KARACHI: After two of the country’s largest private banks had their skirmishes with regulatory authorities in the United States, the State Bank of Pakistan moved to develop a more detailed “governance framework” for the overseas operations of all banks.

In a document released on Tuesday, the SBP said the framework is issued in light of “changing dynamics of foreign environment” and aims “to further strengthen the governance, risk management & compliance practices for banks’ overseas operations.”

The framework covers all foreign operations of Pakistani banks including general operations, overseas subsidiary operations, overseas operations and profit repatriation, performance monitoring & regulatory reporting of overseas branch operations shall be applicable with immediate effect.

In addition to penalties incurred by the Habib Bank Limited last year, the United Bank (UBL) also signed an agreement with the Federal Reserve Bank of New York last month to comply with laws and regulations of United States.

According to the agreement with Federal Reserve Bank of New York, UBL is taking steps to address deficiencies relating to New York branch’s risk management and compliance framework under federal and state laws, rules, and regulations relating to anti-money laundering compliance, including the Bank Secrecy Act.

Half of all profits from overseas branches to be remitted back; boards to play more active role in oversight

SBP’s framework will ensure that the boards and senior management at banks must “have clear understanding of relevant important laws and regulations in respective overseas jurisdictions.” It also mandates banks to “repatriate at least 50 per cent of its profit after tax of each jurisdiction” to the head office in Pakistan every year.

“The bank is expected to maintain Return on Equity — profit after tax/total capital — in each jurisdiction at least equivalent to industry or peer average of that particular jurisdiction,” the circular adds, saying that those overseas operations that fall below this standard for two consecutive years will have to submit an action plan to the SBP explaining reasons for the losses as well as actions planned to be taken to reverse the trend.

All local banks with overseas operations will have to develop a mechanism whereby their respective boards will be required to oversee and regularly evaluate financial and operational performance of its overseas subsidiary, sub-subsidiary, joint venture operations; and that of overall overseas branch operations within the next three months.

Under the framework, all banks will be required to develop comprehensive risk governance framework for its overseas operations within six months.

Furthermore, “the bank with overseas assets of over $1 billion, will consider forming a separate sub-committee of board to oversee its overseas operations,” said the State Bank.

Banks may also consider forming a dedicated management committee under the chair of President for their respective overseas operations, the SBP suggested.

Moreover, under the framework, banks will have to ensure that all their transactions, dealings, contracts with foreign branches and joint ventures of those foreign branches among themselves are also carried out in a transparent manner under a board-approved policy.

Banks will not be allowed to expand operations in jurisdiction(s) where SBP itself is unable to conduct on-site examination or through a third party due to host country’s laws and regulations.

“In jurisdictions where no such bar is in place, the bank will bear the cost if SBP decides to conduct an inspection of bank’s existing operations through a third party,” said the SBP.

Under the policy which shall be applicable with immediate effect, SBP advised banks with overseas operations to ensure strict compliance of ‘Framework’ in letter and spirit within the given timelines.

“There will be a zero tolerance towards regulatory non-compliance,” said the SBP.

Published in Dawn, August 8th, 2018