<div dir="ltr"><div id="header"><h1><a href="http://dealbook.nytimes.com/" title="Go to DealBook Home"><img src="http://graphics8.nytimes.com/images/blogs_v3/dealbook/dealbook_print.png" alt="DealBook - A Financial News Service of The New York Times"></a></h1>
<div class=""> </div></div><div id="dealbook"><div align="left"><span class="" title="2013-01-31T21:06:51+00:00">January 31, 2013, <span>9:06 pm</span></span><h3 class="">Doubt Is Cast on Firms Hired to Help Banks</h3><address class="">By <a href="http://dealbook.nytimes.com/author/jessica-silver-greenberg/" class="" title="See all posts by JESSICA SILVER-GREENBERG">JESSICA SILVER-GREENBERG</a> <span>and</span> <a href="http://dealbook.nytimes.com/author/ben-protess/" class="" title="See all posts by BEN PROTESS">BEN PROTESS</a></address><div class="">
<p>Federal
authorities are scrutinizing private consultants hired to clean up
financial misdeeds like money laundering and foreclosure abuses, taking
aim at an industry that is paid billions of dollars by the same banks it
is expected to police.</p><p>The consultants operate with scant
supervision and produce mixed results, according to government documents
and interviews with prosecutors and regulators. In one case, the
consulting firms enabled the wrongdoing. The deficiencies, officials
say, can leave consumers vulnerable and allow tainted money to flow
through the financial system.</p><p>"How can you be independent if you're hired by the entity you're reviewing?" Senator <a href="http://topics.nytimes.com/top/reference/timestopics/people/r/jack_reed/index.html?inline=nyt-per">Jack Reed</a>, Democrat of Rhode Island, who sits on the Senate Banking Committee, said.</p>
<p>The
pitfalls were exposed last month when federal regulators halted a broad
effort to help millions of homeowners in foreclosure. The regulators
reached an $8.5 billion settlement with banks, scuttling a flawed
foreclosure review run by eight consulting firms. In the end, borrowers
hurt by shoddy practices are likely to receive less money than they
deserve, regulators said.</p><p>On Thursday, Senator <a href="http://topics.nytimes.com/top/reference/timestopics/people/w/elizabeth_warren/index.html?inline=nyt-per">Elizabeth Warren</a>,
Democrat of Massachusetts, and Representative Elijah Cummings, Democrat
of Maryland, announced that they would open an investigation into the
foreclosure review, seeking "additional information about the scope of
the harms found."</p><p>Critics concede that regulators have little
choice but to hire outsiders for certain responsibilities after they
find problems at the banks. The government does not have the resources
to ensure that banks follow the rules. Still, consultants like Deloitte
& Touche and the Promontory Financial Group can add to regulators'
headaches, the government documents and interviews indicate. Some banks
that work with consultants continue to run afoul of the law. At other
times, consultants underestimate the extent of the misdeeds or
facilitate them, preventing regulators from holding institutions
accountable.</p><p>Now, regulators and lawmakers are rethinking their
relationship with the consultants. Officials at the Federal Reserve,
which oversees many large banks, are questioning the prudence of relying
on consultants so heavily, said two people with direct knowledge of the
matter.</p><p>When the <a href="http://topics.nytimes.com/top/reference/timestopics/organizations/c/comptroller_of_the_currency/index.html?inline=nyt-org">Office of the Comptroller of the Currency</a> penalized <a href="http://dealbook.on.nytimes.com/public/overview?symbol=JPM&inline=nyt-org">JPMorgan Chase</a>
last month for breakdowns in money-laundering controls, it imposed
stricter requirements, ordering the bank to hire a consultant with
"specialized experience" in money laundering and to ensure that the firm
"not be subject to any conflict of interest." In a separate action
against the bank related to a $6 billion trading loss last year, the
agency opted not to mandate an outside consultant at all.</p><p>While
the comptroller's office will continue requiring consultants in certain
cases, some agency officials are worried about the quality of the work,
as well as the consultants' independence, according to three government
officials briefed on the matter.</p><p>Since the financial crisis,
regulators have increasingly relied on consultants. The comptroller's
office ordered banks to hire consultants in more than 130 enforcement
actions since 2008, or nearly 15 percent of the cases.</p><p>It can be a
lucrative business. In 2011, regulators mandated that 14 banks employ
consultants to determine whether homeowners were wrongfully evicted.
