US regulators crack down on Pakistan’s biggest private bank with US$630 million fine

PUBLISHED : Tuesday, 29 August, 2017, 12:38am
UPDATED : Tuesday, 29 August, 2017, 5:29am

The New York State Department of Financial Services (DFS) is seeking to fine Pakistan’s Habib Bank Ltd up to US$630 million for “grave” anti-money laundering and sanctions compliance failures at its only US branch, the regulator said on Monday.

If imposed, the penalty on Karachi-listed Habib Bank (HBL) would be the largest ever faced by a Pakistani financial institution.

HBL plans to surrender the foreign bank license for its New York branch, according to DFS documents, which said the watchdog intends to expand its review of the Pakistan-based bank’s transactions.

In a filing, the DFS said HBL’s compliance function was “dangerously weak” and that “serious and persistent” failings found at the bank’s New York branch appeared to affect the entire Habib banking enterprise, posing “grave risks” to the banking system.

It also highlighted that HBL held a US clearing account with Saudi’s largest private bank, which has been linked in the media to Al Qaeda and terrorist financing.

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In a letter to the Pakistan Stock Exchange on Monday, the bank accused the DFS of “still not appreciating or recognising the significant progress that HBL had made at its branch.”

Its company secretary Nausheen Ahmad said the hefty fine was “unjustified, capricious and unreasonable”.

She vowed to “vigorously contest” the decision in US courts and announced it would be closing down its New York branch.

The DFS noted more than 4,000 transactions that were not screened because the parties involved were on a “good-guy” list of customers identified as very low risk. More than 150 “terms” on the list corresponded to entities sanctioned by the US Treasury Department, and included a transaction involving the leader of a Pakistani terrorist group and another involving an international arm dealer.

The DFS said its investigation also uncovered payments totaling more than US$27,000 sent to an account at the bank’s head office associated with an individual wanted by the FBI for cyber crimes.

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HBL said the closure of its New York operation would have no material impact on HBL’s business outside the United States. Pakistan’s central bank said the potential fine posed no “imminent risks” to HBL or the country’s system.

HBL, majority-owned by the Pakistani government, subsequently agreed to introduce a range of measures to guard against money laundering and sanctions violations, including improving management oversight, tightening customer due diligence and suspicious transaction monitoring.

But a 2016 inspection revealed ongoing problems, including insufficient training, documentation, oversight, and a US-dollar clearing account with Saudi Arabia’s Al Rajhi, which “presented Habib Bank with a significant risk of being used for terrorist financing,” the DFS said.

In addition to the penalty, the DFS has demanded a so-called “look back” at some of HBL’s previous transactions.

HBL was founded in 1947 and now has over 40 per cent of market share in Pakistan’s banking sector.

It was part-privatised in 2004, with the Agha Khan Foundation buying the bulk of the shares.

In April 2015 the Pakistan government approved divesting all of its state-owned shares in HBL for US$1.02 billion, in the country’s largest-ever equity offering.

It had received a licence to open a branch in China last year, making it the first South Asian lender to operate in the world’s number two economy.

It currently has more than 1,700 branches in Pakistan and an international network spread over 25 countries.

New York State imposed strict anti-money laundering regulations in 2015, and the DFS has since pursued several aggressive enforcement actions against foreign banks for anti-money laundering control lapses over the past two years.

These include Agricultural Bank of China, Mega International Commercial Bank of Taiwan and National Bank of Pakistan.

In 2013, the DFS imposed a US$2.4 billion fine on BNP Paribas for sanctions breaches.

Because the US dollar is the global reserve currency, US financial regulators have immense clout worldwide and can cut non-compliant foreign banks off from the US dollar clearing system by preventing US banks from doing business with them. This would restrict their ability to offer cross-border services to their clients back home.

With additional reporting by Agence France Presse