US penalty for civil, not criminal offense: HBL analysts

NEW YORK - The Habib Bank Limited (HBL) conducted an analyst briefing on Tuesday to discuss the decision by US Department of Financial Services to impose a $630 million penalty on the bank’s US operations.

The briefing was attended by the bank’s CEO, Nauman Dar, CFO Rayomond Kotwal, and Head of IR, Rehan Sheikh.

Firstly, the penalty amount has not been finalized, the analysts briefed. The DFS seeks to impose a penalty of “up to” USD629.625mn. However, “the case will be presented in the Administrative court of the authority, where both parties will contest the imposition and size of penalty.”

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It is worth highlighting that HBL has been fined for lapses in control procedures. The penalty imposed is for civil offense and not for a criminal offense. While the amount of transactions where observations were raised were relatively small, the DFS appears to have looked at gross USD clearing business handled by the bank to determine the proposed size of the penalty.

While HBL management admitted that there were lapses in the NY branch’s control and compliance procedures, the magnitude of penalty that DFS seeks to impose is very harsh relative to the size of the business. The bank indicated that over 2006-15, the bank made cumulative profits of USD12m at the NY branch.

The bank’s management indicated that they were offered a settlement in early 2017, with the amount being significantly less than the proposed penalty - no indication on the size of the settlement offered - but which was still high relative to the size of the business in the view of the management.

The management also indicated that if the penalty amount is not reduced to a size relative to the business, they will contest the decision in US lower court, and then higher courts in the US, if required.

The management also announced that it is not planning to take any provisions against the proposed penalty unless there is clear visibility of the final outcome of their legal process.

The bank is planning to close its US branch and is in discussion with its legal advisors on how to proceed. The USD transaction business will be done through correspondent banking relationships, which HBL already has.

The management also stated that it will review their entire international operations for compliance and control procedures.

While the bank tried to dispel fears of immediate provisioning and also contest the size of the proposed maximum penalty, it will remain an overhang on the price in the near term till we get more visibility on the legal process, possible reduction in the magnitude of penalty, and timing of the final decision.

“We believe that the September hearing would be key to keep an eye on as that should give an indication on the actual size of penalty that DFS intends to impose on HBL,” the management said in a statement.

On Monday, the Bank had announced its decision to wind up operations in New York following intimation from the state's financial regulator.

The case stems from 2015, when US authorities moved against the bank after finding deficiencies in the risk management and Bank Secrecy Act/Anti-Money Laundering compliance programme at HBL’s New York branch.

The banking circle took the situation seriously and called it a bad omen for the country as well as the banking industry.