Is Promontory Financial Group the ultimate launderer-for-hire?

| August 16, 2012 | 0 Comments

Standard Chartered has reached a settlement with the New York Department of Financial Services over its transactions with sanctioned Iranian entities. It has agreed to pay $340 million in penalties to the relatively new, previously obscure regulator whose dramatic action against the British bank has catapulted it to the global stage.

Yet there’s something quite odd about the whole affair.

DFS alleged that the bank played fast and loose with law by facilitating $250 billion in suspect transactions. At first StanChart fired back against the allegations:

In January 2010, [Standard Chartered] voluntarily approached all relevant US agencies, including the DFS, and informed them that we had initiated a review of historical US dollar transactions and their compliance with US sanctions [...]. This review was conducted by external counsel and external consultants. 

This external consultant was Promontory Financial Group. According to its analysis “well over 99.9% of the transactions” in question were in compliance and only $14 million of transactions had potentially fallen outside of the law.

For those of you keeping score at home: the accused says that the size of the problem was $14 million, while the regulator says it was a quarter of a trillion. That’s quite a gulf. So the following line in the DFS press release announcing the settlement is very interesting.

The parties have agreed that the conduct at issue involved transactions of at least $250 billion.

Two points stand out. First, a $340 million civil penalty looks rather like peanuts in the context of $250 billion in forbidden transactions. Especially since Benjamin Lawsky, the head of DFS, had even threatened to pull StanChart’s New York state banking license. This would have delivered an almost fatal blow to the company’s USD business.

Second, by helping StanChart to arrive at the laughably low $14 million figure Promontory Financial Group has shown that it’s a firm full of yes-men. Is it anything more than a convenient fig leaf for a firm to hide behind when it needs to look like it’s doing something? While actually intending to do nothing? What else has this firm been up to?

It turns out that Promontory is headed by one Eugene Ludwig, who happens to be the former US Comptroller of the Currency. That is, one of the former lead regulators in US banking. (Revolving door much?) And lo an behold, the firm also has a leading role in the fallout from the US housing crisis.

There were not one, but two separate agreements reached between regulators and mortgage lenders and servicers to address the robosigning scandal. The one signed this year was led by the attorneys general of several states and forced the banks to cough up $26 billion as compensation for improper foreclosures. However an earlier agreement was reached in April 2011 between the OCC, the Federal Reserve and BofA, Chase, Citi, HSBC, Wells and others. That agreement required the banks to

[...] engage independent firms to conduct a multi-faceted review of foreclosure actions in process in 2009 and 2010. Under the orders, independent consultants are charged with evaluating whether borrowers suffered financial injury through errors, misrepresentations, or other deficiencies in foreclosure practices and determining appropriate remediation for those customers. Where a borrower suffered financial injury as a result of such practices, the agencies’ orders require financial remediation to be provided.

Guess which “independent” firm has been hired by at least some of the banks to perform the reviews (Wells, PNC and Bank of America)? Given its laxity in the Standard Chartered case, what are the odds that Promontory will actually perform the rigorous, independent reviews needed to determine if homeowners suffered improper foreclosures?

Not very high. Here’s an account from someone who claims he was hired by Promontory to perform independent reviews for Wells (h/t Abigail Field):

I have found errors that should be moved up through the ranks, but am told “quit digging so deep”…”put your shovel away”…Focus on the questions “in scope”… The review forms are set up so no harm could ever be found. It’s equivalent of an attorney presenting his case to a judge with just 20% of the evidence.

Remember, this “independent” review process was chosen by regulators as a solution to the widespread problem of the mortgage lenders “mass production of false and forged execution of mortgage assignments, satisfactions, affidavits, and other legal documents” related to foreclosures. And one of our former top regulators is CEO of a firm hired to whitewash this process of redress. So how much confidence do you have in our regulatory and justice system now?

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Category: Banking