A New York regulator's crackdown on PricewaterhouseCoopers may effectively push the anti-money-laundering audit work of big consulting firms into the hands of smaller advisers, and the increased competition ultimately could benefit banks.
Besides fining Pricewaterhouse $25 million for helping Bank of Tokyo-Mitsubishi UFJ cleanse its records of illicit money transfers, state banking superintendent Benjamin Lawsky banned the firm from entering into business engagements with major banking institutions in New York for two years.
Similarly, last summer he suspended Deloitte Financial Advisory Services from doing business with New York banks for a year after fining it $10 million in connection with its anti-money-laundering advisory work for Standard Chartered.
Such moves may prompt Bank of New York Mellon, Deutsche Bank, Goldman Sachs or any one of the other one hundred-odd banks overseen by Lawsky to seek out new sources of auditing help. Smaller advisory firms offering boutique audit and consulting services are poised to take up the extra work that otherwise may have gone to large competitors, and the quality of work will likely go up as a result, observers said.
When it comes to the biggest firms, the experience level needed to conduct large forensics projects often isn't there, said Dennis Lormel, a thirty-year veteran at the Federal Bureau of Investigation, who now advises clients independently on handling investigations.
"Larger consulting firms put a lot of junior people in these engagements, and that compounding lack of experience can be problematic," Lormel said.
Switching to smaller firms could save costs, too. Boutique auditors tend to charge much less for advisory services than the largest firms, according to a source familiar with industry practices who asked not to be named.
Demand for reviews of financial transactions and anti-laundering controls is rising, said Heather Lowe, the legal counsel and director of government affairs at Global Financial Integrity, a nonprofit that tracks the $850 billion to $1 trillion in money illegally transferred every year from the developing world.
Time will tell whether smaller firms are successful in seizing market share or whether the remaining firms consolidate their power, she said.
"We've seen an uptick in money laundering-related prosecutions coming around since 2010," Lowe said. "There just wasn't nearly as much oversight in the area until recently. But whether smaller advisors and consultants push in more aggressively to take up new opportunities, or whether the largest firms already in the space simply take over, that's hard to tell."
Bank of Tokyo-Mitsubishi UFJ reached a $250 million settlement with Lawsky last year. He had accused the Japanese bank, which has U.S. operations, of processing 28,000 transactions worth $100 billion for entities in sanctioned countries including Iran and Sudan from 2002 to 2007.
The bank hired PwC in 2007 to review a wide range of transactions in a report that was submitted to regulators. PwC found that the bank had instructed employees to strip wire messages of information that would have raised red flags, but it removed that finding from its report under pressure from bank executives, Lawsky's office said in a news release Monday announcing the PwC penalties.
Lawsky's scrutiny is a continuation of worries from regulators over third parties who perform a shadow regulatory function, according to Karen Shaw Petrou, managing partner of Federal Financial Analytics.
"In potential conflicts, the third party may not be sufficiently independent or knowledgeable," Petrou said. "If the consultant is retained to perform a regulator function, but fails to do so, then you do have concerns."
Lawsky suggested that improper practices may be widespread and urged more action by regulators.
"We are continuing to find examples of improper influence and misconduct in the bank consulting industry," he said in the release. "As a regulatory community, it may well be advisable for us to take a hard look in the mirror and ask whether we are doing enough to root out and investigate this troubling web of conflicts."
He had harsh words for banks or their auditors that try to hide misdeeds.
"When 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," Lawsky said.
PWC will be required during its suspension to adopt reforms to minimize conflicts of interests. They are modeled after changes that Deloitte was required to make, Lawsky said. Last year his office said all independent consulting firms had to comply with the reforms imposed on Deloitte, including enhanced disclosures, anti-tampering provisions, rules to ensure the consultant's independence and monthly meetings with regulators.