* Regulator says HBL breached anti-money laundering rules
* DFS, HBL agree on settlement and closure of New York branch
* DFS to review transactions as condition of branch closure
* Regulator says settlement does not preclude future actions
WASHINGTON, Sept 7 (Reuters) - The New York State Department of Financial Services said on Thursday Pakistan's Habib Bank has agreed to pay $225 million to settle an enforcement action brought against the bank for failing to comply with laws designed to combat illicit money transfers.
The DFS said in a legal filing last month that it was seeking to fine the bank, Pakistan's biggest lender, up to $630 million for "grave" compliance failures relating to anti-money laundering and sanctions rules at its only U.S. branch.
The regulator said the bank, known as HBL, agreed to pay just over a third of that sum as part of a broader settlement under which it will shutter its New York branch subject to conditions.
They include submitting to a DFS investigation of transactions processed by the branch from October 2013 to the end of September 2014, and from April 2015 through the end of July 2017.
Thursday's announced settlement does not preclude further future enforcement action if the DFS investigation reveals further problems.
The enforcement action was brought following a 2016 review during which the regulator said it found "weaknesses in the banks risk management and compliance" that bank management had failed to address.
The review revealed HBL had failed to properly screen thousands of transactions and had processed payments for known criminals and sanctioned entities, among other failings.
The bank has repeatedly been given more than sufficient opportunity to correct its glaring deficiencies, yet it has failed to do so," Financial Services Superintendent Maria Vullo said in the statement.
"DFS will not stand by and let Habib Bank sneak out of the United States without holding it accountable for putting the integrity of the financial services industry and the safety of our nation at risk."
HBL disclosed it was in negotiations with the DFS last month and said that the potential fine and closure of its New York branch would have no material impact on its business outside the United States.
HBL is pleased to have this matter behind it and has begun the orderly wind down of its New York operations," Matthew Biben, a partner at Debevoise & Plimpton LLP and the bank's U.S. legal counsel, said in a statement.
"HBL believes that the opportunity to resolve this matter consensually at this time is in the best interests of its investors, shareholders and customers. HBL remains committed to strengthening its operations and controls," he added.
The DFS said a court hearing scheduled for later this month had been canceled as part of the settlement. (Reporting by Michelle Price; Editing by Dan Grebler and Steve Orlofsky)