Habib Bank Expelled From New York

9 09 2017

The case of the Bank of Credit and Commerce International (BCCI), which had fairy tale beginnings and patronage from the ruler of Dubai, is a historic example of a global private Pakistani bank that was shut down because of large-scale financial crime and money laundering. BCCI gave other lenders “bad vibes” and quickly acquired the nickname “the bank of Crooks and Criminals”. The closure of BCCI gave rise to the most costly and extravagant litigation in a generation. Indeed, as the late Lord Bingham discerned, investigating BCCI’s global malpractice “if a possible task, is one which would take many years to carry out”. Now the story seems to be repeating itself with Habib Bank – Pakistan’s largest bank headquartered in Karachi with $24bn worth of balance sheet assets and $1bn in annual revenue – which has been fined $225m because its New York branch failed to comply with New York laws and regulations designed to combat money laundering, terrorist financing, and other illicit financial transactions. Compliance failures were said to have “opened the door” to financing Saudi sponsored terrorism. Transactions were “batch waived” and management was unable to explain their actions. The news comes just days after the announcement that the Department of Financial Services (DFS) is seeking to enforce a civil monetary penalty of $629.625m on the bank. These enforcement actions by the DFS are a grim reminder of the poor culture plaguing banks and misconduct besetting financial institutions. DFS said it would not let the bank “sneak out” of the US without due accountability. In terms of culpability, the failures can be classified as “corporate integrity-related regulatory breach” and/or “imputed breach” events.

Because of significant weaknesses in the its risk management capabilities, the branch received the lowest possible rating of “5” in the latest compliance assessment conducted in 2016. The case for using conduct costs as a framework for analysing in the banking sector in Pakistan has already been articulated on this blog. If anything, the fines imposed by DFS certainly make Habib Bank the foremost – i.e. number “1” –financial institution for poor conduct in Pakistan itself. But of course it is equally true that Habib Bank’s delinquencies are surpassed by the toxic level of failings connected to the £264bn in conduct costs incurred by the world’s foremost international banks including Bank of America, JPMorgan Chase, Morgan Stanley, Lloyds Banking Group, Barclays, HSBC and so forth. As Lord King aptly puts it a decade after the global financial crisis: “Very smart people thought it was fun and completely acceptable to exploit less smart people.” The scale of poor conduct in the New York branch, which processed banking transactions worth a total of $287bn in 2015, raises serious questions about the state of affairs in the banking sector in Pakistan itself where corruption is widespread and regulation is diluted in comparison to the West.

Subsequent to a 2015 Consent Order, in 2016 Habib Bank failed the DFS’s examination which exposed continuing weaknesses in the bank’s risk management and compliance functions. These events link back to an agreement with regulators in 2006 that the bank would put its house in order. But blatant violations – which DFS is finally putting an end to now – of the 2006 agreement and New York Banking law occurred routinely on a yearly basis since 2006. The bank has been licensed to operate in New York since 1978 and had consistently failed to meet expectations and standards. For example, it operated a “good guy” list purportedly composed of customers who supposedly presented a low risk of illicit transactions but in fact included a terrorist, an international arms dealer and banned Iranian entities. Yet the list was used to permit at least $250 million of transactions without any screening whatsoever.

Overall, despite DFS’s repeated criticism of the branch’s behaviour, management dithered in implementing effective controls to mitigate and manage Banking Secrecy Act (BSA) and anti-money laundering (AML) compliance and Office of Foreign Assets Control (OFAC) risks, including insufficient (i) BSA/AML compliance (ii) compliance training (iii) customer risk ratings, including insufficient risk-based foreign correspondent due diligence (iv) documentation for enhanced due diligence customers and (v) senior management and head office governance, oversight and documentation.

The charges against the bank are rather severe indeed. For example, staff processed instructions to withhold the name of a transaction’s beneficiary or other pertinent information – known as “wire-stripping” – which should have automatically identified these transactions as suspicious by the branch’s monitoring system but were allowed to proceed nonetheless. Investigations revealed that in excess of 13,000 transactions with SWIFT payment messages omitted essential information, such as the identities of the ultimate originator and beneficiary of each transaction.

Financial Services Superintendent Maria T Vullo was extremely concerned about the lack of evidence for adequate OFAC and sanctions screening. She expressed grave concerns about the bank’s weaknesses in BSA/AML independent testing and the branch’s audit program, including weaknesses in the internal audit program’s rating methodology and weaknesses in data mapping and integrity.

The superintendent is expanding the scope of an independent review of the bank’s conduct. As a part of the enforcement action, Habib Bank will surrender its license to operate the New York branch upon fulfilment of conditions outlined in a separate Surrender Order aimed at ensuring the orderly wind down of the New York branch. Superintendent Vullo said:

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 …

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.

The bank processed instructions for an individual who is on the FBI’s Cyber Crimes Most Wanted List 2012 and wanted for wire fraud and theft of $50m. Assistance was also provided to persons on the Specially Designated Nationals and Blocked Persons List. There were wholesale failures of due diligence in the bank’s Know Your Customer file. Investigations revealed that, management:

  • 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 its “good guy” list – a list of customers who supposedly presented a low risk of illicit transactions – to permit at least $250 million 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; and
  • 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 resent by intentionally omitting the prohibited party’s name.

The branch was required to perform extensive remedial actions and engage an independent consultant to conduct a “lookback” exercise of the branch’s US dollar clearing transaction activity from 1 October 2014 to 31 March 2015. The new settlement enlarges the scope of the initial lookback to run from of 1 October 2013 through 30 September 2014 and 1 April 2015 through 31 July 2017. The same approved consultant shall conduct this broadened review, until completion even after the completion of the license surrender process.

A year ago I asked Habib Bank in London about the types of accounts they offered. Just by way of conversation, the adviser on the phone informed me that the bank’s UK operations were in the FCA’s sights and it will be interesting to see what, if any, regulatory action will be taken by the City watchdog against the bank. If things were so badly wrong in New York then there is a strong likelihood that Habib Bank’s dodgy culture must also manifest itself in London too.

Not long ago, Chris Stears and I co-authored a briefing (see Comp. Law. 2016, 37(6), 193-194) where we called for measures similar to the Senior Managers Regime to be placed on statutory footing in Pakistan. We advocated that in principle the regime “should also apply to the governor of the State Bank of Pakistan, Mr Ashraf Mahmood Wathra, and the SECP’s chairman, Mr Zafar Hijazi.” We can only note with interest that Zafar Hijazi was taken into custody after he criminally tampered with corporate records in an attempt to save disgraced former prime minister Nawaz Sharif from being ousted from office. Ultimately, Sharif received a lifelong ban from holding elected office after the Supreme Court of Pakistan disqualified him in light of the findings of the Joint Investigation Team formed to assess his behaviour in light of the disclosures about his wealth made in the Panama Papers.

Chris and I have also co-authored another article, to be published soon, which deals with the absence of a proper conduct regime in relation to the regulation of financial benchmarks in South Asia and the key lessons that the region needs to learn from the advancements made in the UK. After all, in The Fix, which provides insight into bankers lying, cheating and colluding to manipulate LIBOR, Liam Vaughan and Gavin Finch explain:

Where LIBOR would land the next day was the great unknowable. Yet it was the difference between success and failure, profit or loss, glory or ignominy.



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