In August, the New York State Department of Financial Services (DFS) sought to impose about $630 million penalty on HBL’s New York branch for charged violations of certain rules and regulations. The bank was also ordered to surrender its license to operate in the state, effectively removing it from the US financial system. The DFS move against HBL gives rise to many questions? Is Habib Bank Limited (HBL) really involved in violations of laws and regulations internationally designed to combat illicit money transactions or a BCCI like episode is being repeated with another Pakistani bank? Has HBL been chosen by the US as a scapegoat to force Pakistan to fully accept the Washington’s new rules of the Afghan war game? Is Pakistan’s banking industry being threatened by targeting the country’s largest bank?
In its charge sheet, the DFS has alleged violations on the part of HBL’s New York branch. The violations 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 DFS alleged that at least $250 million in transactions flowed through the HBL New York branch without any screening due to the apparent improper inclusion on the so-called good-guy list. The bank was accused of withholding transactions’ beneficiary, a practice known as wire-stripping. Though HBL has voluntarily decided to wind up operations at its New York branch yet it has decided to contest all 53 charges.
The $630 million (Rs66 billion) amount is unusually high for the proposed penalty imposed on the Pakistani bank that is unjustified, unreasonable, capricious and unreasonable, according to HBL Company Secretary, Nausheen Ahmad. The HBL CEO, Nauman Dar, has declared the penalty has no logic and the bank is ready to pay the penalty if it is in a “reasonable amount”. The payment of the penalty is subject to the approval of the State Bank of Pakistan, which is closely monitoring the situation and sees no imminent risks to HBL operations and the country’s banking industry.
The central bank has reiterated its commitment to safeguard the interests of depositors and ensure safety and soundness of the country’s banking system. Local analysts urge the central bank to evaluate the charge sheet developed against the Pakistani bank and extend all possible help to HBL to come out of the mess. The central bank of Pakistan should make sure other foreign bank branches of Pakistani banks work with a higher degree of vigilance.
The central bank should utilize its resources to counter and contest the allegations with full evidence to save the country’s image in the global banking community.
There are some serious allegations leveled by the DFS against the Pakistani bank. The HBL has been alleged for failure to establish controls around its high risk clients, including Al-Rajhi Bank, the largest private bank in Saudi Arabia. Al-Rajhi has been linked in a US Senate report to terrorist financing. The DFS found that HBL allegedly cleared transactions to a cybercriminal wanted by the US Federal Bureau of Investigation and a Chinese weapons manufacturer that was subject to US sanctions. Since HBL’s New York operations were used to clear dollar denominated transactions the bank is required to follow US “know your customer” rules and sanctions law.
What actually went wrong with the HBL New York branch was its relationship that it maintained with Al-Rajhi. This one relationship came under special scrutiny in the whole affair and provided the regulator a chance to exploit it.
In a recent press conference, HBL CEO clarified that the bank conducted transactions of Al-Rajhi in 2014 and only remittances of Pakistanis working in Saudi Arabia were handled. He said HBL ended relations with Al-Rajhi on July 10. Since 2014, Al-Rajhi transactions represent approximately 24 percent of the total number of transactions concluded through the New York branch.
The timing of this regulatory scuffle is significant. The move against HBL has come amid heightened tension between Islamabad and Washington over the US President Donald Trump administration’s new Afghan policy. The Trump plans has vowed to keep troops in Afghanistan and accused Pakistan of harboring terrorists. HBL saga could be a warning to the country of opposing the new US Afghan policy. Squeeze is being tightened on Islamabad to follow the US dictations to conclude the Afghan war endgame. Trump’s new Afghan strategy gives India a greater role in Afghanistan as US strategic partner and lambasts Pakistan as a safe haven for ‘agents of chaos’. While unveiling his new Afghan strategy, President Trump warned against the possibility of Pakistan’s nuclear weapons falling into the hands of terrorists and being used against the United States. Trump reportedly said, “The next pillar of our new strategy is to change the approach in how to deal with Pakistan. We can no longer be silent about Pakistan’s safe havens for terrorist organizations, the Taliban and other groups that pose a threat to the region and beyond.” These were perhaps the harshest remarks uttered against Pakistan by any US president over the course of their 70-year relationship.
The move against HBL refreshes the memories of another Pakistani bank, the Bank of Credit and Commerce International (BCCI) that faced serious charges of money laundering internationally. Founded in 1972 by a Pakistani Agha Hasan Abedi, the BCCI had over 400 branches in 78 countries of the world. BCCI came under the scrutiny of numerous financial regulators and intelligence agencies in the 1980s due to concerns that it was poorly regulated. The charge sheet against the BCCI showed its involvement in massive money laundering and other financial crimes. It was also alleged that BCCI illegally gained the controlling interest in a major American bank. BCCI became the focus of a massive regulatory battle in 1991 when customs and bank regulators in seven countries raided and locked down records of its branch offices. Many believe that BCCI did not collapse but it was forcibly shut down under an international conspiracy in 1991. The BCCI closure marked the biggest liquidation in history by that time and it took over two decades to complete.