New York State regulator fines, closes US outpost of Pakistan’s Habib Bank for compliance failures

The banking regulator for the US State of New York has fined the US outpost of Pakistan’s largest bank US$225m (£170m, €187m) and ordered it to surrender its licence to operate its New York branch.

The Department of Financial Services said it had taken the action in response to what it said was Habib Bank’s “failure to comply with New York laws and regulations designed to combat money laundering, terrorist financing, and other illicit financial transactions”.

Habib Bank, it said, had failed “to undertake extensive remedial actions required by a 2015 consent order”, and  that Financial Services superintendent Maria T Vullo had therefore decided to exercise “her authority to expand the scope of an independent review [into the matter]” and to issue a “surrender order imposing conditions for the orderly wind down of Habib’s New York branch”.

Press reports of the matter noted that it was the first time the DFS had ever ordered a bank to shut down in the US.

Headquartered in Karachi, Pakistan, Habib Bank posted sales of US1$bn in 2016, and has some US$24m in assets. The New York branch, based in Manhattan in New York City, had been licensed by the DFS since 1978.

The Pakistan-based bank, which is sometimes known as HBL, has no connection with Habib Bank AG Zurich, which was founded in Zurich in 1967 and has operations in a number of countries, including the UK, where it operates branches in London, Manchester, Leicester and Birmingham.

It also is not affiliated with HAB Bank, a New York State-chartered bank incorporated in 1983, with branches in Manhattan, Jackson Heights, Hicksville and Richmond Heights, New York; Los Angeles and Artesia, California; and Iselin, New Jersey.

HAB Bank has issued a statement to this effect to ensure its clients, many of whom live in the New York area, where HBL’s US outpost is located.

No tolerance for ‘inadequate compliance’

In a statement, superintendent Vullo said her department would “not tolerate inadequate risk and compliance functions that open the door to the financing of terrorist activities that pose a grave threat to the people of this State, and the financial system as a whole”.

“The bank has repeatedly been given more than sufficient opportunity to correct its glaring deficiencies, yet it has failed to do so,” she added.

“DFS will not stand by and let Habib Bank sneak out of the United States without holding it accountable for putting the integrity of the financial services industry and the safety of our nation at risk.”

She said that the bank’s agreement to the terms of a consent order and surrender order would ensure that it would no longer “misconduct” itself “on US soil” and that the DFS would, in the meantime, “still investigate the bank’s prior activities” while it has been active in the US.

“The New York branch has continued to fail to comply with a 2006 agreement with the predecessor agency to [the] DFS, that arose out of significant deficiencies identified within the bank’s compliance with economic sanctions laws and with its anti-money laundering (AML) compliance, including the Bank Secrecy Act (BSA),” Vullo continued.

“Violations of the 2006 agreement and New York Banking law have occurred almost every year since 2006.”

Among the DFS’s specific claims against Habib Bank:

  • That it “facilitated billions of dollars in transactions with a Saudi private bank, the Al Rajhi Bank, with reported links to al Qaeda, without adequate anti-money laundering and counter-terrorist financing controls”;
  • failed to adequately identify customers of the Al Rajhi Bank that might be using the Al Rajhi account at Habib Bank to transfer funds through New York, thus permitting unsafe “nested activity”;
  • allowed for at least 13,000 transactions to flow through the New York branch that potentially omitted information adequate to properly screen for prohibited transactions or transactions with sanctioned countries;
  • “improperly used a “good guy” list – a list of customers who supposedly presented a low risk of illicit transactions – to permit at least US$250m in transactions without any screening, including transactions by an identified terrorist, an international arms dealer, an Iranian oil tanker, and other potentially sanctioned persons and entities;
  • “granted the request of a customer to cancel an instruction to send funds through the New York branch to a person who was blocked from using the US financial system, so that the instruction could be re-sent by intentionally omitting the prohibited party’s name.”

Habib Bank: ‘remains committed to strengthening compliance processes’

Habib Bank officials in Karachi didn’t immediately respond to requests from International Investment for comment. However, in a statement on the company’s website, the bank, which calls itself HBL, said it had reached a settlement with the New York State Department of Financial Services that would see it pay a penalty of US$225m, and that “formal steps for voluntary closure of HBL New York Branch are under way”.

“HBL remains committed to strengthening its compliance processes, operations and controls while improving service standards throughout its network of mover 1,700 branches, 2,700 ATMs and 15,000 POS terminals,” the statment added.

“HBL expresses its sincere appreciation to its customers for their support, loyalty and patronage.”

Latest action by DFS against non-US banks

The action against Habib was seen by banking industry observers as the latest in series of actions against major non-US banking groups by the DFS since the department was created in the wake of the global financial crisis by the merger of New York State’s state’s banking and insurance regulators. Other targets have included BNP Paribas, in 2014.

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