Iran who kept their assets outside Iran.

Ali Sadr pleaded not guilty to the charges, and although he was convicted by the US Department of Justice in March 2020, he was subsequently exonerated by the Southern District of New York in July 2020. Yet significant damage has already been done.

The Pilatus Bank and Ali Sadr Hasheminejad saga has been going on for some time. The Malta Financial Services Authority (MFSA), Malta’s financial watchdog, originally granted Pilatus Bank a licence in 2014, but then subsequently recommended to the ECB that Pilatus Bank’s authorisation to operate as a credit institution be removed. Pilatus Bank had also been accused by Maltese journalist, Daphne Caruana Galizia, of processing corrupt payments to Maltese government officials. This prompted an inquiry by the EU on Malta’s regulation of Pilatus Bank, led by the European Banking Authority (EBA).

Pilatus Bank’s account holders included the subsequently disgraced former Maltese Prime Minister, Joseph Muscat and the widely alleged corrupt ruling family of Azerbaijan. Muscat was forced to resign after the rumours surrounding the assassination of Daphne Caruana Galizia in October 2017. She had provided information to the Panama Papers revelations, which alleged links between the Muscat’s wife and shell companies with Pilatus Bank accounts. Joseph Muscat was subsequently made OCCRP’s “Corrupt Actor of the Year 2019” for the rise in criminality in Malta and lack of prosecutions under his tenure as Prime Minister.

Pilatus Bank reported €308m (£270m) in assets in 2016, and had planned to open a London office in April 2017. Pilatus Bank had been granted a passport by the Maltese MFSA to operate in the UK. This ultimately this did not come to pass as it was never permitted to offer accounts to UK residents.

Due to US Sanctions pressure on Pilatus Bank, and multiple claims of alleged corrupt transactions and alleged corrupt actors as account holders, Pilatus Bank had its licence removed by the ECB back in 2018. Although Ali Sadr Hasheminejad was exonerated and cleared his name, his former Malta-based bank is no more and the damage caused to his reputation internationally by this affair is untold. It should not be forgotten that the allegations surrounding Pilatus Bank – quite apart from the specific alleged US Sanctions and Money Laundering, Fraud violations – involving the Panama Papers, Malta and Azerbaijan governments – were already very damaging indeed.

The fact that the US Government were unable to press home a conviction for Ali Sadr Hasheminejad is somewhat of a pyrrhic victory for Ali Sadr – although it is a further indication – and potentially some solace to those inadvertently caught up in US Sanctions issues – that successful convictions in the US Sanctions arena can be somewhat fleeting and hard to achieve. Nevertheless Risk Managers and in-house Legal folk from financial services, industry, family offices, pension funds and investors will be thinking twice about risking apparent US Sanctions and Money Laundering violations after this case. Ultimately, US Sanctions pressure prompted the arrest of Ali Sadr, led to the closure of his bank Pilatus Bank – with massive and far-reaching consequences, regardless of his eventual exoneration in the US.

Worryingly however, this may not prove to be the case. There remains widespread confusion outside the US regarding the reach of US Sanctions. Particularly where the EU and Middle East, Asia are so keen to criticise and downplay the integrated US Sanctions and AML (Anti-Money Laundering), Counter-Terrorism and Proliferation regime. There is therefore a grave danger that some legal practitioners will regard the Ali Sadr exoneration verdict as a green light to challenge, or, worse still, ignore – the US Sanctions regime. With very grave potential consequences down the line. In Ali Sadr’s case, he may have won a pyrrhic victory by being exonerated by the US, but he has clearly lost the war – with his former bank, Pilatus, closed down.

Sadly, senior political figures, from Germany’s Angela Merkel to Malaysia’s Mahathir Bin Mohamad, have been more than happy to state in 2020 that the US has “no right” to invoke globally-applicable Sanctions enforcement, citing the UN as the only body capable of such wide-ranging powers. Whatever the theoretical validity of the US position on sanctions, its ability to enforce remains without equal, and more often than not without viable challenge. Senior political figures (often with ulterior motives, such as trade expansion ambitions) should take great care before provoking unintended consequences of their statements – which for those (including their own nationals) subjected to US Sanctions enforcement for “apparent” US sanctions violations – could mean multi-million/billion US dollar fines, or being cut off from the US dollar and US market entirely. German banks (Deutsche Bank and Commerzbank are notable examples), have been relentlessly targeted by US sanctions enforcement in recent years.

