The good news is that the New York Department of Financial Services (DFS) is still taking a hard line on bank misconduct despite the departure of its former Superintendent, Benjamin Lawsky.
The bad news is that in reporting on an investigation by DFS into one of the banking industry’s top regulatory fixers, Promontory Group, the New York Times curiously fails to discuss the eye-popping conduct at issue.
The case that led to the Promontory probe was the one that brought Lawsky to international attention, namely, his order against Standard Chartered for over $250 billion of money laundering on behalf of Iran, Myanmar, and other equally savory players. What made the Lawsky order so striking was its description of the scale of the violation, that the British bank had willfully violated previous regulatory settlements and doctored records to escape detection by US authorities. Worse, even Standard Chartered’s outside counsel in the US warned against the law-breaking, and was basically told by the bank’s in-house counsel to mind its own business. Lawsky took the unheard-of approach to order the bank to show up in a hearing and explain why it should not have its New York branch license yanked. That would have put it out of the dollar clearing business, which would have been a huge blow.
Here is the priceless part, and where Promontory comes in. Standard Chartered asserted it had only $14 million of transactions out of compliance. This was despite the fact that the procedures for “repairing” as in doctoring, bank wires were commemorated in Standard Chartered operating manuals. How did Standard Chartered justify its claim of such inconsequential law-breaking? Promotory was the source of that very convenient estimate.
In case you managed to miss it, $250 billion is over four orders of magnitude larger than the $14 million that Promontory, whose claim to fame is that it is chock full of ex regulators, said was not kosher. And yes, Standard Chartered in its settlement with New York and other regulators, agreed that it had engaged in $250 billion of illegal transactions and that the Promontory estimate was wrong, and paid a total of $667 million to the DFS and other regulators.
That should have been the end of the matter but it wasn’t, for reasons good and bad. The good part is that Lawsky and his chief of staff, now acting superintendent Anthony Albanese, pursued Promontory and other consultants that tried to hide the extent of financial firm misconduct. Pricewaterhouse Coopers has already settled for $25 million and Deloitte, $10 million (in Deloitte’s case, for its role with Standard Chartered).
The reason that the use of consultant is such a big deal is their use goes well beyond the role they played in Standard Chartered, of helping falsify records and/or provide analyses that were so mind-bogglingly client-flattering as to not stand up to the slightest inspection. But of course, the premise was that, coming from such seemingly-reputable firms, they never would be inspected.
Supposedly independent consultants have become the worst sort of compliance fig leaves. Thinly-staffed regulators lack the manpower to oversee that terms of orders, settlements, and deferred prosecution agreements are obeyed. In cases of moderate-to-severe misconduct, it’s become common for the regulator to order that an “independent” monitor be engaged as a supervisor of sorts. But the “independent” monitors are checked only for conflict of interest (which is defined narrowly) and general expertise. And since the financial firm in question is paying the bills, and more generally, financial firms are major clients for these firms while financial regulators aren’t, whose interest do you expect them to be serving? As the New York Times confirms:
Despite those conflicts, regulators have leaned on consultants to conduct the sort of large-scale examinations the government cannot afford to undertake. But after recent concerns arose about PricewaterhouseCoopers and Deloitte succumbing to pressure from banking clients, regulators began to reconsider that reliance, prompting them to release new guidelines for the use of consultants.
For instance, as we recounted at length in a whistleblower series on the Independent Foreclosure Reviews, Promontory managed to earn over $600 million for “reviews” that were not only never completed, but to the extent any real work was done, it was performed by temps hired by Bank of America on premises owned or leased by Bank of America. In other words, it was not only a whitewash, but it was also clearly designed as a rental of the Promontory name, and not actual consulting work where the billings bore any correspondence to hours of work done by Promontory staff or its contractors.
The bad reasons were that Standard Chartered continued to be defiant and Promotory is as well, raising the question as to which party is the real ringleader (ie, is Promontory aiding and abetting Standard Chartered’s bad impulses because it is the most profitable course of action, or also because Standard Chartered’s high-handedness serves as a front line of defense for Promontory’s dubious conduct?). As reported by the Financial Times in 2014:
StanChart has had a rocky history with US authorities since the 2012 sanctions settlement. Sir John [Peace, the chairman] irked regulators when he dismissed the bank’s actions as “clerical errors” rather than a “wilful” intention to break the rules, even though the group had accepted responsibility for breaching sanctions.
