IBM International Business Machines Corp

By Ryan Tracy and Katy Burne 

Promontory Financial Group, one of the best-connected and most powerful financial consultancies, is selling out.

The Washington-based firm has agreed to be bought by International Business Machines Corp., which plans to set up a new unit combining Promontory's consultants with its own artificial-intelligence technology to advise clients on financial regulation.

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

The sale comes a year after a run-in with New York regulators who alleged Promontory watered down reports about potential sanctions violations by British bank Standard Chartered PLC. The New York Department of Financial Services said the firm exhibited "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 and agreed to pay $15 million to settle the matter.

IBM hopes to combine Promontory's financial regulatory expertise with Watson, the technology company'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.

"There is no way that professionals can keep up with critical information growing at these rates," IBM Senior Vice President Bridget van Kralingen said in an interview. "Watson is going to learn...by continuously ingesting this regulatory information as it is created."

IBM has run technology systems for financial institutions for decades, but this acquisition represents a new foray into financial regulatory compliance work.

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

With anti-money-laundering compliance, for example, 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, executives said Thursday.

Promontory previously drew criticism from members of Congress for pay it received when regulators tapped it to search for errors in mortgage foreclosures at big banks after the financial crisis. Promontory was paid more than $900 million for the work, it disclosed in 2013. The company said at the time that it put in several million hours on the project and stood by the quality of its work.

In recent years, Promontory hasn't attracted a piece of business as sizable as the foreclosure review, according to people familiar with the company.

Mr. Ludwig, 70 years old and deeply involved in day-to-day operations, has a "multiyear commitment" to the company and remains its CEO, said Promontory spokesman Todd Davenport.

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.

Mr. Davenport said Promontory "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 formal discussions with IBM had been going on for about the past six months, although he first approached the company with the idea of a joint venture a decade ago. "To get [regulatory compliance] right for large institutions takes tremendous computing power, but it also takes domain expertise" that Promontory has, he said.

The new venture, to be called Watson Financial Services, will be part of IBM's Industry Platforms unit, Ms. van Kralingen said.

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.

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

(END) Dow Jones Newswires

September 30, 2016 02:47 ET (06:47 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