Penalty of up to $630 million on Habib Bank: Is it a funding arm for terrorism?

Seven days after U.S. President Donald Trump accused Islamabad of providing “safe havens” to extremist groups; a US state regulator, the New York State Department of Financial Services (DFS) says it is seeking to fine Habib Bank, which is majority-owned by the Pakistani government, up to $630 million.

The bank responded within hours by closing its New York location, which is its only branch in the U.S. The Pakistan Stock Exchange (PSX) reacted negatively, reaching a 10-month low on Tuesday with investors selling off their holdings. Bank, opened its only branch in the U.S. in 1971. According to the 14-page penalty notice, Habib Bank has been restricted from increasing the number of dollar-clearing transactions from the New York branch until the hearing resolves the case.

The regulator (Department of Financial Services (DFS)) insists on a hearing in September to investigate the bank’s “serious and persistent” failings relating to anti-money laundering rules. In a filing calling Habib Bank’s compliance with the rules “dangerously weak,” the DFS claimed that the bank’s “failings” affected the entire Habib banking enterprise and even posed “grave risks” to the state’s banking system.

Terrorism funding and money laundering nexus

The tensions between Habib Bank and the DFS can be traced back to 2006, when the regulator urged the Pakistani bank to look into issues regarding its sanctions laws compliance program. The state agency claims that Habib Bank has failed to comply with the rules since then. Two years ago, an inspection by the DFS allegedly revealed “serious deficiencies” in the bank’s anti-money laundering controls.

According to DHS, Habib Bank held a U.S. clearing account with Saudi Arabia’s largest private bank, Al Rajhi, which the U.S. Senate says it has linked to Al Qaeda and the sponsoring of extremists. The DHS also accused the bank of the “wire-stripping” tactic, which refers to the practice of deliberately stripping out payment-related information that may look suspicious.

The state regulator said Habib Bank was responsible for wire-stripping a payment involving a Chinese weapons manufacturer that was included on the list of U.S. non-proliferation sanctions.

New York State imposed strict anti-money laundering regulations in 2015, and the DFS has since pursued several aggressive enforcement actions against foreign banks for anti-money laundering control lapses over the past two years. These include Agricultural Bank of China, Mega International Commercial Bank of Taiwan and National Bank of Pakistan. In 2013, the DFS imposed a $2.4 billion fine on BNP Paribas for sanctions breaches.

Background of Bank

Habib Bank Limited) now referred to as HBL Pakistan is a Karachi based multinational bank. It is the largest bank in Pakistan. Founded in 1941, HBL became Pakistan's first commercial bank, in 1951 it opened its first international branch opened in Colombo, Sri Lanka. In 1972 the bank moved its headquarters to the Habib Bank Plaza, which became the tallest building in South Asia at the time. The Government nationalised the bank in 1974 and privatized it in 2003; at that time the Aga Khan Fund for Economic Development acquired a controlling share. As of 2016, HBL has 1700 branches with presence in over 25 countries spanning across four continents.

Shifting interests

U.S. had been Pakistan’s biggest investor from 1990 through the early 2010s, when America’s role in the Pakistani economy was slowly being replaced by China. In the 1990s and 2000s, the U.S. provided approximately one-third of Pakistan’s total foreign direct investment (FDI). Washington has been steadily pulling out its investments from Pakistan since relations with the nation went sour after U.S. Navy SEALs killed Taliban chief Osama bin Laden on Pakistani soil in 2011. As a result, China now accounts for almost half of Pakistan’s total FDI.

Interestingly, the total volume of U.S.-Pakistan bilateral trade amounts to $5.78 billion, while bilateral trade between China and Pakistan stands at more than $13 billion.

The future of relations between Islamabad and Washington remains unclear, as the two nations are spiraling into a diplomatic crisis.