Richard Perry/The New York TimesGov. Andrew M. Cuomo of New York, right, and Benjamin M. Lawsky, the state regulator of financial services, are advocates of stricter oversight over consulting firms.8:33 p.m. | Updated
Federal and state regulators are united in their concern that outside consulting firms have produced some shoddy work for Wall Street banks.
Yet on Tuesday, the regulators took starkly divergent stances toward the multibillion-dollar consulting industry: while federal authorities seemed to reinforce the industry’s power, a state agency tried to undercut it.
The Federal Reserve, the nation’s chief banking authority, ordered a large regional bank to hire a consulting firm to comb through “high-risk customer accounts.” The order, which could bolster the impression that the consulting industry has become a shadow regulator for Wall Street, came as part of an anti-money-laundering enforcement action that the Fed released on Tuesday.
In contrast, as momentum appears to have stalled in Washington for overhauling the consulting industry, New York State’s top regulator seized upon an obscure state banking law to try to compel changes. The first action using that law came on Tuesday as the state regulator, Benjamin M. Lawsky, imposed a $10 million fine and a one-year ban on Deloitte, a prominent consultant that he accused of “misconduct.”
It is unclear whether actions by state regulators like Mr. Lawsky — who has a history of irking his federal counterparts by running ahead of them — portend an overhaul of the consulting industry or a coming clash of state and federal banking regulators.
Some federal authorities who spoke on the condition of anonymity argued that while they depended on consultants, they were quietly rethinking the reliance on the outside firms. The federal regulators further noted that they could punish banks that failed to improve and could instruct a bank to replace any consulting firm that had erred.
Still, Mr. Lawsky has pushed for a more public crackdown. And in his impatience with Washington — federal regulators were upset when Mr. Lawsky took action last summer against the British bank Standard Chartered before they did — Mr. Lawsky is drawing comparisons to an earlier New York prosecutor: Eliot L. Spitzer. Mr. Spitzer, during his tenure as New York’s attorney general, similarly received praise and criticism for his aggressive tactics on Wall Street and his tendency to muscle aside federal authorities.
“The notion that he is using a statute that gives him discretion to control information flow as a way of creating a needed reform is a wise and good use of his authority,” Mr. Spitzer said in an interview on Tuesday.
Mr. Lawsky’s action is the latest threat to the consulting industry, which has drawn fire for inadequately responding to some recent bank regulatory problems. After a botched review of millions of home foreclosures nationwide, for example, lawmakers and regulators came to question the independence of the consultants. The firms, critics note, are paid and handpicked by the same banks they are expected to help reform.
“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,” Mr. Lawsky said in a statement on Tuesday. “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.”
Federal regulators have expressed similar concerns. In testimony before Congress in April, a senior federal banking regulator said he was exploring new ways to curb the use of consultants and correct problems when they occur.
“While the use of independent consultants can be an effective supervisory tool, there are certainly lessons to be learned from our experience, and we believe we can improve the process going forward,” Daniel P. Stipano, who supervises enforcement at the Office of the Comptroller of the Currency, which regulates many large banks, said in the testimony. The agency plans to “enhance our oversight of the consultants when they are utilized,” he said.
While Mr. Stipano petitioned Congress for greater authority, lawmakers have yet to respond. And despite the concerns about the consulting industry, federal authorities face a quandary. Grappling with scarce resources, they rely on consultants to address weaknesses at banks that are hit with enforcement actions.
Even if federal regulators were to adopt a harder line with consultants, they would most likely face legal limitations. When the comptroller of the currency fined a consulting firm in 2006, a federal appeals court later ruled that the regulator had “exceeded his statutory authority.”
Mr. Lawsky has tried to carve out his own authority, deploying the little-known banking law to rein in the consultants. But without support from federal authorities, it is unclear whether banks and consultants will challenge his use of the law or question whether he is overstepping his authority.
Under the law, which dates back to the turn of the 20th century, Mr. Lawsky’s office controls access to regulatory documents that consultants need before advising a bank. Mr. Lawsky will choke off access to firms that fail to meet a new set of standards introduced on Tuesday. The standards include a requirement that consultants disclose whether any bank has “substantively reviewed or commented” on reports that the consultants submit to regulators.
That issue was at the heart of Mr. Lawsky’s complaint against Deloitte Financial Advisory Services, which he accused of “misconduct, violations of law and lack of autonomy” during its work for Standard Chartered, the British bank accused of illicitly transferring billions of dollars on behalf of Iran.
Under a 2004 agreement with state and federal regulators, Standard Chartered hired Deloitte to spot suspicious money transfers routed through its New York branches. But when it came time for Deloitte to submit a report to regulators, Mr. Lawsky said, the consultant caved to pressure from the bank and watered down its recommendations.
Deloitte, Mr. Lawsky said, removed a recommendation that was “aimed at rooting out money laundering.” It did so, he said, “based primarily on Standard Chartered’s objection.”
Mr. Lawsky also discovered that a Deloitte employee sent e-mails to Standard Chartered containing confidential information about the consultant’s other bank clients — a violation of New York State law. But Mr. Lawsky’s office conceded that it found “no evidence” that Deloitte “intentionally aided and abetted or otherwise unlawfully conspired with” Standard Chartered to launder money.
In a statement, Deloitte noted that it “voluntarily entered” into the deal with Mr. Lawsky. “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 statement said.
In a statement released by state authorities, Gov. Andrew M. Cuomo indicated that the action against Deloitte would lay the groundwork for broader change.
“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,” he said.