IBM International Business Machines Corp

International Business Machines Corp. plans to purchase consultancy Promontory Financial Group LLC, the two companies said Thursday, creating a new IBM offering called Watson Financial Services.

The companies didn't disclose financial details of the deal, which they said is subject to regulatory approvals and expected to close by the end of the year. The idea, they said, is to combine Promontory's financial regulatory expertise with Watson, IBM's artificial intelligence computer system, to help banks meet ever-rising regulatory expectations in areas such as anti-money-laundering detection systems, consumer complaint databases and so-called stress tests.

Financial regulatory requirements are "rapidly outstripping the capacity of humans to keep up," a joint press release from the companies said.

Privately held Promontory was founded in 2001 by Eugene Ludwig, a former U.S. Comptroller of the Currency, and has hired a small army of former senior regulators and government officials to advise financial firms. It now has about 600 full-time employees and 19 offices, 14 outside the U.S. Promontory will keep its name and will become an IBM subsidiary.

Banks and government agencies use Promontory as an adviser, but also as a sort of outsourced regulator, which sometimes performs jobs the government doesn't have the resources to do. For example, regulators might hire Promontory to monitor a financial firm's compliance with the terms of a settlement.

At times, the business has drawn controversy, with Promontory facing accusations it is too close to financial firms. In August 2015, Promontory agreed to pay $15 million to settle allegations by the New York Department of Financial Services that it watered down reports about potential sanctions violations by Standard Chartered PLC, the bank that had engaged the consultancy on an internal review of its compliance.

The department accused Promontory of exhibiting "a lack of independent judgment in the preparation and submission of certain reports" from 2010 to 2011. Promontory admitted it didn't meet certain standards.

Promontory previously took heat when regulators tapped it to search for errors in mortgage foreclosures at big banks after the financial crisis. It was paid more than $900 million for the work, it disclosed in 2013, even as lawmakers and other critics said wronged homeowners weren't being adequately compensated. The company said at the time that it put in several million hours on the project and stood by the quality of its work.

Promontory last year had briefly explored a sale to Boston Consulting Group, according to a person briefed on the matter, but both sides walked away. David Fondiller, a spokesman for BCG, had no immediate comment.

Promontory spokesman Todd Davenport said the company "has regularly received indications of interest and has on occasion discussed potential strategic opportunities with various entities." He said the company didn't proceed "until IBM approached us with a transformational opportunity that stands to benefit our clients, their customers and the financial system."

Mr. Ludwig, in an interview, said discussions with IBM had been going on for about the past six months. "To get (regulatory compliance) right for large institutions takes tremendous computing power, but it also takes domain expertise" that Promontory has in the regulatory space, he said.

Watson Financial Services will be part of IBM's Industry Platforms unit, IBM Senior Vice President Bridget van Kralingen said. IBM has run technology systems for financial institutions for decades, but the acquisition announced Thursday represents a new foray into regulatory compliance work.

Ms. Van Kralingen said the increasingly data-driven world of financial regulation was a logical expansion of the Watson cognitive computing technology, which the company is also applying in cancer research and other areas.

"There is no way that professionals can keep up with critical information growing at these rates," she said in an interview. "Watson is going to learn…by continuously ingesting this regulatory information as it is created."

One area where the companies expect Watson to help financial firms is in anti-money-laundering compliance. Banks are expected to track millions of customers and financial transactions, looking for suspicious activity and reporting it to the government. If they miss activity such as terrorism financing or sanctions evasion, they can face multimillion-dollar or even billion- dollar fines.

Promontory's experts and IBM's Watson team are looking to create a smarter system for catching suspicious transactions and customers, which then could be sold to banks, the two executives said in the interview. Similar artificial intelligence could be built to track banks' compliance with fair lending laws, model financial risks in "stress tests," track customer complaints and other areas.

Write to Ryan Tracy at ryan.tracy@wsj.com and Katy Burne at katy.burne@wsj.com

(END) Dow Jones Newswires

September 29, 2016 13:25 ET (17:25 GMT)

International Business M... (NYSE:IBM)
Historical Stock Chart
From Mar 2024 to Apr 2024

International Business M... (NYSE:IBM)
Historical Stock Chart
From Apr 2023 to Apr 2024