New York DFS Seeks over $629 Million from Bank for AML Violations
On August 24, 2017, the New York State Department of Financial Services ("DFS") instituted enforcement proceedings against a Pakistani bank seeking a $630 million civil penalty for alleged anti-money laundering ("AML") violations. The DFS described the AML, Bank Secrecy Act ("BSA") and economic sanctions compliance function of the bank as "dangerously weak."
According to the DFS Notice of Hearing and Statement of Charges, the New York branch of Habib Bank (the "Bank") committed various compliance violations and failed to remedy "severe deficiencies" despite written agreements with the DFS and the Board of Governors of the Federal Reserve System. In a 2016 exam and related investigation, the DFS noted significant deficiencies in the Bank's customer due diligence program. The DFS explained that these deficiencies were of particular concern because the Bank counted the largest private bank in Saudi Arabia, which had alleged ties to terrorism financing, as "one of its largest U.S. dollar clearing accounts."
The DFS noted, among other violations, deficiencies with the Bank's (i) screening of "SWIFT payment messages" and other transaction-monitoring processes and practices, (ii) assignment of customer risk ratings, and (iii) maintenance of a "good guys" list, which allegedly allowed for more than $250 million in transactions to pass through the Bank without requisite screening. The DFS charged the Bank with 53 separate violations of law, regulations, orders and consent agreements in connection with its alleged misconduct.
An initial hearing is scheduled for September 27, 2017. The Bank has indicated that it intends to challenge the enforcement action and surrender its DFS banking license.
Commentary
This enforcement action emphasizes a considerable flexing of DFS's muscles, and illustrates the exposure of New York-regulated financial institutions. The Notice of Hearing and Statement of Charges focuses not only on individual AML/BSA and economic sanctions violations, but on broad and longstanding compliance deficiencies at the Bank. The Bank had years to remedy these deficiencies with DFS and the Federal Reserve. By failing to do so, the Bank stands to lose its only U.S. branch which it has operated for nearly forty years. Financial institutions subject to DFS authority should be mindful of the power and scope of its regulatory authority.