By Syed Raza Hassan
ISLAMABAD (Reuters) - The New York State Department of Financial Services (DFS) is seeking to fine Pakistan's Habib Bank Ltd up to $630 million for "grave" antimoney laundering and sanctions compliance failures at its only U.S. branch, the regulator said on Monday.
If imposed, the penalty on Karachi-listed Habib Bank (HBL) (KA: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 U.S. clearing account with Saudi's largest private bank, which has been linked in the media to Al Qaeda and terrorist financing.
The DFS further 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 U.S. 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 $27,000 sent to an account at the bank's head office associated with an individual wanted by the FBI for cyber crimes.
Nausheen Ahmad, the bank's company secretary, said in a statement earlier on Monday that DFS did not recognize "the significant progress that HBL has made at its branch in New York" and that the bank would vigorously contest the proposed fine in the U.S. courts.
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.
SERIOUS DEFICIENCIES
The DFS said HBL's compliance issues dated back to 2006, when the bank agreed with regulators to address problems with the bank's sanctions laws compliance program.
Since then, HBL has struggled to comply with the agreement, the DFS said, noting a 2015 inspection identified "serious deficiencies" in the bank's anti-money laundering controls.
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 U.S.-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.
AGGRESSIVE ENFORCEMENT
U.S. federal and state laws require financial institutions operating in the United States to have policies and procedures in place to detect and prevent illicit money transfers.
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 $2.4 billion fine on BNP Paribas (PA:BNPP) for sanctions breaches.
Because the U.S. dollar is the global reserve currency, U.S. financial regulators have immense clout worldwide and can cut noncompliant foreign banks off from the U.S. dollar clearing system by preventing U.S. banks from doing business with them. This would restrict their ability to offer cross-border services to their clients back home.