New York Governor Andrew Cuomo has announced that the Administration has reached an agreement with Deloitte Financial Advisory Services regarding the company’s misconduct, violations of law, and lack of autonomy during its consulting work at Standard Chartered on anti-money laundering issues.
Under the agreement, Deloitte agrees to a one-year, voluntary suspension from consulting work at financial institutions regulated by the New York State Department of Financial Services ('DFS'), will make a $10 million payment to the State of New York, and will implement a set of reforms designed to help address conflicts of interest in the consulting industry.
DFS intends to use the reforms Deloitte has agreed to today as a model that will govern all independent consulting firms that seek to be retained or approved by DFS. These reforms could also potentially serve as a template for other government agencies that retain independent consultants in regulatory work.
'The State’s agreement with Deloitte will serve as a new model for reforming the financial services consulting industry in New York as well as across the country', Governor Cuomo said. 'When tasked by government agencies to undertake regulatory work at financial institutions, it is critical for these consultants to remain autonomous and avoid conflicts of interest. Our homeowners, investors and economy are protected when independent consultants are truly ‘independent'.
Benjamin Lawsky, Superintendent of Financial Services, said, 'At times, the consulting industry has been infected by an 'I'll scratch your back if you scratch mine' culture and a stunning lack of independence. Today, we are taking an important step in helping ensure that consultants are independent voices – rather than beholden to the large institutions that pay their fees. Our aggressive work investigating and reforming the consulting industry is far from over and will continue in the days, weeks, and months ahead'.
DFS’s Investigation into Deloitte's Work at Standard Chartered
In 2004, Standard Chartered executed a joint written agreement with the New York State Banking Department (“the Department” – a DFS predecessor agency) and Federal Reserve Bank of New York (“FRBNY”), which identified several compliance and risk management deficiencies in the anti-money laundering and Bank Secrecy Act controls at Standard Chartered's New York branch. The agreement required Standard Chartered to retain a qualified independent consulting firm to review anti-money laundering issues at the bank. Standard Chartered engaged Deloitte to conduct that review.
DFS’s investigation into Deloitte’s conduct during its consultant work at Standard Chartered found that the company:
Did not demonstrate the necessary autonomy required of consultants performing regulatory work. Based primarily on Standard Chartered's objection, Deloitte removed a recommendation aimed at rooting out money laundering from its written final report on the matter to the Department. The recommendation discussed how wire messages or “cover payments” on transactions could be manipulated by banks to evade money laundering controls on U.S. dollar clearing activities.
Violated New York Banking Law § 36.10 by disclosing confidential information of other Deloitte clients to Standard Chartered. A senior Deloitte employee sent emails to Standard Chartered employees containing two reports on anti-money laundering issues at other Deloitte client banks. Both reports contained confidential supervisory information, which Deloitte FAS was legally barred by New York Banking Law § 36.10 from disclosing to third parties.
To resolve the misconduct, lack of autonomy, and violations of law at Deloitte uncovered during DFS's investigation, Deloitte has agreed to:
Voluntary, one year suspension from conducting consulting work at firms regulated by DFS;
Make a $10 million payment to the State of New York;
Establish and implement a new set of safeguards to address conflicts of interest in the consulting industry. DFS intends to use these standards as a new model that will govern independent consulting firms that seek to be retained or approved by DFS.
When a financial institution engages an independent consultant pursuant to an agreement or order by DFS, the following code of conduct will apply:
Disclosure of Past Work that Could Represent Potential Conflicts of Interest. The financial institution and the consultant will disclose to DFS all prior work by the consultant for the financial institution in the previous three years.
Declaration of Independence Provision. The engagement letter between the consultant and the financial institution shall require that the consultant's ultimate conclusions and judgments during its work will be based upon the exercise of its own independent judgment – rather than that of the financial institution.
Anti-tampering Provisions. The consultant's final report shall contain a listing of all of the personnel from the financial institution who substantively reviewed or commented on drafts of the findings, conclusions, and recommendations to be included in the final report. The consultant will also bring any disagreement over a material matter between itself and the financial institution to DFS's attention.
Records of Recommendations Financial Institutions Failed to Implement ('Anti-Sweeping-Under-the-Rug' Provision). The consultant and financial institution shall maintain records of recommendations to the financial institution that the financial institution did not adopt, and provide such records to DFS.
Monitoring the Monitor, Independent Lines of Communication. DFS will meet regularly – at least monthly – with the independent consultant. The financial institution will consent that contacts between the Consultant and DFS may occur outside of the presence of the financial institution.
Protecting Confidential Information. The consultant shall have in place policies and procedures designed specifically to maintain the confidentiality of bank supervisory material.
Provisions Regarding a Breach of this Agreement
If Deloitte breaches this agreement, DFS may employ any and all remedies available to it, including but not limited to an order pursuant to New York Banking Law § 36.10 barring regulated financial institutions from sharing confidential supervisory information with Deloitte.
Under New York Banking Law § 36.10, DFS can 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.
To view a copy of DFS’s agreement with Deloitte, please visit, http://www.governor.ny.gov/assets/documents/deloitteagreement.pdf