FIAU warning: lawyers can launder criminal monies through sham litigation

Sham litigation and out-of-court settlements, not an uncommon sight in the Maltese courts, have been identified by the Financial Intelligence Analysis Unit as a way of laundering criminal gains.

The FIAU said that although litigation cases do not fall within anti-money laundering rules, lawyers and their clients can conspire to create fabricated disputes as a pretext to transfer the proceeds of crime.

“There is a possibility that clients set up, or are knowingly involved in, fabricated civil claims in courts of law,” the FIAU said in a warning to lawyers to steer clear of such claims.

“In most instances these would be disputes between parties acting in collusion, and they would tend to be settled between these parties so that the settlement would itself be fabricated. The parties would then agree to settle the claims amicably, with funds being transferred to the claimant as part of the settlement.

“The recipient of the funds would then attempt to use the civil suit, including a record of the court proceedings, as evidence of the purpose of the transaction, when requested to do so by a financial institution or other subject person to justify the source of funds.”

FIAU director Kenneth Farrugia: the agency has been issuing interpretative notes for professionals and various industries that handle money on the risks of money laundering and terrorism financing

The FIAU said lawyers should be aware that civil cases may be misused and that clients end up using them to facilitate the laundering of proceeds of crime.

Similarly, criminals and their lawyers can concoct a constitution of debt, which provides the creditor with an enforceable legal instrument in the case of a default in payment by the debtor, among other legal consequences.

The FIAU warned lawyers could facilitate the transfer of illegitimate funds by representing clients on fictitious debts without asking the right questions or documents to substantiate the alleged debt.

“This risk may be compounded by the fact that the lawyer representing the client, or the notary publishing the constitution of debt… are not typically present at the point of the creation of the alleged pre-existing debt, and are therefore not always in a position to verify whether the debt is real.”

A case in point was a litigation case filed by suspected fuel smuggler Gordon Debono – who faces criminal charges in Italy – to have his Belize company Oil & Ship Consultancy (OSC) of Belize pay back a €1.5 million loan from Dubai company International Properties and Investment Ltd (IPIL), whose ‘board of directors’ is represented by Debono’s wife Yvette.

Suspected fuel smuggler Gordon Debono filed for court action to have one offshore company move money to another offshore company whose director was his wife, over a constitution of debt

In July 2018, the two companies went to a Cypriot court, which recognised the constitution of debt between OSC and IPIL to reach a ‘court settlement’ for €1.5 million. The loan agreement was created just a month before Gordon Debono’s arrest in Sicily in late October 2017. Yvette Debono was only transferred the Dubai company’s shares in March 2018 from a corporate service provider.

A Maltese court in 2019 then recognised the Cypriot court’s decision, as per EU law.

Malta’s financial regulator had later lost a bid to stop the shuttered Satabank from releasing the funds requested by Debono, over money laundering concerns.

An Appeals Court declared there were no grounds to stop the withdrawal, but said the money would still have to be scrutinised for money laundering purposes.

However the three-judge Court of Appeal presided by the Chief Justice, specifically said the first court had been wrong in stopping the execution of the debt repayment. “Satabank cannot issue the sequestered funds to OSC directly, but it has to deposit this money to the court that issued the executive title, and one understands that the withdrawal will only be authorised if and when there is no reason to stop such a withdrawal – particularly if this process of verification on Oil & Ship Consultancy does not reveal any irregularities.”

A second, similar case is now ongoing in the Maltese courts, to enforce another Cypriot court decision, brought by Yvette Debono’s IPIL against a BVI company, Marine Offshore Investments Ltd (MOIL), over a €1.3 million loan agreement also created on 4 September, 2017. The debt was recognised by a Limassol court in June 2018.