Habib Bank throws caution to the wind

Habib Bank and its former compliance officer Syed Itrat Hussain have been fined over a half million pounds by the British for downplaying the risks of dealing with customers in jurisdictions prone to money laundering and terror finance.

Banks, and especially their compliance divisions and officers, have a responsibility to adhere to anti-money laundering regulations and know-your-customer standards.  When opening an account or conducting business with citizens from corrupt, unstable, or rogue regimes, those customers represent a greater risk to the bank and to the international financial system.

But Syed Itrat Hussain saw things a little bit differently.  He and the Swiss-based (but Islamic-oriented) Habib Bank regarded customers from the notoriously corrupt and jihadi financial swamp of Pakistan as no different from bank clients in New Zealand or Norway.

From MoneyLaundering.com on May 22:

U.K.’s FSA Singles Out AML Officer for Fine, Penalizes Swiss Bank

By Brian Monroe

The United Kingdom’s banking regulator Tuesday penalized a Zurich-based financial institution and its former anti-money laundering officer a combined 540,000 pounds for broad failures in risk-ranking and enhanced due diligence procedures.

The U.K.’s Financial Services Authority (FSA) said that Habib Bank Zurich AG underestimated the risk of approximately 67 percent of the accounts the agency had reviewed. In doing so, the Swiss bank removed Pakistan and Kenya from its list of high-risk jurisdictions because it believed it had “specialist knowledge” of the countries that mitigated its vulnerabilities to financial crime, the agency said.

As a result, nationals of those countries “were treated as having the same risk profile as those from a country with a lower perceived risk of corruption, such as customers based in Norway or New Zealand,” said the FSA, which fined the bank 525,000 pounds. When regulatory officials properly adjusted the rankings for the jurisdictions, they found that Habib Bank officials had mistakenly rated 170 high-risk clients as posing “normal” risks.

As part of the enforcement action, which focused on violations between December 2007 and November 2010, the FSA also penalized former Money Laundering Reporting Officer (MLRO) Syed Itrat Hussain 17,500 pounds for not ensuring that adequate anti-money laundering (AML) controls were in place at the institution.

“The failings were quite serious, particularly because so many of the bank’s customers are from high-risk countries,” said FSA spokeswoman Clare Murphy-McGreevey. “Part of the problem is that the bank relied on [Transparency International’s Corruption Perceptions Index] in isolation,” without the context of data provided by the Financial Action Task Force and other organizations, she said.

The FSA singled out Hussain because, “in that role, you should really be responsible for ensuring everything is up-to-date and focusing on the ever evolving landscape of financial crime,” said Murphy-McGreevey. “It changes quite a bit and compliance officers have to keep on top of it.”

“AML is a big area of focus for us, particularly the responsibilities of the MLRO,” she said.

In Tuesday’s enforcement action, the regulator also cited inadequate AML audits, training and recordkeeping related to its employees and individual accounts. The bank did not properly assess whether the beneficial owners of its accounts were residents of high-risk jurisdictions, the FSA said.

The latter resulted in the bank risk-ranking corporate clients with operations in Zimbabwe or Sudan, for example, no differently from a British company with exclusively U.K. operations, the regulator said.

The compliance missteps overall reflect a basic misunderstanding of risk-ranking, said Simon Dilloway, a principal with Norfolk, England-based Lopham Consultancy.

“Just because a bank knows an area or has operations in a high-risk country doesn’t stop the area from being high-risk,” he said, adding that FSA examiners have more closely examined how financial institutions gauge risk in the past year.

In a thematic review of depository institutions published in June, the agency said that three out of four U.K. banks failed to properly manage accounts maintained for high-risk clients, including politically exposed persons (PEPs). The review found that some banks had no formal procedures for PEPs at all.

“The problem is that, for a lot of these higher risk customers, they also have a lot of money and banks don’t want to ask the difficult questions and put them off,” said Dilloway. “Even when the bank identified a higher risk customer, they didn’t follow their own policy and get the proper documentation,” he said, adding that the monetary penalty is “quite small for something so serious. The bank must have cooperated hugely.”

The bank had initially faced a penalty of 750,000 pounds, but agreed to settle at an early stage, earning itself a 30 percent discount, the FSA said in a statement.

The agency, which is scheduled to close its doors in April 2013 as part of a regulatory overhaul, has been increasingly willing to fine banks for AML violations.

In 2010, the FSA more than doubled the number of AML penalties it levied in 2009, with the total related fines rising from 7.7 million pounds in 2009 to 9.7 million pounds the next year. In August 2010, the agency fined RBS 5.6 million pounds for AML violations, an enforcement penalty exceeded by March’s 8.75 million pound fine against Coutts & Co. The FSA had no AML-related fines in 2011.

The FSA’s oversight duties will be assumed by the Financial Conduct Authority and Prudential Regulation Authority next year.

Formed in 1967, Habib Bank Zurich AG has 25 branches in the United Kingdom, United Arab Emirates, Kenya, Isle of Man, South Africa and Canada.