The European Banking Authority in London is to investigate the Maltese regulator's supervision of Pilatus Bank, which the American Government has accused of facilitating illegal payments on behalf of Iran.

The EBA, which is moving to Paris at an unannounced date, has already mounted a so-called 'preliminary enquiry' about a possible breach of or failure to apply the law of the European Union by the Malta Financial Services Authority in relation to Pilatus Bank.

The EBA's chairperson, Andrea Enria, decided to open this formal investigation in relation to the Maltese Financial Intelligence Analysis Unit (FIAU). In doing so, she considered three things.

• The manner in which the FIAU conducted its investigation and planned its supervisory activities in relation to the 'highly risky' institution appeared inadequate for the job of enforcing the EU's third money-laundering directive, especially article 37, which requires such competent authorities to do this.
• The FIAU appears to have failed to make the institution set up adequate AML/ATF policies and procedures, as required under article 34.
• In the EBA's eyes the FIAU did not impose effective, proportionate and dissuasive sanctions (nor, indeed, any other supervisory measures) to correct the shortcomings that it had identified to make the institution comply with the directive.

The EBA has sent the FIAU a report on the subject and given it time to reply - the nature of its response is unknown. The supra-national regulator will now convene a panel that will decide whether anyone has broken EU law and, if so, to propose some recommendations to the EBA. The EBA has given itself two months in which to investigate.

Concerning the Maltese Financial Services Authority (MFSA), Enria has sent it a letter asking for additional information in relation to its preliminary findings by tomorrow. In particular, she has asked it to describe the things it plans to do (along with a specific deadline) about some of the problems that the preliminary enquiry identified, such as its co-operation with the FIAU, the prudential supervision and interventions regarding the authorisation process and the bank's internal controls and business model. Much hangs on the regulator's reply.

The EBA has told Compliance Matters that "the situation is evolving all the time."