They are known as Wall Street’s shadow regulators. And after years of guiding banks through problems like money laundering and foreclosure abuses, their influence has soared.
Now, regulatory scrutiny of the consulting industry itself is intensifying.
New York State has subpoenaed two consulting firms as part of a broader investigation into the industry’s perceived coziness with Wall Street, according to people briefed on the inquiry. The two firms that received the subpoenas in recent months — Promontory Financial Group and PricewaterhouseCoopers — are among the industry’s biggest names.
The subpoenas by the New York Department of Financial Services present the latest threat to the consulting industry, which is being faulted for inadequately handling recent bank regulatory problems. In another sign that the industry’s clout is in jeopardy, federal regulators are rethinking their own reliance on consultants, which are often called in to bolster compliance procedures at banks.
The examination of the consultants stems from a concern that the industry’s business model is rife with conflicts of interest. While consultants are supposed to provide an objective assessment of a bank’s problems, they are also handpicked and paid by those same banks.
PricewaterhouseCoopers declined to comment on the subpoena. Promontory also declined to address it, but a spokesman acknowledged that the firm “from time to time receives document requests in the form of subpoenas related to client activities.” The spokesman, Christopher Winans, added, “Promontory does not disclose the nature of individual requests or scope of inquiry.”
Neither firm has been accused of wrongdoing, and New York has not indicated that it will penalize the firms. Time magazine earlier reported online that Promontory had received a subpoena.
In the past, the consulting industry defended the independence of its work. Conflicts of interest, however, were a central issue when New York took action against another seasoned consultant, Deloitte. New York’s financial regulator, Benjamin M. Lawsky, fined Deloitte $ 10 million in June and banned it from advising banks in New York for one year after accusing the firm of watering down a report about money-laundering controls at the British bank Standard Chartered.
At Standard Chartered’s request, Deloitte removed a recommendation from the report that was “aimed at rooting out money laundering,” Mr. Lawsky, New York’s superintendent of financial services, said when announcing the Deloitte action. Deloitte was not accused of intentionally aiding or abetting Standard Chartered. At the time, Deloitte said it “has an important responsibility to continually elevate the standards that govern our work and that of our profession.”
Mr. Lawsky is scrutinizing some of the same issues in his investigation of Promontory and PricewaterhouseCoopers, according to the people briefed on the matter.
The subpoena of Promontory seeks e-mails and other documents generated during the firm’s work for Standard Chartered, which settled with New York and federal regulators over claims that it had illegally transferred money for Iran. Mr. Lawsky is also examining Promontory’s work for another bank suspected of transferring money for countries blacklisted from doing business in the United States. The identity of the other bank was unknown.
Promontory helped Standard Chartered assess the amount of illegal transfers routed through the bank’s New York branches. Mr. Lawsky, the people briefed on the matter said, is questioning whether Promontory lowballed the estimate at the request of Standard Chartered.
“We were not retained to characterize the transactions or interpret their legal meaning,” Mr. Winans, the Promontory spokesman, said.
Even among regulators, there has been widespread disagreement about the extent of Standard Chartered’s wrongdoing, presenting a challenge for Mr. Lawsky’s investigation of Promontory.
Based on Promontory’s review, Standard Chartered originally estimated $ 14 million in illicit transfers but ultimately conceded that the problem reached $ 24 million. And Mr. Lawsky, who has a broader authority to penalize the bank for failing to keep accurate books and records, valued the bank’s misconduct at $ 250 billion.
In Mr. Lawsky’s examination of PricewaterhouseCoopers, he is focused on the consultant’s work for the Bank of Tokyo-Mitsubishi UFJ, which faced investigations over foreign money transfers, according to people briefed on the matter. In June, Mr. Lawsky accused the bank of processing 28,000 payments worth about $ 100 billion on behalf of countries that were facing sanctions by the United States. PricewaterhouseCoopers was tasked with assessing the volume of transfers.
Weeks before penalizing the bank, the people briefed on the matter said, Mr. Lawsky pushed PricewaterhouseCoopers to turn over additional documents about its correspondence with the bank. Before doing so, PricewaterhouseCoopers hired a law firm to review the material. Although many of the documents were innocuous and did not imply that the firm was complicit in the bank’s wrongdoing, language in a few e-mails did suggest that certain employees were not fully independent from the bank.
PricewaterhouseCoopers, which is cooperating with the investigation, has since begun to produce documents for Mr. Lawsky. The regulator, the people briefed on the investigation said, is also reviewing whether the PricewaterhouseCoopers and Promontory employees who worked on the cases have since moved on to Wall Street.
Until now, such consulting firms have enjoyed a certain cachet in Washington and on Wall Street. Promontory was founded by Eugene A. Ludwig, a former bank regulator and a law school friend of Bill Clinton’s.
But both firms came under the spotlight for their work in reviewing foreclosure abuses at banks. Consultants racked up more than $ 2 billion in fees while struggling to complete the assignment.
The consultants have defended their work, and the Government Accountability Office has placed blame on regulators. Still, Congress has questioned the $ 2 billion in payouts.
“Consultants have a financial incentive to do things to attract repeat business,” Senator Sherrod Brown, Democrat of Ohio, told a panel of regulators who testified before the Senate Banking Committee.
In testimony before the committee, a senior federal banking regulator said he was exploring new ways to curb the use of consultants. The official also petitioned Congress for greater authority to police the firms.
Mr. Lawsky, however, believes he has found the authority to rein in the consultants. Under an obscure law that goes back to the turn of the 20th century, Mr. Lawsky’s office controls access to documents that consultants need to advise a bank. Mr. Lawsky will block access to those documents if a consultant reveals a lack of independence.
“At times,” Mr. Lawsky has said, “the consulting industry has been infected by an ‘I’ll scratch your back if you scratch mine’ culture and a stunning lack of independence.”