An employee of Deutsche Bank AG (DBK)’s Japanese brokerage unit was arrested today on suspicion of bribery as the securities watchdog recommended penalties against the firm for excessive entertainment spending.
Shigeru Echigo, a director of Deutsche Securities Inc.’s pension solution sales department, is suspected of entertaining a client at a Mitsui & Co. (8031) unit in exchange for purchases of investment products, a Tokyo Metropolitan Police official said, asking not to be named in accordance with its policy. A former Mitsui pension executive was also detained, the official said.
The unit of Germany’s biggest bank broke Japanese rules by providing special benefits to three pensions, the Securities and Exchange Surveillance Commission said in a statement in Tokyo today, without naming the funds. The firm spent a total of 6.3 million yen ($62,000) entertaining the clients on about 100 occasions from 2010 to 2012, the commission said.
“It’s clear that the brokerage broke the rules, and that’s serious,” said Mamoru Nagano, a professor of economics and international finance at Seikei University in Tokyo. “But the total amount spent was small and I was surprised that this led to arrests. My concern is that any crackdown may undermine dynamism in Japanese financial markets.”
Deutsche Securities would be the first brokerage in Japan to be punished for client spending if the Financial Services Agency adopts the SESC’s proposal. The breach adds to the bank’s regulatory woes as legal costs mount amid probes into interbank rate rigging and lawsuits related to the U.S. housing market.
The former Mitsui pension executive who was arrested is Yutaka Tsurisawa, 60, the police official said. Echigo, 36, allegedly spent about 900,000 yen entertaining him with trips abroad, rounds of golf, and wine and meals from late April to late August 2012, according to the official.
Tsurisawa bought 1 billion yen of financial products from Deutsche Securities for the pension fund and probably understood that Echigo was seeking preferential treatment for future purchases, the official said. Tokyo-based Mitsui is Japan’s second-biggest trading company by market value.
Deutsche Bank apologized for the arrest of an unidentified employee and vowed to improve compliance, according to a statement on its Japanese website.
Echigo didn’t answer a call by Bloomberg News to his work phone or reply to an e-mail seeking comments. Yusuke Yamauchi, a Tokyo-based spokesman for Mitsui, said it’s very regrettable that a former employee was arrested and the company will consider appropriate action after confirming the facts. Tsurisawa left the company in May.
The breach by the pension solution sales department was serious and Deutsche Securities is responsible as an organization, an SESC official said at a briefing in Tokyo, asking not to be named in accordance with its policy. The pension sales team has since been dissolved, the official said.
The law clearly states that financial firms can’t provide special benefits to civil servants and the actions at Deutsche Securities continued even after fraud at AIJ Investment Advisors Co. roiled the pension industry, the official said.
Pension fund managers in Japan are treated like civil servants when they look after public retirement assets. Japanese regulators have been beefing up oversight of the pension industry since it found that Tokyo-based asset manager AIJ covered up losses of clients’ money last year.
The SESC has authority to make recommendations that the FSA usually upholds. The agency may order Deutsche Securities to improve compliance and internal controls, people with knowledge of the matter said yesterday.
The only other financial firm to be punished by Japanese regulators for excessively entertaining pension clients is KTOs Capital Partners Co., a Japanese hedge fund. The Kanto Local Finance Bureau ordered KTOs to halt some operations for three months in July.
Deutsche Bank was among six companies fined by the European Union for rigging interest rates linked to Libor, the EU said in a statement yesterday. The Frankfurt-based bank was fined 725 million euros ($988 million), the largest penalty. It has set aside 4.1 billion euros in reserves to cover legal costs.
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