Pilatus Bank – Malta’s US Sanctions & Money Laundering Nightmare

In one of the very rare successful challenges to the US sanctions and anti-money laundering regime, US exonerated former Pilatus Bank Chairman, Iranian Ali Sadr, is suing Malta via the World Bank’s ICSID.

Malta stands accused of expropriating his former Pilatus Bank and having it closed down, with Ali Sadr claiming millions of dollars in damages. Intriguingly, he is using his Hong Kong entity Alpene to file the action with the ICSID for breach of the 2009 Malta – China Bilateral Investment Treaty. The ICSID’s decision in: Alpene Ltd v. Republic of Malta (ICSID Case No. ARB/21/36) is pending.

In November 2018, EU Member State Malta’s Pilatus Bank was shut down by the European Central Bank (ECB) after its chairman, Iranian Ali Sadr Hashemi Nejad, was arrested in March 2018 for alleged involvement in a US sanctions avoidance scheme. In June 2018, Pilatus Bank’s licence had been withdrawn by the European Banking Authority (EBA). This was regarding the illegal processing of $115m via a Venezuelan housing complex through the US financial system in a violation of US sanctions on Iran, as the money was directed to Iranian individuals and entities.

This followed an MoU (Memorandum of Understanding) between the Iranian and Venezuelan

governments which related to a Venezuelan housing infrastructure project, which was led by Ali Sadr Hashemi’s own Stratus Group, an Iranian conglomerate owned by Ali Sadr Hashemi Nejad and his family, and chaired by the father of Ali Sadr. The project size was c. $475m for a total of 7,000 housing units.

An elaborate scheme was devised to use US dollar transactions whilst covering up the fact that there were Iranian parties involved. This included the use of St. Kitts and Nevis passports and an address in the United Arab Emirates to set up two entities to receive funds outside Iran from the proceeds of the Venezuelan housing project. Major failures were apparent in the Maltese Financial Intelligence Analysis Unit, Malta’s anti-money laundering agency. Ultimately, the hand of the Malta Financial Services Authority (MFSA) was forced as it froze the assets of Pilatus Bank, and the EU was looking into taking further action against Malta due to the serious shortcomings in the handling of the Pilatus Bank affair. Maltese journalist and campaigner, Daphne Caruana Galizia, who was killed in October 2017, accused Pilatus Bank of dubious payments which relate to the Panama Papers revelations, involving senior Maltese and Azerbaijani public figures.

Pilatus Bank and Ali Sadr Hashemi Nejad were accused of conspiracy to violate sanctions, and was charged with defrauding the US government banks, as well as money laundering and other conspiracy charges by the U.S. Attorney’s Office for the Southern District of New York. Ali Sadr Hashemi Nejad’s trial date in the US was set for 21 October, 2019. The U.S. Department of Justice held that Ali Sadr used his St. Kitts and Nevis passport to set up companies instrumental to the scheme. Ali Sadr pleaded not guilty, and was convicted in March 2020 after being found guilty on five counts of breaching US-Iran sanctions as well as bank fraud for the multi-million US dollar housing project in Venezuela. He was also found guilty of defrauding the US government. Ali Sadr faced a possible US prison term of 85 years.

In July 2020, he appealed the US verdict and a US court granted a motion for a new trial, which reversed Ali Sadr’s guilty conviction on 17 July 2020 and exonerated him. There had been issues with non-disclosure of information held by the US Government to Ali Sadr’s defence attorneys in the case, which had already led to US attorney Berman deciding to drop the case back in June 2020. Not only was Ali Sadr exonerated by the US – he sought – and received a guarantee from the US Government that it will not have him removed from the US.

In a final twist to this long-running US sanctions and money laundering saga, Ali Sadr’s defence team applied to sue Malta for millions of dollars in damages using his Hong Kong entity Alpene. This called for a suspension of all proceedings in Malta against Ali Sadr and related parties in the Pilatus Bank case. Interestingly, the request was made to the ICSID – the World Bank’s International Centre for the Settlement of Investment Disputes. This focused on the 2009 Bilateral Investment Treaty (BIT) between Malta and China – ironically, a country that Malta is very keen to receive further investment from. Ali Sadr is claiming that the ongoing harassment by Malta to him and those affect by the Pilatus Bank are in breach of the 2009 Malta – China BIT.

Malta’s Government were informed of the dispute being put forward to the ICSID under the auspices of the Malta – China BIT in August 2020, but did not respond. In June 2021, Alpene filed for arbitration before the ICSID, noting Malta’s lack of response. In many respects, filing via the ICSID was a very smart move indeed. The ICSID was set up in 1966 to settle international investor – State dispute settlements (ISDS). ICSID decisions are binding. The court process in micro EU Member State Malta is notoriously slow and, when Malta’s Government are involved, decisions can be very self-serving in favour of Malta.

Alpene claimed that Malta was engaging in harassment and retribution against Ali Sadr and Pilatus Bank over the arbitration case being filed against Malta by Alpene, and that Pilatus Bank had been effectively expropriated by Malta. In September 2021, the ICSID responded by calling for a cessation to all proceedings in Malta against Ali Sadr and Pilatus Bank until the case has been decided. In response to Malta’s attempts to get the arbitration thrown out, the ICSID ignored them as it concluded that Malta has a case to answer. On 25 September 2024, the ICSID issued a decision allowing the case to proceed to the next stage.

Tiny Malta must feel like it is between a rock and a hard place, up against some very smart counter-measures from US exonerated Ali Sadr’s defence team. It is often the case that taking on a case internationally is successful when combating decisions in smaller jurisdictions, which put them under the international spotlight and unwanted scrutiny. Malta’s former Prime Minister, Joseph Muscat, was named “Person of the Year in Organized Crime and Corruption” by OCCRP in 2019, and Malta’s notoriety as a haven for money laundering and illicit finance is not helped by its handling of the Ali Sadr case, nor the killing of Maltese journalist and transparency campaigner Daphne Caruana Galizia, in 2017. In a highly competitive investment environment, smaller states need to be sure that they are adding true value to their investor base to attract greater potential fiscal revenue and FDI.

Despite the extraordinary efforts of Ali Sadr’s defence team, straddling international investor state dispute settlements, the message is very clear. Engaging in dubious US sanction-hit jurisdictions carries very severe penalties, and effective appeals and remedies are extremely rare and time-consuming. For those engaging in global, cross-border transactions, the US is precisely the sort of extra-territorial sovereign enforcer that major multinationals would want to avoid. According to Good Jobs First Violation Tracker, the total fines in US actions against US and non-US corporations since 2000 is over $1 trillion – a staggering figure equivalent to the total nominal GDP of the top 20 or so economies in the world.