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Pakistan central bank issues rules for banks' overseas operations

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Pakistan central bank issues rules for banks' overseas operations

Pakistan's central bank issued a governance framework for banks to strengthen their ability to manage risks posed by overseas operations.

The State Bank of Pakistan said the framework requires banks' boards of directors and senior management teams to have a clear understanding of relevant laws and regulations in respective overseas jurisdictions, according to a circular released Aug. 6. Further, it requires banks to develop a risk governance framework for their overseas operations within six months.

All banks must develop a mechanism for their boards to regularly evaluate the financial performance of overseas units, the central banks said, adding that it will not allow banks to expand branch operations in jurisdictions where it is unable to conduct on-site examinations.

The central bank also ordered banks to repatriate at least 50% of their after-tax profit to their headquarters in Pakistan on an annual basis starting in 2018. Banks are also expected to maintain their return on equity in each jurisdiction at least equivalent to industry or peer average of that particular jurisdiction. If the bank incurs losses for two consecutive years or its ROE falls below average ROE of the bank's peer group, the bank must submit a strategic plan to the State Bank of Pakistan on ways to reverse the trend.

The announcement came after the U.S. branches of two major Pakistani banks faced scrutiny for noncompliance with local rules. United Bank Ltd. in July agreed to tighten its anti-money laundering policies after U.S. regulators found that it failed to comply with anti-money laundering rules. In September 2017, Habib Bank Ltd. was penalized by U.S. regulators for noncompliance with anti-money laundering and counter-terrorist financing laws.