The bank directed PricewaterhouseCoopers to remove key warnings to regulators on illicit transactions in an independent report, masking the reality of its business with the sanctioned countries, the New York State Department of Financial Services said.
PwC discovered near the end of a year-long review of transactions that the bank had issued special instructions employees to strip wire messages of information that would have triggered sanctions compliance alerts.
The instructions meant PwC's report was more superficial and likely missed some transactions, the regulator said.
PwC initially drafted language warning regulators that its review had been compromised as a result of the instructions.
But under pressure from the bank, part of Mitsubishi UFJ Financial Group, PwC agreed to cut that language and to replace it with a statement saying the review had been comprehensive and appropriate.
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"BTMU employees pressured PwC into watering down a supposedly objective report on the bank's dealings with Iran and other sanctioned countries, thereby misleading regulators," said Benjamin Lawsky, Superintendent of Financial Services in New York.
"It is clear that we -- as a regulatory community -- must work aggressively to reform the cozy relationship between banks and consultants, which far too often has resulted in shoddy work that sweeps wrongdoing under the rug."
Lawsky mandated the PwC review after fining BTMU $250 million in June 2013 over doing business with sanctioned countries.
In August, Lawsky fined PwC $25 million for its work on BTMU and banned it from accepting consulting engagements at financial institutions regulated in New York for 24 months.
As part of the settlement, the bank agreed to terminate an employee who managed its anti-money laundering compliance office and to bar two other employees from business involving New York financial institutions.
The bank confirmed the settlement and said it is "committed to conducting business with the highest levels of integrity and regulatory compliance, and to continually improving its policies and procedures."