N.Y. to deny Promontory Financial access to confidential bank data

(Adds Promontory statement, other details)

By Karen Freifeld

NEW YORK, Aug 3 (Reuters) - New York state's financial watchdog effectively suspended Promontory Financial Group LLC, a prominent consulting firm, from doing regulatory work for banks licensed by the state after finding that it whitewashed reports it gave to authorities.

The sanction is a blow to Promontory, a firm that was founded by former regulators and that says it helps banks clean themselves up. The firm, which advises big banks, foreign governments and even the Vatican, said it would seek a stay against the decision in New York state court.

The New York State Department of Financial Services found that Promontory was not sufficiently independent in its work for Standard Chartered (HKSE: 2888.HK - news) , a London-based bank that helped clients evade U.S. sanctions against Iran and other countries.

In 2012, Standard Chartered settled with state and federal regulators for $667 million for violations. The bank was fined another $300 million by New York last year, and it is still under scrutiny by authorities.

The bank initially reported possible problems in following sanctions rules to authorities in 2010. It hired Promontory to provide reports about the scope of the bank's violations.

Promontory "made changes to 'soften' and 'tone down' the language used in its reports, avoid additional questions from regulators, omit red flag terms or otherwise make the reports more favorable to the bank," the New York state watchdog said.

It made the changes at the direction of the bank or its counsel, or on its own initiative, the department found.

"The most important thing is that we get to the end of the project without jeopardizing our relationship with [Standard Chartered Bank] as a whole," the report quotes one senior Promontory analyst as saying.

The firm omitted timelines from the report that would have shown an increase in violations over time, while including those that showed a decrease.

Witnesses from Promontory who testified before the department in recent weeks also "lacked credibility," according to the report. For instance, a former analyst testified that an instruction from the bank's counsel to make language "more bland" meant "more accurate," the report said.

In recent years, New York has been scrutinizing the independence of consultants retained by banks to report to regulators. As a result, Deloitte LLP and PricewaterhouseCoopers settled similar investigations, agreeing to refrain from certain work for a year or two.

CONFIDENTIAL INFORMATION DENIED

New York's Department of Financial Services said it intends to deny Promontory requests for confidential information until further notice.

The ban will immediately impact work Promontory is doing for Bank of Tokyo-Mitsubishi UFJ Ltd, according to a source familiar with the situation, as a waiver allowing access to that bank's confidential information will not be approved.

A spokesman for Bank of Tokyo-Mitsubishi declined to comment, as did a spokeswoman for Standard Chartered.

Promontory said in a statement that it would defend itself against "regulatory overreach" by going to court.

It claims the department "willfully misconstrued its work."

Promontory earned $54.5 million from its work on the Standard Chartered project and another $12.4 million from other work for the bank between 2007 and 2014.

(Reporting by Karen Freifeld in New York; Editing by Alan Crosby and Cynthia Osterman)