US case against Pakistani bank reveals shocking lack of oversight
New York State's Department of Financial Services has thrown the book at HBL over glaring irregularities and criminal neglect, but it seems Pakistan's own financial authorities did little to no monitoring
A complete absence of any guidelines or monitoring systems to keep watch on the activities of Pakistani banks overseas – that is the picture that is emerging of the failure of oversight that led a US regulator to hit Pakistan’s Habib Bank Limited (HBL) with charges of non-compliance with US laws and a fine of US$360 million last week.
“We will adopt a proactive approach in monitoring foreign branches of local banks,” was the response of Tariq Bajwa, the governor of the State Bank of Pakistan (SBP), to the move by New York State’s Department of Financial Services (DFS). Such vigilance, it seems, has been entirely lacking, although Bajwa insisted that when the DFS shared confidential information relating to HBL with the SBP a month ago, “HBL had not done anything wrong.”
In fact, the HBL case speaks of wretched compliance and risk-management procedures, with one of Pakistan’s largest banks having been allowed to breach several US laws and regulations, including the Bank Secrecy Act (BSA), Anti-Money Laundering laws, and US non-proliferation sanctions.
The penal action against HBL did not come out of blue. The bank’s New York branch has been under observation by the DFS and the US Federal Reserve since 2006 and violations of agreements with those institutions have occurred every year. Two consecutive examinations of compliance and risk-management procedures at the branch were conducted in 2015 and 2016 – and showed the situation was deteriorating. And through all these years, neither the SBP or Pakistan’s Ministry of Finance have taken effective corrective measures.
Such laxity in complying with standards and regulations gives a free hand, of course, to extremists, money launderers, and narcotics traffickers, allowing their financial transactions to go unidentified.
Addressing a press conference last week, HBL chief Nauman Dar accepted all 53 charges leveled against the bank, but said they were “small procedural lapses” and that no criminality, wrongdoing or fraud had been identified. He said the penalty had no logic but that the bank was ready to pay a “reasonable amount,” and that even if it had to pay the US$630 million, it was “big enough to absorb this shock.” he added.
The DFS’ statement of charges summed up very clearly the glaring irregularities and criminal neglect it has uncovered.
For example, HBL held a US clearing account with Saudi Arabia’s largest private bank, Al Rajhi, which has been linked by the US Senate to Al Qaeda and found to be involved in financing extremism.
The bank’s ‘good-guy’ list contained 150 entities under sanction by the US Treasury Department, including the leader of a Pakistani militant group, an international arms dealer, and an individual wanted by the FBI for Cybercrimes
The DFS also found the branch to be involved in “wire-stripping,” which means the bank deliberately hid information concerning the identities of originators or beneficiaries of transactions. In one instance, the HBL facilitated payment to a Chinese weapons manufacturer in contravention of US non-proliferation sanctions.
HBL, moreover, failed to properly screen more than 4,000 transactions because the parties involved were on a “good-guy” list of customers identified by the bank as very low risk. However, that list contained 150 entities under sanction by the US Treasury Department, including the leader of a Pakistani militant group, an international arms dealer, and an individual wanted by the FBI for Cybercrimes.
Following the DFS’ move against the bank, its rating has been downgraded by JCR-VIS Credit Rating Company to ‘Watch Negative.’ Its stocks have also plummeted. However, its capitalization remains strong and it does have the muscle to absorb the incoming blows.
For the year ended December 31, 2016, HBL declared a profit of US$1 billion, deposits of US$19 billion and an assets base worth US$25 billion. The bank operates 1596 branches – in addition to 43 Islamic banking branches – domestically, and 48 branches overseas. It has three offshore affiliates, including Diamond Trust Bank, Kenya (DTB), in which HBL holds an 11.97% shareholding worth US$54 million. Its other two affiliates are Nepal’s Himalayan Bank Limited, of whose stock it holds 20%, and the Kyrgyz Investment and Credit Bank, in which it has an 18% of share.