Financial Services Spotlight

Object Lesson on How Not to Respond to Consent and Enforcement Actions

Posted by Roy Andersen on Aug 31, 2017 11:53:18 AM

Last week, the DFS announced an enforcement action and charges against the NY Branch of Habib Bank, a Pakistani bank that had been doing business in NY for almost 40 years.

Summary of the Facts

The Branch had been operating under the terms of a written agreement with the DFS and the Federal Reserve since 2006. The written agreement covered OFAC and AML deficiencies at the Branch. The DFS allowed the Branch to operate since 2006 despite continued violations of the written agreement and repeated breakdowns in compliance. This inaction led to a 2015 Consent Order with the DFS and a Cease and Desist Order with the Federal Reserve. In 2016, both the DFS and the Fed conducted an examination of the Branch and determined that there were still serious deficiencies with AML and OFAC compliance. Almost everything that can go wrong with AML compliance was cited, including insufficient: training, risk rating, due diligence, documentation, oversight, OFAC screening, audit, independent testing and data mapping.

Most concerning was that the Branch’s major correspondent account was with a bank that was linked to al Qaeda and terrorism—this was one-quarter (25%) of all transactions done by the Branch. The due diligence here was close to nonexistent. In addition, the Branch had over 13,000 SWIFT payments that omitted identity information on the originator or the beneficiary and used “good guy” lists that included named terrorists and arms dealers and over 150 parties specifically named on the SDN List.

Laws Violated

In some respects, it really reflects poorly on the regulators for letting all this go on without taking serious action, but the Superintendent of the DFS has lowered the boom on Habib at long last. The Banking Law provisions being invoked are:

Section 40(1)(i) of the Banking Law—allows the Superintendent to revoke a license if there is any violation of law; conducting business unsafely or unsoundly or noncompliance with an order of the DFS.

Part 116 of the General Regulations of the Banking Board on AML and OFAC

Section 44 of the Banking Law that establishes fines and penalties for branches of foreign banks for unsafe operations

Sections 672 and 220-c of the Banking Law that govern false entries and true books and records.

What the Branch did Wrong

The short answer is that the Branch did everything wrong. The DFS found that since 2007 the Branch was in violation of Part 116 in every respect. In addition, the Branch appeared to intentionally make false entries in the books with the intent to deceive the DFS.

The Branch violated the Written Agreement of 2006 in almost all respects. In addition, the Branch violated the 2015 Consent Order with the DFS. These failures were at the board of director’s level at the parent bank and the Branch’s management. Dozens of violations were cited by the DFS.

The net result is that the DFS seeks a civil penalty of almost $630 million and Habib Bank plans on closing its branch office in NY.


It is amazing that a bank can stay in business in the US for over ten years while it is under constant examination scrutiny and is consistently failing to follow the law. Moreover, it is stunning that it can do this under the noses of the regulators and actually do business with terrorist supporters in a major way.

The DFS is culpable for these failings and it undermines the effectiveness of the federal/state regulatory system. If 10 years of these shenanigans is not enough to close a bank then no bank would ever be shut down.

If there ever was a case for criminal actions, this would appear to be the case. Especially since the previous Superintendent made a push to charge individuals personally jdansfor violations of the Banking Law wherever possible.

Sullivan 4c

About the Spotlight

The Financial Services Spotlight examines the regulatory and technology developments impacting banks, asset managers and other financial services providers—where challenges meet opportunities.

The material on this site is for general information only and is not legal advice. No liability is accepted for any loss or damage which may result from reliance on it. Always consult a qualified lawyer about a specific legal problem.

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