NYDFS fines Promontory $15M; places moratorium on industry work

By John M. Pachkowski, J.D.

Following the release of an Aug. 3, 2015, report by the New York Department of Financial Services that found Promontory Financial Group, LLC lacked independent judgment in the preparation and submission of reports to the NYDFS in 2010-2011, the agency and Promontory have entered into an agreement to resolve the conduct outlined in the report.

NYDFS report. The report chronicled the results of a two-year investigation by the NYDFS into Promontory’s work for Standard Chartered Bank pertaining to the bank’s compliance with Bank Secrecy Act/Anti-Money Laundering laws and regulations, and sanctions imposed by the Office of Foreign Assets Control. As part of its work, Promontory produced a number of reports and made various presentations to the bank and government authorities, including the NYDFS’ successor, the New York State Banking Department (NYSBD). These reports included interim reports throughout 2010, final reports in January and March of 2011, and updates to those final reports in October 2011.

Beside finding that Promontory lacked independent judgment, the report also found that certain testimony regarding key issues provided by Promontory witnesses during the course of the NYDFS’s investigation lacked credibility. The report also noted that “ends of justice and the public advantage would not be served by providing Promontory with access to confidential supervisory information.”

NYDFS agreement. Under the terms of the Aug. 18, 2015, agreement, Promontory was required to:

• Pay a $15 million monetary penalty and cannot claim any type of tax offset based on the monetary payment.
• Take a 6-month voluntary abstention from new consulting engagements that require the NYDFS to authorize the disclosure of confidential information under New York Banking Law §36(10). That provision allows the NYDFS to revoke a consultant's access to confidential supervisory information if continued access to that information would not serve “the ends of justice and the public advantage.” Virtually all consulting and monitoring work at regulated financial institutions requires access to confidential supervisory information.
• Agree that its actions during the Standard Chartered engagement did not meet the NYDFS’s current requirements for consultants performing regulatory compliance work for entities supervised by the NYDFS.
• Acknowledge that any report submitted to the NYDFS must be objective and reflect its best independent judgment. Regarding all pending and future matters in which it or its client submits a report to the NYDFS, Promontory will document any changes to such a report that it makes at the suggestion of a client or the client’s counsel.

Working constructively. Commenting on the agreement, Acting Superintendent of Financial Services Anthony J. Albanese said, “We are pleased that Promontory has agreed to resolve this matter and to work constructively with the Department moving forward to help strengthen integrity within the consulting industry. The Department will continue to aggressively investigate and address conflicts of interest at consulting firms, which is a critical part of combating misconduct and improving accountability in the financial markets.”

Quality and integrity. In a brief statement, Eugene Ludwig, the founder and chief executive officer of Promontory Financial Group, said, “We are glad to have resolved this matter.” He added, “We remain committed to quality and integrity in carrying out our work.”

Prior NYDFS actions. The action against Promontory is the latest taken by the NYDFS against firm providing consultancy services to the banking industry in New York State.

Roughly a year ago, PricewaterhouseCoopers (PwC) Regulatory Advisory Services has agreed to a series of measures imposed by the NYDFS. In its settlement, PwC has agreed to voluntarily abstain from accepting consulting engagements at financial institutions regulated by NYDFS; pay a $25 million penalty to the state of New York; and establish and implement procedures and safeguards for engagements that meet the standards established by NYDFS. Also, PwC withheld over 20 percent of the director’s compensation after the director’s misconduct during the engagement came to light during DFS’s investigation.

Also, in June 2013, Deloitte Financial Advisory Services settled with NYDFS over its work done for Standard Chartered following the bank’s 2004 written agreement with the NYSBD and Federal Reserve Bank of New York. Under its settlement, Deloitte agrees to a one-year, voluntary suspension from consulting work at financial institutions regulated by the DFS, make a $10 million payment to the state of New York, and implement a set of reforms designed to help address conflicts of interest in the consulting industry.

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