His comments earned Sir John, Mr [Peter] Sands and then finance director Richard Meddings a summons to Washington, where all three were personally reprimanded by US authorities. Sir John was forced to apologise to investors and the bank’s staff, and admitted his remarks had been “both legally and factually incorrect”.
The New York Times brings us up to date:
The regulator’s interactions with Standard Chartered have been even more difficult.
In 2012, the bank agreed to pay $667 million to several agencies…
That did not end its problems. Two years later, the New York regulator took action once again, forcing the bank to pay a $300 million fine and suspend an important business activity because of its failure to weed out transactions prone to money laundering.
The bank, which recently overhauled its top management, is now once again under criminal investigation. The Justice Department is examining whether it committed sanctions violations beyond those covered in the 2012 deal, which centered on what the bank called “Project Gazelle,” an effort to forge “new relationships with Iranian companies.”
The Times describes the battle of wills with Promontory. The bone of contention is whether Promontory succumbed to pressure from Standard Chartered and understated the level of illicit conduct. Given the yawning gap between Promontory’s $14 million and the $250 billion in doctored transactions that the bank ‘fessed up to, one has to consider whether there was any pressure at all, as in whether Promontory did anything that would rise to the level of a serious review. It conduct in the Bank of America foreclosure reviews suggests that that is a real possibility. Under New York law, DFS does not have to prove legal liability, merely that Promontory “lacked the objectivity expected of consultants.” The New York regulator could direct banks to withhold records that Promontory would need to complete a consulting assignment, both ending its dealing with New York regulated entities and putting a cloud over Promontory generally.
When an executive at one of Wall Street’s top consulting firms testified before Congress two years ago, he stressed the importance of independence in reviewing bank misdeeds, declaring, “If we merely told our clients what they want to hear, we would lose credibility.”
A long-running New York State investigation into potential conflicts of interest at the firm, Promontory Financial Group, is now calling some of that credibility into question, according to lawyers briefed on the matter. And in an escalation of the investigation, state authorities recently subpoenaed several of the firm’s employees, including the executive who testified before Congress.
The subpoenas from New York’s financial regulator, the latest step in a two-year inquiry, require that at least six Promontory employees sit for depositions beginning on Tuesday…
The depositions represent an escalation of an investigation that was already hostile.
When the New York regulator requested Promontory’s correspondence with Standard Chartered, the firm balked, according to the lawyers briefed on the matter. Promontory contended that it was hired by the bank’s lawyers, an arrangement that might have shielded those records under attorney-client privilege.
That argument spurred an unusually contentious debate that threatened to stall, or even derail, the investigation. After the regulator threatened to take Promontory to court, Standard Chartered agreed to produce the documents for the sole purposes of the investigation into Promontory.
Promontory’s argument for withholding documents is mind-boggling. As we explained in our discussion of the Steptoe & Johnson investigation of CalPERS’ pay-to-play scandal, the reason that law firms are hired for those assignments is to obtain the benefit of attorney-client privilege. Promontory, which is not a law firm, has become the go-to firm in insider trading scandals precisely because hiring a outside investigator not protected by attorney-client privilege is a sign that the financial firm is coming clean. Moreover, the argument that Promontory’s work product is shielded by its having been engaged via the firm’s outside counsel fails under the “sword and shield” principle of implied waiver of attorney-client privilege. The fact that Promontory’s work product was used to defend the bank in a regulatory inquiry made it fair game for further scrutiny.
In other words, Promontory’s conduct vis-a-vis the DFS has been as bad as Standard Chartered’s. I hope the DFS comes down on Promontory like a ton of bricks. As as we stressed, it’s disappointing but not entirely surprising to see the Times shade the story towards Promontory by not discussing the scope of Standard Chartered’s bad deeds and the how aggressive the failed Promontory whitewash was.
If you have time, please drop a short “atta boy” note to the acting New York Superintendent of Financial Services at this link. Thank him for continuing up the high standards set by Lawsky by being tough on bank miscreants and enablers like Promontory and tell him to keep up the god work.