Mizuho Probe Concludes Controls Failure Rather Than Coverup

Mizuho Financial Group Inc. (8411)’s investigators said a probe into loans made to gangsters uncovered a failure in internal controls rather than efforts by Japan’s third-largest bank to deliberately mislead regulators.

There was no evidence of a coverup and President Yasuhiro Sato didn’t know about the transactions even after they were highlighted in documents distributed in executive meetings, a panel of lawyers hired by the bank said in a report today.

The findings may ease pressure on Sato, who is set to outline changes to the board today after submitting a report to the Financial Services Agency on how he aims to prevent more loans to yakuza crime syndicates. The shares rose 2.5 percent, paring their drop since the regulator ordered Mizuho to improve compliance a month ago for failing to act on 200 million yen ($2 million) in credit extended to members of such groups.

“The report will definitely help Sato stay on as Mizuho’s president,” said Yoku Ihara, an investment adviser at Retela Crea Securities Co. in Tokyo. “The third-party panel accepted Mizuho’s explanation that Sato didn’t know about the loans.”

Sato will brief the press at 5 p.m. in Tokyo on the bank’s report to the FSA and changes to the board, spokeswoman Masako Shiono said by telephone today. She declined to comment on the panel’s findings.

Photographer: Kiyoshi Ota/Bloomberg

A pedestrian walks past the corporate logo of Mizuho Financial Group Inc. displayed outside the Mizuho Bank Ltd. headquarters in Tokyo. Close

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Photographer: Kiyoshi Ota/Bloomberg

A pedestrian walks past the corporate logo of Mizuho Financial Group Inc. displayed outside the Mizuho Bank Ltd. headquarters in Tokyo.

The three-member committee, led by former High Court Chief Justice Hideki Nakagome, said Tokyo-based Mizuho didn’t have clear disclosure rules on issues relating to criminal organizations. Communication between compliance divisions and other sections of the company was lax, it added.

‘Lacked Awareness’

“Mizuho lacked awareness of the significance of tackling the issue of relationships with antisocial groups,” the panel said in the report.

Nakagome told reporters that the company didn’t have any incentive to hide the matter from regulators. There was no evidence that issues relating to the loans were discussed at compliance and board member meetings attended by Sato, 61, and Chairman Takashi Tsukamoto, 63, according to the report.

The committee interviewed 81 current and former Mizuho officials and four Orient employees and reviewed e-mails of 12 individuals, according to the report. It didn’t check e-mails of Sato, Tsukamoto or former banking unit chief Satoru Nishibori, Nakagome said.

The panel said that during the FSA’s investigation, a Mizuho official wrongly told the agency that crime loans weren’t reported to senior compliance and board meetings. That led to the bank’s incorrect report to the regulator that only lower-level compliance officials were aware of the loans.

Boxed Text

Mizuho acknowledged the mistake this month, saying that some top managers including Nishibori, knew of the assets. Sato, who took the helm at Mizuho in June 2011, said he himself was in a position to have found out about the transactions in reports that he overlooked at executive meetings.

One of the lawyers, Gaku Ishiwata, said that text referring to the loans was set off in boxes in the more than 10-page documents, making it “not unreasonable” to think that top executives could have read it.

Financial Services Minister Taro Aso said last week that he will respond appropriately to the company’s reports, including the findings of the lawyers. Lawmakers from both sides of parliament have asked to question Sato.

Mizuho’s banking unit made 230 transactions, mostly loans for automobiles, through its Orient Corp. (8585) consumer credit affiliate, according to the regulator. Pay for officials at Mizuho Bank Ltd., including Sato, will be cut as punishment, the Nikkei newspaper reported on Oct. 25.

Management Handover

The panel also highlighted a lack of communication when top executives changed, saying Nishibori didn’t properly hand over the crime-loan issue to his successor, Tsukamoto, when he stepped down in June 2011 following a computer glitch. No one explained the issue to Sato either, according to the report.

Sato has driven measures designed to improve management at Mizuho, which has been penalized for lapses ranging from computer failures to trading errors since its creation in 2000 through the merger of Dai-Ichi Kangyo Bank Ltd., Fuji Bank Ltd. and Industrial Bank of Japan Ltd.

In May 2011, the FSA ordered Mizuho to improve operations and repair its “corporate culture” following system malfunctions at its retail bank that delayed transactions in the wake of the nation’s March 2011 earthquake and tsunami.

To contact the reporters on this story: Takahiko Hyuga in Tokyo at thyuga@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net

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