Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Donald Trump's election was supposed to usher in an era of U.S. isolationism and deregulation. For global finance, it has yet to deliver either: regulators appear no less keen to police multinational banks that access the U.S. dollar system and impose harsh fines when they see lax money-laundering controls or the risk of sanctions dodging.

The benefits are, in theory, a cleaner financial system and a stream of settlements to help fund public services. But there's a down-side: the risk of pushing illicit payments deeper underground. Take the latest punishment New York's Department of Financial Services has meted out against Pakistan's biggest bank by market value, Habib Bank Ltd.

The watchdog is seeking to impose a penalty of up to $630 million -- equivalent to about two years' of Habib's profit -- over what it calls "serious" and "persistent" compliance failures at the lender's New York branch and beyond. The Pakistani lender admits to "negligence" in crediting an account holder on the FBI's most-wanted list with $27,000 and is asking for leniency, according to Bloomberg News.

Two Years Gone
A fine of $630 million would be equivalent to about two years of profits at Habib Bank Ltd.
Source: Bloomberg

All this may seem just another day's work for the DFS, which made a name for itself under Benjamin Lawsky by fining big European banks like BNP Paribas SA and Standard Chartered Plc billions of dollars over breaches of U.S. sanctions policy. And it's hard to criticize regulators for aiming too high when so much taxpayer money has been spent on fixing the financial system.

The twist here is that Habib Bank is going to shut down its New York branch and contest the penalty in court. For the Pakistani bank, the cost of keeping the U.S. entity is too great. It plans to handle its dollar clearing needs through correspondent banks.

There's downside in pushing banks to shut their doors. A 2015 paper for the Notre Dame Law Review looked at some of the unintended consequences when banks pulled the plug on wire transfers to Somalia or cut their operation in Mexico for fear of incurring fines. It said money flowing to Somalia had become unregulated, untraceable and more expensive for Somalis, while in Mexico, even legitimate businesses were opening multiple accounts and disguising cash flows just to keep access to the banking system. Even small U.K. businesses complain they are being wrongly frozen out by banks.

Ripple Effect
Fears over the cost of a U.S. enforcement action have cut the value of Pakistan's biggest bank
Source: Bloomberg

Regulatory actions can have serious national implications. Habib shares are down by a third over the past month; Pakistan's central bank has had to come out and say that the domestic banking system is under no "imminent" risk. It's slightly reminiscent of when Germany's No. 1 lender, Deutsche Bank, faced an existential crisis over the size of one fine from the U.S. Justice Department.

Compliance Crackdown
Banks have paid some $321 billion total in financial enforcement penalties since 2008
Source: BCG

The dominance of the U.S. dollar as the world's reserve currency explains why, by and large, banks are willing to take the regulatory hit: Since the crisis of 2008, lenders have paid about $321 billion in penalties, according to BCG. But that willingness may not last forever. One Russian official is touting a new crypto-currency similar to Bitcoin as a "good alternative" to the dollar. That may be far-fetched for now, but it would be ironic indeed if it was the legacy of New York's regulators.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net