Habib Bank Limited has voluntarily decided to wind up operations at its New York branch as the New York State Department of Financial Services seeks to impose about $630 million penalty on it for charged violations of certain rules and regulations.

However, the bank has decided to contest all charges, 53 in total, at the hearing of its case at the Department of Financial Services (DFS) on September 27, a source close to HBL said.

The bank stressed the same in an announcement stating that it would ‘vigorously’ contest the proposed penalty in “the scheduled administrative hearing and in courts of law in the US”.

The payment of the penalty, if it is finally imposed, is subject to the State Bank of Pakistan’s approval.

Meanwhile, the SBP said in a statement it is “closely monitoring the situation and finds no imminent risks to HBL operations and Pakistan’s banking industry.”

In a press release issued last week, the central bank reiterated its commitment “to safeguard the interests of depositors and to ensure safety and soundness of the banking system of the country.”

“There will be no material impact on HBL’s business outside of the US and the bank will continue to service the requirements of its domestic and international customers, including US dollar business,” the bank said in a letter sent to the Pakistan Stock Exchange.

The DFS move against HBL has come at a time when the new US Afghan policy, and US President Donald Trump’s threats to Pakistan, has led to a strain in Pak-US relations.

Many bankers fear that this could be a silent message to Pakistan to “behave or be ready to face the music” after openly opposing the new US afghan policy.

Another reason why Pakistani bankers are sceptical about the DFS move is that the amount of the proposed penalty ($629,625,000) is unusually high. Converted into rupees it comes to more than Rs66 billion.

This means if HBL eventually has to pay the penalty, the amount can wipe off its entire reserves of about Rs50bn. In a statement, HBL Company Secretary, Nausheen Ahmad, called it “unjustified, unreasonable, capricious and unreasonable.”

Bankers say even if HBL’s appeal fails in court, it might still be able to negotiate with DFS for a phased penalty payment which may keep its reserves from being wiped off.

A source close to the SBP says “the SBP can also find a way out for penalty payment — if it is finally imposed — in a manner least constraining for HBL.” He, however, said chances for HBL actually attracting the amount of penalty that the DFS has indicated “and that too in the near future, are uncertain.”

According to a ‘statement of charges’ sent by the DFS to HBL, a review of HBL’s New York branch found compliance failures that are “serious, persistent and apparently affect the entire Habib banking enterprise.”

In this charge sheet, DFS claims it has found such alleged violations (on the part of HBL’s NY branch) which “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.”

HBL’s point of view is that despite its “sincere and extensive remediation measures, DFS is still not appreciating or recognising the significant progress that HBL has made in its New York branch.”

News of the DFS seeking to impose a penalty on HBL hasn’t surprised some top bankers in Pakistan for two reasons.

“First, the DFS is a stern regulatory body with zero tolerance for non-compliance,” says a former head of a foreign bank in Pakistan.

“Secondly after 9/11, the DFS has become all the more vigilant and takes violations of the KYC (Know Your Customer) regime very seriously. Its purpose is to ensure that financial institutions not be misused for apparent money laundering and potential terror financing.”

But the timing of the DFS move as well as the amount of the potential penalty has surprised many in the local banking community and they smell a rat in it.

“First of all, the graveness of the DFS charges has to be evaluated, both by HBL as it’s going to contest them, as well as by the SBP,” says a former central banker, well aware with the history of the case.

“The SBP needs to evaluate the DFS charges to help HBL come out of the mess and to make sure other foreign bank branches of Pakistani banks work with a higher degree of vigilance.”

Another former central banker said HBL would have to tread carefully in defending some of the charges against it that seek to establish wilful neglect on part of its NY branch in transactions involving people on the US banking blacklist.

The DFS has framed charges in the light of two solid reviews of HBL’s NY branch (the first one took place in 2015) and put the bank on a hearing notice.

Some of its charges, sources close to the SBP say, are more serious in nature and have to be contested forcefully and with full evidence to save Pakistan’s image in the global banking community.

Sources in the central bank say the SBP will continue to closely watch every development related to this case adding that HBL would be offered all legitimate support to contest the case first at the DFS and maybe also in a US court of law at a later stage.

They add that the central bank routinely keeps warning all Pakistani banks with presence in foreign countries to maintain and enhance systemic controls over compliance of rules and regulations particularly those related to anti-money laundering, cyber-security and terror financing.

Published in Dawn, The Business and Finance Weekly, September 5th, 2017