The New York State Department of Financial Services (“NYDFS” or “the Department”) published a press release on February 24, 2022 announcing the issuance of a Consent Order (“the Consent Order”) to the National Bank of Pakistan (“NBP” or “the Bank”), which will require the Bank to pay $35 million in penalties to NYDFS.  In conjunction with the Department’s enforcement action, the Federal Reserve Bank of New York (“FRBNY”) also announced a $20.4 million penalty against NBP for its alleged Anti-Money Laundering (“AML”) violations.

The Consent Order describes NBP as a “multinational commercial bank incorporated in Pakistan in 1949 that is majority owned by the Pakistani government, with more than $20 billion in assets as of June 30, 2021.”  The Department’s issuance of the Consent Order marks the first major fine against a bank since Adrienne A. Harris was confirmed as New York’s top financial regulator (Superintendent of NYDFS) in January 2022.  In November 2021, while still leading the Department on an acting basis, Harris issued a consent order to Dubai-based Mashreqbank for sanctions violations requiring the bank to pay $100 million in penalties.

As we will discuss, the Department’s and the NYFRB’s actions sends a clear message confirming that repeated findings of violations over multiple examinations is a sure-fire way to become subject to enforcement.

The Consent Order

Foreign bank branches operating in New York are subject to annual supervisory examinations, which are typically conducted jointly by NYDFS and the FRBNY.  These examinations include reviews of banks’ risk management, BSA/AML compliance programs, transactions monitoring, and their OFAC sanctions screening programs.

The Consent Order alleges that the 2014 investigation of the Bank’s New York Branch uncovered an inadequate BSA/AML compliance program, based on “serious issues with the transaction monitoring system, weak internal controls, and significant shortcomings in managerial oversight.”  The Department’s findings allege that these shortcomings persisted into the 2015 examination.  In response to the 2014 and 2015 investigations, the Department took enforcement action against the Bank, issuing a Written Agreement on March 3, 2016, requiring the Bank “to engage an independent third party to conduct a comprehensive review and assessment of the Branch.”  The Consent Order alleges that despite the 2016 Written Agreement, the Branch’s “overall condition, risk management, and compliance programs continued to deteriorate” over the next five examinations.

After receiving inadequate examination reports from 2014 through 2019, the Bank terminated the New York Branch manager and senior compliance officer in February 2020 and hired new leadership as well as outside counsel.  The Bank also more than tripled the number of compliance staff working for the New York Branch between May 2020 and November 2021.  Despite the change in management, increase in compliance staff, and implementation of new policies and procedures, NYDFS and FRBNY concluded in the Branch’s 2020 Examination that the Bank “continued to operate in an unsatisfactory manner with an inadequate compliance program, and that the Bank had yet to address fully prior examination findings and the BSA/AML provisions of the Written Agreement.”

The Department alleges in the Consent Order that the Bank violated laws and regulations by: (a) conducting business in an unsafe and unsound manner, in violation of New York Banking Law § 44; and (b) failing to maintain an effective and compliant AML program in violation of 3 N.Y.C.R.R. § 116.2.  In addition to the monetary penalty of $35 million dollars, the Consent Order includes a number of other remedial settlement provisions.

Remediation and Possible Monitorship

Among other things, the Department’s remedial settlement provisions require that within sixty days of the execution of the Consent Order, the Bank must submit status reports to the Department with updates on Bank’s BSA/AML compliance program, suspicious monitoring and reporting, customer due diligence, and corporate governance and management oversight.  The Bank must also submit written progress reports to the Department every six months for three years “detailing the form, manner, and anticipated completion date of all actions taken to secure compliance with the provisions of the Order and the results thereof.”  Further, one year after the effective date of the Consent Order, the Department will determine whether to require the Bank to engage an independent consultant to conduct a comprehensive evaluation of the Bank’s remediation efforts.

The Department also reserved the right to require the Bank to engage an independent monitor who would: “(i) conduct a comprehensive review of the effectiveness of the Branch’s then-existing program for compliance with BSA/AML requirements, laws and regulations (the “Independent Monitor Review”); and (ii) prepare a written report of findings, conclusions, and recommendations (the “Independent Monitor Report”).  The remedial measures ordered by the FRBNY are largely overlapping with those included within the Department’s Consent Order.

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