NYDFS Enters Settlement Agreement With PwC Under Which PwC Pays $25 Million Fine, Accepts 24-Month Consulting Suspension and Will Implement Reforms of Specified Practices

by Goodwin

The New York State Department of Financial Services (“DFS”) entered into a settlement agreement (the “Settlement Agreement”) with PricewaterhouseCoopers LLP (“PwC”) related to consulting services performed by PwC for the Tokyo Branch of The Bank of Tokyo—Mitsubishi UFJ, Ltd. (“BTMU”) under which PwC:  (1) paid a $25 million fine; (2) was suspended for 24 months from accepting consulting engagements for PwC’s Regulatory Services unit at financial institutions regulated by the DFS; and (3) was required to implement a series of reforms to its practices and procedures designed to address conflicts of interest that may arise in consulting arrangements.

In 2013, the DFS and BTMU entered into a consent order (the “Consent Order”) under which BTMU paid a $250 million penalty for unlawfully clearing through BTMU’s New York licensed branch (“BTMU NY”) approximately 28,000 U.S. dollar payments with an aggregate value of approximately $100 billion to Iran, Sudan, Myanmar and certain entities that were, at the applicable time, on the Office of Foreign Assets Control’s Specifically Designated Nationals list.  Under the Consent Order, BTMU was required to hire an independent consultant “to conduct a comprehensive review of the BSA/AML related sanctions compliance programs, policies and procedures currently in place at BTMU NY.”  The independent consultant selected was a Regulatory Services unit of PwC, and PwC conducted a Historical Transaction Review (“HTR”) of BTMU’s U.S. dollar-clearing activity between April 1, 2006 and March 31, 2007.  In June 2008, BTMU submitted PwC’s HTR Report (“HTR Report”) to the DFS’s predecessor agency.  The HTR Report stated that “it was the product of an objective and methodologically sound process.”  The Settlement Agreement provides, however, that “[DFS] and PwC agree that PwC’s work for [BTMU NY]…did not demonstrate the necessary objectivity, integrity, and autonomy that is now required of consultants performing regulatory compliance work for entities supervised by the [DFS].”  The DFS said that, under pressure from BTMU senior managers, PwC removed a warning in the HTR Report concerning BTMU’s scheme to falsify wire transfer information for Iran, Sudan and other sanctioned entities.  Superintendent Lawsky of the DFS declared that “[w]hen bank executives pressure a consultant to whitewash a supposedly ‘objective’ report to regulators—and the consultant goes along with it—that can strike at the very heart of our system of prudential oversight.”  PwC, said the DFS, repeatedly reacted to BTMU’s demands and revised the HTR Report to omit and downplay issues of material regulatory concern to the DFS.

The DFS stated that it is concerned because it is continuing to find examples of improper influence and misconduct in the bank consulting industry.  There is an indirect tension and conflict in such engagements because, while the consulting firm is working in a quasi-regulatory capacity, its fees are being paid by the bank whose compliance record is being evaluated.  The reforms that PwC is required to implement as part of the Settlement Agreement are designed to mitigate the effect of these conflicts of interest.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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