New York State has suspended Deloitte Financial Advisory Services from consulting work on financial institutions regulated by the state’s Department of Financial Services, and the firm has agreed to make a $10 million payment to the state as a result of problems with Deloitte FAS’s consulting work for Standard Chartered bank.
New York Governor Andrew M. Cuomo announced the agreement Tuesday regarding the firm’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, 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.
The state’s Department of Financial Services intends to use the reforms Deloitte has agreed to 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,” Cuomo said in a statement. “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 M. 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.”
Consulting work has been a growing part of Deloitte’s revenues, and the suspension will no doubt have an impact on the firm in the short term, although the firm pointed out that the agreement only affects its Deloitte FAS unit, not other parts of the firm. “As a leading professional services firm, Deloitte has an important responsibility to continually elevate the standards that govern our work and that of our profession,” the firm said in a statement forwarded by a spokesperson. “As such, Deloitte FAS has voluntarily entered into an agreement with the New York Department of Financial Services that resolves DFS’ inquiry into Deloitte FAS’ role in the 2004-2005 Standard Chartered Bank matter. We are pleased that, as the agreement states, a thorough investigation by DFS found no evidence that Deloitte FAS knew of, or aided, abetted or concealed any alleged violation of law by SCB. Deloitte FAS looks forward to working constructively with DFS to establish best practices and procedures that are ultimately intended to become the industry standard for all independent consulting engagements under DFS’ supervision. It is important to note that, as the agreement also states: ‘This is not intended to affect engagements performed by any Deloitte entity other than Deloitte FAS. Neither the fact of this agreement nor any of its terms is intended to be, or should be construed as, a reflection of any of the other practices of Deloitte-affiliated entities.’”
In 2004, Standard Chartered executed a joint written agreement with the New York State Banking Department and Federal Reserve Bank of New York, 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 FAS to conduct that review.
DFS’s investigation into Deloitte’s conduct during its consultant work at Standard Chartered found that the firm 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.
Deloitte FAS also violated New York Banking Law Section 36.10 by disclosing confidential information of other Deloitte clients to Standard Chartered, the state found. 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 Section 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 a 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: 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. 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. 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.
The consultant and financial institution will also need to maintain records of recommendations to the financial institution that the financial institution did not adopt, and provide such records to DFS. DFS will meet regularly—at least on a monthly basis —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.
The consultant will need to have in place policies and procedures designed specifically to maintain the confidentiality of bank supervisory material.
If Deloitte breaches this agreement, DFS said it may employ any and all remedies available to it, including but not limited to an order barring regulated financial institutions from sharing confidential supervisory information with Deloitte.
Under New York Banking Law Section 36.10, DFS is able 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.
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