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By Brett Wolf and Aruna Viswanatha
WASHINGTON, Nov 12 (Reuters) - Wall Street banks could getgreater power to fight back against bad report cards on theirefforts to combat money laundering under a proposal beingdiscussed by U.S. regulators and the financial industry.
The bank examiner reports can form the basis ofmultimillion-dollar enforcement actions, and banks complain thatthey currently have little ability to appeal them.
The proposal, which is in early stages, would create anombudsman to adjudicate disagreements between financialinstitutions and regulatory examiners, according to severalpeople familiar with the talks.
The idea was raised by the Treasury's Financial CrimesEnforcement Network, or FinCEN, anti-money laundering arm, to anadvisory group of regulators, law enforcement personnel andindustry representatives that FinCEN created last year toidentify more efficient ways of combating financial crime.
The move could give banks greater power amid a crackdown onhow financial institutions vet their customers for illegal drugactivity, terrorism or other crimes.
Some of the world's biggest banks have been hit withhundreds of millions of dollars in fines for failing to catchunlawful proceeds moving through their systems and many morehave invested comparable sums to improve their complianceefforts.
The largest settlement to date was with HSBC, whichpaid a record $1.9 billion last year for its failure to stophuge sums of drug money routed through it from Mexico.
It is unclear whether the idea for an independent arbiterwill turn into a formal proposal, or how long it would take toadopt such a proposal.
REGULATORY TENSION
Regulators at the agencies that examine financialinstitutions - the Office of the Comptroller of the Currency,the Federal Deposit Insurance Corp. and the Federal Reserve - inthe past have said the firms have access to the agencies'ombudsman to report any grievances about their examiners.
But bank officials say they feel that avenue is limitedsince those officials sit within the agencies themselves.
"The industry sits there and chuckles because nobody isgoing to go to the regulator's ombudsman on their examiner -they'd be dead," said one money-laundering executive at a topbank who is part of the group.
The exam process is a confidential one. Disputes betweeninstitutions and their examiners rarely emerge in public,although a few recent incidents have shown the tension.
Last month a former Fed examiner sued her former employerand said she had been fired because she refused to changefindings critical of Goldman Sachs. Documents released bya Senate committee last year showed JPMorgan clashing with itsregulator, the OCC, with its executives yelling at theirexaminers and calling them "stupid."
FinCEN Spokesman Stephen Hudak declined to comment onspecific ideas generated by the group but said the effortsinvolved a "very significant undertaking," and that "parallelwork streams" developing the ideas were underway.
"I think the fact we are having these conversations is agood sign," said Rob Rowe, a lawyer with the American BankersAssociation's Center for Legal and Regulatory Compliance, whohas participated in the meetings.
The advisory group, established last November and known asthe Delta Team, has been off to a relatively slow start. It hasmet only twice to date, and a meeting was canceled due to thegovernment shutdown.
In addition to the independent arbiter idea, the group hasexplored more fundamental logistical issues, according toofficials who have attended the meetings.
The group has discussed allowing financial institutions toshare official reports about suspicious activity by theirclients with their foreign affiliates, which they cannot dounder current law.
As a result of the discussions, FinCEN has also encouragedthe institutions to share certain types of information that theyare currently allowed to share with each other, includingspecific information about certain customers and transactions.
