Law360, New York (January 29, 2016, 11:02 AM ET) -- In late-2015, federal and state banking agencies issued consent orders against two foreign bank branches operating in New York that signal an increased focus by the regulators on ensuring compliance with the federal anti-money laundering (AML) rules and regulations. This recent activity highlights the importance for banks to keep Bank Secrecy Act (BSA) compliance programs current and ensure consistent devotion of resources to BSA/AML compliance.

Habib Bank Ltd.

On Dec. 17, 2015, in a joint action, the New York Department of Financial Services (DFS) and the Board of Governors of the Federal Reserve System (FRB) issued a consent order and cease-and-desist order (collectively, the Habib Bank orders) against Habib Bank Ltd., a foreign bank located in Pakistan (the bank), and its New York branch (the branch),[1] for failure to comply with AML requirements under the Bank Secrecy Act and its implementing regulations. The DFS and FRB allege that during their most recent examination they identified significant breakdowns in the branch's risk management and its compliance with the BSA.

The Habib Bank orders result from a record of alleged noncompliance with the BSA and come nine years after the DFS' predecessor agency and the FRB entered into a written agreement with the branch designed to correct BSA program weaknesses and deficiencies related to correspondent banking and funds transfer clearing activities. Having found that the branch had not sufficiently complied with each provision of the 2006 written agreement, the DFS and FRB are now subjecting the branch to a number of compliance-related requirements. Under the Habib Bank orders, the branch must:

  • submit a written plan to enhance oversight of the branch's compliance with the BSA/AML requirements, including a number of specific governance improvements, such as more clearly defined roles, responsibilities and accountabilities regarding BSA/AML compliance, increased control by the bank's board of directors, and measures to track and escalate BSA/AML compliance issues to senior management;
  • retain an independent third party to conduct a comprehensive compliance review of the effectiveness of the branch's BSA/AML program;
  • submit a written revised BSA/AML compliance program for the branch;
  • submit a written enhanced customer due diligence program;
  • submit a written program reasonably designed to ensure timely, accurate, and complete suspicious-activity monitoring and reporting;
  • engage an independent third party to conduct a "look-back" review of the branch's dollar clearing transaction activity for the six-month period from Oct. 1, 2014, to March 31, 2015, to determine whether record-keeping and reporting requirements were properly met;
  • refrain from taking any action that would result in an increase in the aggregate dollar value or transaction volume of the branch's U.S. dollar clearing activities;
  • refrain from accepting any new foreign correspondent accounts or new customer accounts for U.S. dollar clearing;
  • submit a written plan to manage the growth in the branch's U.S. dollar clearing activities;
  • submit written policies and procedures governing the branch's personnel in all supervisory and regulatory matters; and
  • submit a plan to enhance the bank's compliance with Office of Foreign Assets Control regulations.

Although the DFS and FRB did not impose a civil money penalty against the branch, these enforcement actions impose significant remedial measures and require the branch to meet objectives that will place additional financial and operational burdens on the branch. Two of the Habib Bank orders' mandates — the requirement to engage third-party consultants to review the branch's BSA program and past compliance records and the requirement not to increase dollar clearing activity conducted through the branch — may prove particularly costly:

Third-Party Consultant Engagement and "Look-Back" Review. The branch must engage a third party or third parties to conduct comprehensive compliance reviews of the newly developed programs and to conduct a "look-back" review of all of the branch's dollar clearing activity for a six-month period. The report resulting from this review must be submitted to the DFS and FRB, and any transactions that should have required the branch to file currency transaction reports or suspicious activity reports must be reported to the Financial Crimes Enforcement Network, which also has the authority to pursue an enforcement action against the branch.

Restrictions on Dollar Clearing Growth. Significantly, the FRB and DFS have also restricted the branch's ability to increase its U.S. dollar clearing activities or establish any new dollar clearing banking relationships. These restrictions impose limitations on what the DFS and FRB appear to view as a pattern or practice of deficient controls over dollar clearing activities extending back to 2006. The DFS has imposed similar restrictions on other New York-regulated banks in the past and, in the most egregious cases, completely suspended a bank's ability to engage in dollar clearing activities.

Bank of India

On Nov. 30, 2015, the Federal Deposit Insurance Corp. issued a consent order against the New York branch of the Bank of India in connection with unsafe and unsound banking practices relating to weaknesses in the branch’s BSA compliance program (Bank of India order). Similar to the Habib Bank orders, the Bank of India order imposed numerous requirements on the branch to bolster its compliance with the federal AML requirements, including, among other requirements, retaining qualified management to oversee the branch’s BSA program, reviews and enhancements of the branch’s risk assessment and internal controls, establishment of a BSA committee whose composition is acceptable to the FDIC and the DFS, and engaging a qualified third party to perform a validation of the branch’s suspicious activity monitoring program.

Significantly, the Bank of India order also requires the branch to conduct a “look-back” review of all accounts and transaction activity to determine whether suspicious activity involving any account or transactions within or through the branch was properly identified and reported. This requirement is similar to that of the Habib Bank orders’ requirements, but even more onerous because the FDIC is requiring the Bank of India branch to conduct a review covering transactions over a 23-month period.


The Habib Bank orders and Bank of India order underscore the importance of a robust BSA program that meets the ever-evolving expectations of regulators. Each bank must ensure that its BSA/AML compliance programs are commensurate with the risk posed by the institution and the banking environment in which it operates. Accordingly, every bank must periodically assess the risks posed to the institution by actively monitoring the bank's products and services, types of customers and entities with which the bank engages, and the geographies in which those customers reside or conduct business. Finally, each bank should closely monitor the regulatory environment, including recent enforcement actions, and tailor its BSA program and approach to BSA compliance appropriately.

During a period of increased focus on anti-money laundering, regulators are taking a closer look at financial institutions' efforts to monitor and thwart illicit transactions, and banks must be prepared to meet regulators' expectations. Indeed, these enhanced expectations are evidenced in the DFS' recently proposed rules to strengthen BSA controls and impose criminal liability on head compliance officers. In addition, FinCEN is already demonstrating an increased focus on AML controls in 2016, recently publishing geographic targeting orders intended to generate more BSA data related to real estate secrecy in New York and Miami and issuing guidance on the Financial Action Task Force’s updated list of jurisdictions with strategic AML/counter-terrorist financing deficiencies.

Published by Banking Law360, Capital Markets Law360, and New York Law360 on January 29, 2016.