Standard Chartered’s hired gun, Promontory Financial Group, has shot itself in the foot. New York financial regulators say the politically cozy consultant, the go-to for financial institutions dealing with Washington’s red tape, whitewashed a probe of the British bank and have suspended it from advising state-licensed lenders. The penalty may curb conflicts – and stings a lot more than a mere fine. Maybe other American regulators will take the hint.
Promontory is as connected as can be. Top management includes a former comptroller of the currency, a former vice chairman of the Federal Reserve board of governors and other Washington honchos. The credentials have polished its reputation for unmatched influence and integrity.
They have also made the firm a high-profile target – and New York’s Department of Financial Services didn’t miss its shot. The agency formerly led by Benjamin Lawsky (his deputy is the interim boss) accused Promontory on Monday of succumbing to StanChart’s demands to water down a report on how the bank evaded sanctions against blacklisted nations like Iran. When a bank lawyer asked that a presentation be made “more bland,” for example, Promontory responded, “let’s do it,” said DFS.
The department had relied on the report to punish StanChart, and it said Promontory lacked “independent judgment” in its preparations. The penalty: denying the consultant access to confidential regulatory information necessary to advise banks in the future.
It’s a tough sentence, especially for behavior that’s not illegal. Deloitte was fined only $10 million and PricewaterhouseCoopers $25 million for similar misconduct and voluntarily agreed to narrow limits on business. Yet the penalty targets serious conflicts of interest that arise when a bank pays an eminent firm to investigate and then asks watchdogs to trust the probe’s findings.
Mere settlements involving even hefty fines too often prove ineffective. HSBC, for example, paid $1.9 billion and agreed to close scrutiny in 2012 in resolving money laundering charges, yet the UK bank has resisted reforms and stonewalled the appointed monitor, according to prosecutors. Stiffer penalties – federal rules restricting wrongdoers from holding bank licenses or engaging in the securities business – are routinely waived.
New York watchdogs deserve credit for resisting that practice. Promontory has denied any wrongdoing and says it will fight the sanctions in court. If state regulators are vindicated, however, they will have inflicted punishment that could actually deter misconduct. That’s far more than their federal colleagues can claim.