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Habib Bank Crisis: U.S.-Pakistan Relations Reach All-Time Low

By Polina Tikhonova. Originally published at ValueWalk.

U.S.-Pakistan relations have plummeted to a new all-time low after Habib Bank, Pakistan’s biggest lender, shut down its operations in the U.S.

  • Seven days after U.S. President Donald Trump accused Islamabad of providing “safe havens” to extremist groups, a state regulator says it is seeking to fine Habib Bank, which is majority-owned by the Pakistani government, up to $630 million.
  • The bank responded within hours by closing its New York location, which is its only branch in the U.S.
  • The Pakistan Stock Exchange (PSX) reacted negatively, reaching a 10-month low on Tuesday with investors selling off their holdings.

The New York State Department of Financial Services (DFS) said on Monday that it is seeking to impose a penalty of more than $600 million against Habib Bank, the largest fine ever faced by a Pakistani financial institution in history.

habib bank us-pakistan relations reach all-time low
by Furqanlw via Wikimedia Commons

Karachi-based Habib Bank, which opened its only branch in the U.S. in 1971, has shuttered its operations in the U.S. The banking regulator claims the Pakistani bank is responsible for “grave” compliance failures in regards to anti-money laundering rules and indirect links to financing extremism.

The DFS served the notice seeking to impose the penalty just a week after the Trump administration unveiled its long-overdue Afghan strategy, which includes increasing the number of U.S. troops in Afghanistan and putting more pressure on Islamabad for allegedly harboring extremists on its soil.

What is all the fuss around Habib Bank?

Although Habib Bank decided to withdraw from New York, the regulator insists on a hearing in September to investigate the bank’s “serious and persistent” failings relating to anti-money laundering rules. The penalty notice comes exactly a month after former Pakistani Prime Minister Nawaz Sharif was disqualified for life by the Pakistan Supreme Court on corruption charges.

In a filing calling Habib Bank’s compliance with the rules “dangerously weak,” the DFS claimed that the bank’s “failings” affected the entire Habib banking enterprise and even posed “grave risks” to the state’s banking system. In a statement announcing Habib’s withdrawal from New York, the branch’s general manager, Nausheen Ahmad, said there “will be no material impact” on the bank’s business outside of the United States.

According to the 14-page penalty notice, Habib Bank has been restricted from increasing the number of dollar-clearing transactions from the New York branch until the hearing resolves the case.

Pakistan Stock Exchange hits 10-month low in light of Habib crisis

The Pakistan Stock Exchange (PSX) reacted in less than 24 hours after the New York regulator’s order, which prompted investors to sell off their holdings, pushing the stock exchange to a 10-month low. Since Monday, the stock’s benchmark KSE 100-index lost 741.14 points on Tuesday to hit 41,233.08 points. Interestingly, the index has lost a staggering 5,332.21 points since July 1, which marked the start of the 2017-2018 fiscal year.

The DFS’ filing prompted a furious response from Pakistani officials. Former Pakistan Foreign Minister Khurshid Kasuri said on Geo News’ Capital Talk that he “hoped” the U.S. regulator’s decision has nothing to do with the current political tensions between Washington and Islamabad, which have been caused by Trump’s national address last week. In the address, he criticized Pakistan and accused it of harboring terrorists.

Habib Bank’s alleged ties to funding extremism and U.S. sanctions

The tensions between Habib Bank and the DFS can be traced back to 2006, when the regulator urged the Pakistani bank to look into issues regarding its sanctions laws compliance program. The state agency claims that Habib Bank has failed to comply with the rules since then. Two years ago, an inspection by the DFS allegedly revealed “serious deficiencies” in the bank’s anti-money laundering controls.

In its latest filing, the banking regulator said it had found out that Habib Bank held a U.S. clearing account with Saudi Arabia’s largest private bank, Al Rajhi, which the U.S. Senate says it has linked to Al Qaeda and the sponsoring of extremists. The DHS also accused the bank of the “wire-stripping” tactic, which refers to the practice of deliberately stripping out payment-related information that may look suspicious.

The state regulator said Habib Bank was responsible for wire-stripping a payment involving a Chinese weapons manufacturer that was included on the list of U.S. non-proliferation sanctions.

Economic crisis

The latest developments indicate that cracks continue to deepen in the decades-old friendship between the U.S. and Pakistan. Many U.S. companies which entered Pakistan back when it was America’s core ally in South Asia have contributed to the country’s economic development through investments for many decades.

In fact, the U.S. had been Pakistan’s biggest investor from 1990 through the early 2010s, when America’s role in the Pakistani economy was slowly being replaced by China. In the 1990s and 2000s, the U.S. provided approximately one-third of Pakistan’s total foreign direct investment (FDI). Washington has been steadily pulling out its investments from Pakistan since relations with the nation went sour after U.S. Navy SEALs killed Taliban chief Osama bin Laden on Pakistani soil in 2011. As a result, China now accounts for almost half of Pakistan’s total FDI.

Interestingly, the total volume of U.S.-Pakistan bilateral trade amounts to $5.78 billion, while bilateral trade between China and Pakistan stands at more than $13 billion. The two Asian neighbors have expanded their economic, diplomatic and political partnerships, largely thanks to their joint connectivity project, the China-Pakistan Economic Corridor (CPEC).

Pakistan to bring “fundamental changes” to ties with U.S.

U.S.-Pakistan relations have come under increased scrutiny since Trump unveiled his highly-anticipated Afghan strategy, in which he openly criticized his country’s former Cold War-era ally. He accused Pakistan of providing safe haven to extremists and warned that the South Asian nation had “much to lose” by continuing to harbor terrorists.

trump on pakistan

Since then, Pakistan has suspended a series of official visits and talks with the U.S. to protest Washington’s accusations that it has been harboring extremists, which the Pakistani government vehemently denies. For days, hundreds of Pakistanis rallied across the nation to protest Trump’s criticism of their country.

The future of relations between Islamabad and Washington remains unclear, as the two nations are spiraling into a diplomatic crisis. Sources cited by Waqt News revealed earlier this week that the Pakistani government could make fundamental changes to its diplomatic relationship with the U.S., The Nation reported.

Where is the U.S.-Pakistan crisis going?

In the wake of Trump’s criticism of Pakistan, the unnamed sources revealed that Islamabad is poised to abandon its current ties with Washington and plans to cut diplomatic communications with its former strategic partner. The sources also claim that no official from the Trump administration will be allowed to visit Pakistan without Islamabad’s approval.

Some analysts suggest that the current crisis in U.S.-Pakistan relations could lead to grave consequences, which include Washington stripping Pakistan of its non-NATO ally status or even declaring it a state sponsor of terrorism.

The post Habib Bank Crisis: U.S.-Pakistan Relations Reach All-Time Low appeared first on ValueWalk.

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