Spearhead Analysis – 28.08.2017
By Farrukh Karamat
Senior Research Coordinator, Spearhead Research
It would appear that Habib Bank Limited (HBL) is closing down its sole Branch in New York, on the back of significant breakdowns of risk management and compliance identified in the bank’s New York branch, where US regulators highlighted deficiencies in the risk management and Bank Secrecy Act (BSA)/anti-money laundering (AML) compliance in the branch. Spearhead Research published a comprehensive write-up on the Banking sector titled: “Banking: Crime and Compliance” on August 30, 2016, which among other issues focused on the compliance issues facing the overseas branches of Pakistan Banks. The article highlighted the following issues with HBL New York operations:
- In 2015 there was news that since 2011 the US Federal Reserve barred Habib Bank Limited from conducting any dollar-clearing transactions or accepting any new accounts for US dollar clearing because the bank was not in compliance with US Anti-Money Laundering (AML) Laws. As per the Fed’s assessment HBL’s risk management and its compliance systems had broken down and it was in violation of laws such as the Bank Secrecy Act and regulations issued by the US Treasury Department. Additional remedial and risk management requirements were placed on the Bank.
- In August 2016 there was news that the only US branch of Habib Bank Limited was slapped with a strict enforcement order by United States Federal Reserve after significant breakdowns were identified in the Branch’s anti-money-laundering (AML) program, which was found to be not in compliance with US federal laws. As per the Wall Street Journal, following the enforcement order Habib Bank had been stopped from opening new dollar-clearing accounts, which were one of the US services to send and receive dollars from abroad, or even correspondent accounts with foreign banks.
Now as per a notice issued at the Pakistan Stock Exchange (PSX), the State Department of Financial Services (DFS) USA has sent a notice to Habib Bank Ltd (HBL) seeking to impose civil monetary penalty of up to US$630 Million on the bank. It would appear that despite a considerable amount of time having elapsed the bank was unable to take remedial actions, in terms of being able to devise appropriate risk management and compliance systems to meet the requirements of the US regulators. The bank at the time of identification of operational deficiencies by the US Regulators had categorically stated that it would conduct a review and enforce remedial actions.
Now, while the bank management has stated that it will contest the penalty, it has been decided to close its New York operations. The monetary penalty imposed by the Regulators potentially places considerable risk on the country’s already depleted foreign exchange reserves on the back of this potential penal outflow. This comes at a time when the US and Pakistan are heading towards a stormy relationship, which could translate into economic pressures for Pakistan. It is unfortunate that the bank continued to be in violation of the Laws of the United States and besides the obvious financial cost, there is the reputational loss for the Bank and Pakistan as the sole HBL branch in New York is being shut down. As stated earlier in 2016, Pakistan Banks need to step up their Risk Management and Compliance divisions to meet the regulatory requirements of the countries they operate in. This requires structured and regular training programmes and implementation of systems to combat the scourge of Anti-Money Laundering and Terrorist Financing. Shutting down the Branch, paying a hefty fine, and pretending all is well is not the solution to a persistent problem.