Consulting firms hired to investigate banks find themselves often in a difficult position; they are handpicked and paid by the same people they are supposed to investigate. PwC Consulting US has recently come under fire for watering down its report on the transactions of Bank of Tokyo-Mitsubishi with Iran and other countries on the US blacklist.
The Regulatory Consulting Unit of PwC in the US has come in the spotlight for the same misconduct it was supposed to detect; the omitting of facts. PwC was hired by Bank of Tokyo-Mitsubishi to review its transactions with, among others, Iran. Financial regulators had suspected the bank of routing money through New York on behalf of nations on the US blacklist. As a response, in 2007 Bank of Tokyo-Mitsubishi enlisted PwC to investigate its transactions with Iran and other sanctioned countries and to quantify the improper wiring.
In its initial report*, PwC had highlighted the fact that Bank of Tokyo-Mitsubishi had stripped out the names of Iranian clients to avoid detection. In addition, PwC acknowledged that there were certain limitations to its examination. The report filed by the Bank of Tokyo-Mitsubishi two week later, however, turned out to be different than PwC’s initial report. According to documents and interviews, information had been altered or even withheld. As a result, the New York State’s Financial Regulator, Benjamin M. Lawsky, has taken PwC under fire for watering down the report.
Lawsky is poised to announce its settlement with PwC of a $25 million penalty and a two-year ban for its consulting units to accept certain assignments from New York-regulated banks. Even though this settlement could harm PwC's reputation and could cause banking clients to leave, PwC has agreed to the terms. Reason for this is a New York law under which the State’s Financial Regulator has the authority to withhold documents from consulting firms they need to do their advising. This can be done without any legal violation. It has been reported that Bank of Tokyo-Mitsubishi has reached a settlement with Lawsky of $250 million.
Consulting in the banking sector
The potential conflicts of the hiring of consultants by banks to examine their conduct, has long been overlooked. Conflicts that could easily arise when these consultants are handpicked and paid by the banks they are hired to examine. Only recently authorities started to reconsider the reliance of banks on consulting firms to conduct large scale examinations, and New York State’s Financial Regulator Lawsky opened its investigations into the three biggest New York names: Deloitte**, PwC and Promontory***. In addition, new guidelines for the hiring of consultants have been released.
* This initial report has been reviewed by The New York Times.
** Lawsky has given Deloitte a $10 million fine and a 1 year prohibition to advise New York banks, this follows the conclusion that Deloitte had removed a recommendation “aimed at rooting out money laundering” from a report on suspicious money transfers of the British Bank Standard Chartered.
*** Lawsky’s inquiry into Promontory is still continuing.