The fact remains that the bank which Ali Sadr headed, Pilatus Bank, had all its assets frozen and was closed down by the European Central Bank, prompted by US Sanctions concerns from the Maltese MFSA as well as other major worries. Ali Sadr’ and Pilatus Bank’s reputation have undoubtedly been severely tarnished by the affair for multiple reasons. Moreover, this case provides very little justification for any serious risk/reward strategy which involves “apparent” breaches of the US Sanctions, Anti-Money Laundering, Counter-Terrorism and Proliferation regime. Sadly, too many legal practitioners rush to the lack of actual convictions in this arena as support for underplaying the dangers of risking US Sanctions breaches. The key facet to the US Sanctions regime is to force massive, at times, multi-billion dollar civil settlements based on mere “apparent” violations – with global impact and, feasibly, the treacherous US secondary sanctions arena, which can involve third party, non-US dollar, non-US venue, non-US party transactions. The can make effective due diligence a real challenge.

Those who wrongly cite the JCPOA initiative that the US exited in November 2018 omit the fact that much of the thrust of the US Sanctions regime on Iran remained largely unchanged after the JCPOA – with so many avenues still closed – or highly risky – in terms of US and Iran trade on the non-nuclear, commercial front. Furthermore, the superficial argument that the US President alone controls Sanctions policy ignores the fact that US Congress has been instrumental in pushing for – and passing unanimously – major foreign policy and Sanctions initiatives, such as the major US Magnitsky (global human rights measure), CAATSA (targets Iran, North Korea, Russia), and CAESAR (counter-Syria, targeting Syrian allies Russia and Iran) legislation.

Or that President Obama, contrary to much of the “noise” on the social media front, along with fellow Democrat President Clinton, were instrumental in supporting the tough US Sanctions regime. Particularly against Iran in the aftermath of the JCPOA – where the Obama Administration’s robust position vis-à-vis Iran – after President Obama’s initial diplomatic attempts to deal with Iran failed – has been much misunderstood. Bipartisan US foreign policy harnesses its US Sanctions regime – that much is abundantly clear. As for the much-lauded JCPOA, or “Iran Nuclear Deal” – all the US pressure on Pilatus Bank and Ali Sadr Hasheminejad was initiated the US was still nominally part of the JCPOA and prior to it exiting the JCPOA in November 2018. Clearly, the presence of the JCPOA made little to no difference in the way the US approached the alleged US Sanctions breaches in this case.

The sorry saga of now US-exonerated Ali Sadr Hasheminejad and his now-closed Pilatus Bank of Malta is clear – risk “apparent” violations of US Sanctions, and suffer the consequences. The allegations surrounding Pilatus Bank from a non-US perspective were already serious enough, based on the input of the likes of murdered Maltese investigative journalist Daphne Caruana Galizia and the types of alleged corrupt account holders and transactions that Pilatus Bank was involved in – with further liquidity issues prompting the ECB to close the bank down, with all assets and deposits frozen.

Even more worryingly, if convictions against would-be US Sanctions offenders fail, it will simply increase US resolve to tighten restrictions – which could easily prompt US President-led Executive Orders, legislation, or US Congress-led bipartisan foreign policy initiatives further down the line. Naturally, the US will need to take greater care in future when pursuing US Sanctions-related convictions for alleged offences. Which is, potentially, welcome news for those caught up (inadvertently) in potential US Sanctions violations.

But the message remains clear – it remains very hard to make a robust business, commercial or investment case for committing even “apparent” US Sanctions violations – given the potential fallout that may ensue. So entities and investors need to take the utmost care when involving themselves – directly, or, at times, even indirectly (where US Secondary Sanctions apply) – with US Sanctions targets – be they governments, entities, individuals or transaction types.

Ali Sadr was charged, imprisoned in the US, pursued for six years with the bank he was Chairman of, Pilatus Bank, Malta closed down and all its assets and deposits frozen before being finally exonerated by the Southern District of New York. That is one bitter pill to swallow.