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August 28, the New York Department of Financial Services (DFS) – a statewide reformer and regulator of the financial sector- filed a consent order against Habib Bank Limited (HBL), the largest bank in Pakistan, for “serious [and] persistent” failures in anti-money laundering (AML) compliance procedures at the New York branch. HBL was facing fines up to USD $630 million and ultimately agreed to surrender its operating license in New York, its only US branch. Without this US branch, HBL will no longer have direct access to the US financial sector – that includes the regulatory arms. While some specifics of the HBL case are unsavory and have strong implications of intentionally malign activity, there are a couple key takeaways for global anti-corruption compliance efforts for foreign banking institutions.
Proactive risk and compliance standards are vital to a financial provider’s global reputation and international market-access. In the consent order DFS stated, “[Pakistan-based] Head Office screening, which the [NY] Branch has repeatedly relied on as an excuse for its own lax attitude regarding [anti-money laundering] safeguards, appears to be as weak as that of the Branch itself.” In essence, the New York branch used the home office in Karachi as a barometer for its own risk appetite and subsequent lax standards.
Unsurprisingly, branches operating in the U.S. are obligated to meet U.S. banking regulations regardless of the entity’s local laws or attitudes. More concerning were the allegations of violations of Office of Foreign Asset Control (OFAC) sanctions, producing “grave risks to itself and to the financial system as a whole.” In an increasingly connected world, banks that do not prevent illicit financial transactions run just as great of a risk of closure as enterprises that do not manage corruption risks.
Entities that neglect compliance and find themselves with repeated fines, reputational losses, and ever-increasing legal fees will ultimately be at a competitive disadvantage to local and global competitors. This is especially true in high risk jurisdictions where foreign investors and partners conduct extensive due-diligence to identify and exclude poor performers.
States, banks, and enterprises should look to international standard-setting bodies like the Financial Action Task Force (FATF) for guidance on standards – though Pakistan is not a member of the FATF secretariat, it is a participant of the Asia/Pacific Group (APG), a subsidiary supported by the Secretariat. FATF sets recommendations that among other things, assist banks and companies’ with identifying needed policies and procedures to operate in the global economy. In the HBL case, DFS reported that the NY branch neglected to conduct basic screening, resulting in the clearing of funds for an individual on the FBI’s most wanted list.
FATF creates these frameworks for implementation at the state-level, however enterprises should observe these recommendations and try their best to adapt their own company policies and systems to help guarantee future access to markets and long-term business opportunities, regardless of the pace of their government. Although implementation gaps will persist, hopefully this case will serve as an example for financial and commercial entities about the need to take on risk management and compliance proactively.
Max Scherzer is a Program Assistant for Eurasia at CIPE.
Muhammed Talib uz Zaman is the Program Coordinator at the CIPE Pakistan Office.