Over 14 months, the consultants collected about $2 billion in fees,
according to regulators and bank officials.</p><p>Those fees amounted to
more than half of what homeowners will receive under the $8.5 billion
settlement that ended the review. As part of the deal, officials will
disburse $3.3 billion to 3.8 million borrowers in foreclosure.</p><p>According
to consultants and regulators, the broad review was plagued with
inefficiencies. For example, Promontory initially instructed employees
to calculate lawyers' fees for each loan, to assess if borrowers were
overcharged. Later, it scrapped the original procedure, only to reverse
the policy again two weeks later, according to two reviewers who worked
for Promontory.</p><p>"From Day 1, Promontory strove to conduct its
review work as thoroughly and independently as possible," a spokesman
for the firm, Christopher Winans, said in a statement. "Our overarching
concern at all times was to serve the best interests of borrowers."</p><p>Some
lawmakers question whether a consultant's regulatory connections helped
it secure contracts. PricewaterhouseCoopers, which has a stable of
former <a href="http://topics.nytimes.com/top/reference/timestopics/organizations/s/securities_and_exchange_commission/index.html?inline=nyt-org">Securities and Exchange Commission</a> officials, won much of the foreclosure review work, signing deals with four banks, including <a href="http://dealbook.on.nytimes.com/public/overview?symbol=C&inline=nyt-org">Citigroup</a>. Promontory, the firm examining loans for <a href="http://dealbook.on.nytimes.com/public/overview?symbol=WFC&inline=nyt-org">Wells Fargo</a>, <a href="http://dealbook.on.nytimes.com/public/overview?symbol=BAC&inline=nyt-org">Bank of America</a> and PNC, was founded in 2000 by the former head of the comptroller's office, <a href="http://topics.nytimes.com/top/reference/timestopics/people/l/eugene_a_ludwig/index.html?inline=nyt-per">Eugene A. Ludwig</a>.</p>
<p>When
the contracts were initially awarded, some housing advocates complained
that consulting firms could not objectively evaluate banks with which
they had pre-existing business relationships. The comptroller's office
said it vetted the firms to spot such potential conflicts, and argued
that the process provided swifter relief for homeowners than if the
government had hired the companies directly through a lengthy
contracting process.</p><p>But concerns persisted. Deloitte, which won the contract to review JPMorgan's loans, had previously audited <a href="http://topics.nytimes.com/top/news/business/companies/washington_mutual_inc/index.html?inline=nyt-org">Washington Mutual</a> and <a href="http://topics.nytimes.com/top/news/business/companies/bear_stearns_companies/index.html?inline=nyt-org">Bear Stearns</a>,
two firms JPMorgan acquired during the financial crisis. In May, the
comptroller's office replaced Allonhill, the consultant for Aurora Bank,
after the firm disclosed that it had already reviewed some "of the same
pool of loans" as part of an earlier contract.</p><p>"It's clear from
the foreclosure settlement that oversight over consultants was
inadequate and the review process was deeply flawed," said
Representative <a href="http://topics.nytimes.com/top/reference/timestopics/people/m/carolyn_b_maloney/index.html?inline=nyt-per">Carolyn B. Maloney</a>,
Democrat of New York, who recently pressed regulators to detail how
consultants were paid. People close to the review say consultants relied
on a process that the comptroller's office designed in 2011, under
previous leadership.</p><p>"This was a very complex process," a
spokesman for the comptroller said. "Throughout the process, regulators
provided continuous oversight, guidance and were available to discuss
issues." The agency also performs spot checks on the consultants.</p><p>Still, the foreclosure review highlighted broader concerns about the role consultants play.</p><p>Since
the financial crisis, the comptroller's office has issued nearly 20
enforcement actions against banks that had already hired consultants to
help iron out problems, according to government documents. While
consultants cannot be expected to remedy every last issue at the banks,
the actions raise questions about the effectiveness of their work.</p><p>When <a href="http://dealbook.on.nytimes.com/public/overview?symbol=HBC&inline=nyt-org">HSBC</a>,
the British bank, was sanctioned in 2003 over porous money-laundering
controls, the bank turned to Deloitte to review its compliance, an
official briefed on the matter said. Deloitte also worked for HSBC from
2006 to 2008, the person said, building a system to monitor money flows
more effectively. But the bank ran into trouble in 2010 over similar
issues, as highlighted in a recent scathing report by the Senate's
Permanent Subcommittee on Investigations.</p><p>As part of a regulatory
order, HSBC again hired Deloitte, this time to assess the number of
times the bank failed to report suspicious transactions. Deloitte, three
officials said, generously bundled hundreds of missed transfers into a
single report. That may have helped save the bank from some government
fines.</p><p>Despite the undercounting, HSBC still paid a record $1.9
billion last year to settle accusations that it enabled drug cartels to
move money through its American subsidiaries.</p><p>In a statement, a
spokesman for the firm said, "Deloitte fully stands behind the quality
and integrity of its work on behalf of regulatory authorities."</p><p>Deloitte
has also been suspected of helping institutions cloak illicit transfers
of money to rogue nations around the globe. In August, New York's top
banking regulator, Benjamin M. Lawsky, accused Deloitte of helping the
British bank <a href="http://topics.nytimes.com/top/news/business/companies/standard-chartered-plc/index.html?inline=nyt-org">Standard Chartered</a> flout American sanctions.</p><p>The
consulting firm was hired to flag suspicious transfers routed through
Standard Chartered's New York branches. Instead, it instructed bankers
on how to escape regulatory scrutiny, according to state court
documents.</p><p>Deloitte turned over "highly confidential information"
from which the bank gleaned insight into "regulators' concerns and
strategies," the court documents said. The firm later doctored its
report to regulators, Mr. Lawsky said, deliberately removing some
illegal transfers on behalf of Iranian clients. In an e-mail, a Deloitte
partner admitted that a report on the transactions was a "watered-down
version."</p><p>The authorities never took legal action against
Deloitte, and federal officials noted in a separate settlement agreement
that Standard Chartered employees withheld critical information from
the consulting firm.</p><p>Despite these concerns, regulators are
turning to a familiar source to help Standard Chartered. As part of a
$327 million settlement last year, the bank is required to hire "an
independent consultant."<br clear="all"></p></div></div></div><br>-- <br>Art Deco (Wayne A. Fox)<br><a href="mailto:art.deco.studios@gmail.com" target="_blank">art.deco.studios@gmail.com</a><br><br><img src="http://users.moscow.com/waf/WP%20Fox%2001.jpg"><br>
</div>