On August 24, 2017 the Superintendent of the New York State Department of Financial Services (NYDFS) issued a Notice of Hearing and Statement of Charges to Habib Bank Limited, Pakistan’s largest bank, for a broad range of violations of New York and Federal anti-money laundering regulations. The regulator has “commanded” the bank to appear for the hearing on September 27, 2017 and is seeking to impose  a $630 million penalty.

Alleged violations

The bank has 53 alleged compliance failures dating back to 2007 that are “serious, persistent and apparently affect the entire Habib banking enterprise” and  “indicate a fundamental lack of understanding of the need for a vigorous compliance infrastructure, and the dangerous absence of attention by Habib Bank’s senior management for the state of compliance at the New York branch”.

The regulator assigned the bank with its lowest rating after repeated violations of regulations since 2006. According to the Statement of Charges, “the Bank has been given more than sufficient opportunity to rectify its deficiencies, it has utterly failed to do so – demonstrating a sheer inability to accomplish remediation, a stubborn unwillingness to do so, or both”.

The bank has since advised the regulator that it will contest the charges and close its New York branch, having operated since 1978. The branch processed correspondent banking transactions of about $287 billion for the year ended December 31, 2015.

Habib Bank’s majority shareholder is the government of Pakistan. It reported $325 million in net income in 2016 and has $24 billion in total assets. The fine is equivalent to almost two years of the bank’s world wide profit.

Some of the alleged compliance failures include:

• Failure by the board of directors and branch management to implement an effective compliance risk management regime and provide sufficient oversight;
• Failure of branch management to ensure independence of the compliance officer and its department as well as provide sufficient resources and personnel to maintain an effective compliance program;
• Insufficient procedures for filing suspicious and currency transaction reports as well as lack of adequate documentation on investigation of suspicious activity, including resolution and escalation procedures;
• Failure to submit a report to the Superintendent misconduct such as approving fraudulent entries by the officers of the branch;
• Insufficient policies and procedures to assure effective risk-based transaction monitoring and filtering;
• Absence of independent effectiveness testing of the branch anti-money laundering compliance regime;
• Insufficient training that is appropriate for the personnel;
• Insufficient customer identification and verification program;
• Inadequate OFAC and sanctions screening;
• Inadequate system of internal controls for correspondent banking and wire transfer activities;
• Inadequate risk-focused assessment of customer base and transactions as well as enhanced due diligence on customers deemed as high-risk.

Nesting accounts and “wire-stripping”

A matter of serious concern for the regulator was that the bank failed to have adequate internal controls over transactions with Al-Rajhi Bank, the largest private bank in Saudi Arabia with alleged links to terrorist financing. The branch provided US dollar clearing account to the private bank that accounted for about a quarter of the transactions conducted by the branch. The branch had failed to perform sufficient due diligence of Al-Rajhi’s own customers and that the senior management of the branch were unaware that its head office was engaged in clearing activities of other affiliates of Al-Rajhi Bank.

The review uncovered a prevalent “wire-stripping” practice of branch management omitting essential information such as the identities of the ultimate owner and beneficiary of SWIFT payment messages.

Not so “good guy” list

As well, the review revealed that over $250 million flowed through the branch  without appropriate screening as the customers were on a “good guy” list – a list of customers identified by the head office as “very low risk”. Some of the customers in the list are included on the Specially Designated Nationals and Blocked Persons List (SDN) of the US Treasury Department.

Powerful message from NYDFS to foreign banks

This is not the first time the regulator has imposed such punitive fines on non-US banks: The regulator has fined since 2003, Deutsche bank $425 million, BNP Paribas SA $325 million, Standard Chartered Plc $300 million, Bank of Tokyo & Mitsubishi $250 million  and HSBC $1.9 billion. This trend clearly points out that the regulator has a powerful enforcement agenda against foreign banks that violate state and federal banking regulations.

The NYDFS Superintendent, Maria T. Vullo, sums up the unprecedented message to the industry, especially for repeat violators, “ DFS will 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…..”

She further added, “the bank has repeatedly been given more than sufficient opportunity to correct its glaring deficiencies, yet it has failed to do so. 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. The terms of this consent order and the surrender order now agreed to by the bank will ensure that Habib’s misconduct will no longer occur on US soil and that DFS will still investigate the bank’s prior activities.”

FINTRAC is stepping up too…

Here in Canada, although the fines are immaterial compared to that of NYDFS, the federal watchdog, Financial Transactions and Reports Analysis Centre of Canada (FINTRAC),  is also stepping up its enforcement efforts. Manulife Bank was fined $1.15 million for a number of administrative failures among them, failure to report on suspicious transactions on time. This is the highest penalty imposed to a Canadian bank to date.

This year, FINTRAC’s head announced that he will work with the Government to review the anti-money laundering regulations, specifically in relation to the penalty policy program. The Government also announced in its 2017 Federal Budget that the regulations will be amended to strengthen the anti-money regulatory framework. It is hoped that these initiatives will make regulated entities raise the bar for compliance with the regulations.