Irregularities Found at Pakistan’s Top Bank After U.S. Sanction
17 Feb 2020

A Middle East operation of Pakistan’s largest bank displayed “significant irregularities” in dealings with politically exposed clients and screening some transactions, according to an inspection by the South Asian nation’s central bank that took place more than a year after the lender was shut out of the U.S. financial system.

The findings are contained in a State Bank of Pakistan report, finalized in the first half of 2019, on Habib Bank Ltd.’s operations in the United Arab Emirates. The inspection was conducted after the Financial Action Task Force, a global watchdog for illicit financial activities, put Pakistan on its monitoring list.

FATF is due to review whether to downgrade Pakistan a step further, to its blacklist, at a meeting in Paris that starts on Sunday. That would have serious consequences for the nation’s economy and its bailout program with the International Monetary Fund.

Employees in some of Habib Bank’s U.A.E. branches helped certain customers disguise transactions by issuing pay orders in their own names, while gaps in risk profiling and monitoring reflected an “ineffective compliance function and compliance culture,” the central bank said. In an earlier draft version of its inspection report, also seen by Bloomberg News, the central bank said U.A.E. staff skirted rules when opening an account for Duduzane Zuma, the son of former South African President Jacob Zuma.

The critical nature of the findings, which haven’t previously been reported, offers further evidence of the sorts of weak controls FATF has been looking at more broadly in its assessment of Pakistan, though the central bank’s final inspection report also notes some remedial measures taken by the bank. After Pakistan was put on the FATF monitoring list in June 2018, it pledged to improve observance of global anti-money laundering and counter-terrorism financing controls.

License Surrendered

The previous September, New York’s banking regulator fined the Karachi-based bank for weak anti-money-laundering controls and sanctions compliance and ordered it to surrender its license, effectively removing the lender from the U.S. financial system.

In response to questions from Bloomberg, State Bank of Pakistan said its draft and final inspection reports are confidential and as a result it’s unable to comment “on the veracity of observations purportedly related to inspection reports or inspection process.”

The draft report on the U.A.E. operations of Habib Bank was prepared soon after an on-site inspection by the central bank. It includes lists of customer accounts that were flagged for allegedly involving various violations by Habib Bank staff. The final report has the same broad conclusions but incorporates input from the bank, and omits the lists of specific accounts.

The problems in the U.A.E. have since been addressed by a sweeping overhaul that the bank started to roll out in the Middle East and other international operations in early 2019, according to Sagheer Mufti, Habib Bank’s chief operating officer. “There were process issues and those process issues pertain to legacy clients and legacy transactions and legacy processes,” Mufti said in an interview, responding to questions about the inspection report.

Habib Bank has “put in place a set of processes, controls to ensure the organization does not see a repeat of these issues,” Mufti said, adding that the program had been designed in cooperation with PricewaterhouseCoopers International Ltd. and cost roughly $100 million.

According to the State Bank inspection report, which is based on the U.A.E. operation’s results for the period ended Sept. 30, 2018, the local business failed to comply with instructions from the head office in Karachi to close the accounts of all Iranian nationals. Some accounts were still active despite the lapse of a “significant time period,” the report said. The bank was in the process of closing the remaining accounts “where possible,” it added.

In another example, a Habib Bank customer was found to have been importing goods via or from Iran. Instead of carrying out a thorough investigation, the bank only conducted a limited review of transactions during the previous six months “in which another instance of a similar nature was identified,” the central bank said.

By Faseeh Mangi, Bloomberg, 15 February 2020

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