The US Office of the Comptroller of the Currency (OCC) on Friday said it determined the bank's branch had internal control weaknesses, especially in its international funds transfer activities.
Arab Bank, by far the largest bank operating in the Palestinian territories, has had several lawsuits brought against it on behalf of relatives of US citizens killed or injured in violence in the Middle East, accusing the bank of helping move money to families of bombers.
The Jordan-based bank has denied that it helped transfer such funds and said it had made extensive investments to promote peace by financing projects in Palestinian territories.
On Friday OCC said Arab Bank agreed to convert the branch to an agency office, maintain asset levels and take some steps to improve its compliance programme and internal controls.
Bob Chlopak, a spokesman for the bank, said the OCC order forces Arab Bank to exit the wire transfer business in New York, but allows it to continue activities in trade and corporate finance at the branch.
The wire transfer business has historically accounted for about 9% of the bank's New York branch profit, Arab Bank said.
Chlopak said the shortcomings cited by the OCC were not related to problems with specific transactions but to inadequacies in the bank's information system, such as information gathering, monitoring, auditing and filing suspicious activity reports.