Under the terms of an agreement with New York's top banking regulator, Deloitte Financial Advisory Services is barred from consulting work with financial institutions in that state for one year and will pay a $10 million fine.

On Tuesday, Gov. Andrew Cuomo and his state's Department of Financial Services (DFS) announced the agreement with the Deloitte financial advisory unit (which is separate from its larger auditing business) to settle allegations of “misconduct, violations of law, and lack of autonomy” during its consulting work with U.K. banking giant Standard Chartered on anti-money laundering issues.

In 2004, Standard Chartered executed a joint written agreement with the New York State Banking Department and the Federal Reserve Bank of New York which identified compliance and risk management deficiencies in the anti-money laundering and Bank Secrecy Act controls at its New York based unit. The agreement required Standard Chartered to retain “a qualified independent consulting firm” to review money laundering issues. Deloitte was hired to conduct that review.

In August 2012, one day before a scheduled hearing that would have revoked its license to operate in New York over charges it “willfully bypassed sanctions against the Iranian Government,” the bank agreed to a settlement with DFS. It paid a $340 million civil penalty and agreed to install a monitor, chosen by the state regulator, to evaluate money-laundering risk controls for at least two years.

DFS's subsequent investigation into Deloitte's conduct during its work with Standard Chartered found that:

Based primarily on Standard Chartered's objection, Deloitte removed money laundering related recommendation from the final written report submitted to DFS. The recommendation discussed how wire messages or “cover payments” on transactions could be manipulated by banks to evade money laundering controls on U.S. dollar clearing activities.

Deloitte violated New York banking law by disclosing the confidential information of other clients to Standard Chartered. A senior Deloitte employee sent emails to Standard Chartered employees containing two reports on anti-money laundering issues at other Deloitte client banks. Both reports contained confidential supervisory information, which Deloitte FAS was legally barred from disclosing to third parties.

The agreement also calls for Deloitte to implement reforms “designed to help address conflicts of interest in the consulting industry.” In a statement, DFS said it intends to use these “as a model that will govern all independent consulting firms that seek to be retained or approved by DFS.” These reforms may also “serve as a template for other government agencies that retain independent consultants in regulatory work.” Among those requirements:

The disclosure of any past work that could show potential conflicts of interest for a financial institution and hired consultant. All prior work by a consultant for a financial institution must be documented for the previous three years.

An engagement letter between the consultant and the financial institution will require that conclusions be based upon the consultant's independent judgment, rather than that of the financial institution.

The consultant's final report must include a listing of all personnel from the financial institution who substantively reviewed or commented on drafts of the findings, conclusions, and recommendations.

The consultant will bring any disagreement over a material matter between itself and the financial institution to DFS's attention.

The consultant and financial institution must maintain records of recommendations to the financial institution that were adopted, providing these records to DFS.

DFS will meet regularly (at least monthly) with the independent consultant.

The consultant will have in place policies and procedures designed specifically to maintain the confidentiality of bank supervisory material.

“When tasked by government agencies to undertake regulatory work at financial institutions, it is critical for these consultants to remain autonomous and avoid conflicts of interest,” Cuomo said in a statement.

“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,” said DFT Supt. Benjamin Lawsky. “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.”

If Deloitte breaches the agreement, DFS can revoke its access to confidential supervisory information. Nearly all consulting and monitoring work at regulated financial institutions requires access to this information.