Japan Regulator Widens Probe Into Crime Loans by Big Banks

Japan’s financial regulator plans to inspect the nation’s three largest lenders, widening a probe into credit given to gangsters to include Mitsubishi UFJ Financial Group Inc. and Sumitomo Mitsui Financial Group Inc.

The inspections are to determine whether their banking units are complying with rules including those meant to curb transactions with criminal organizations, Hiroki Kato, an official at the Financial Services Agency, said by telephone yesterday. The reviews will start Nov. 5, another FSA official said, declining to be identified because of the agency’s policy.

The probe follows Mizuho Financial Group Inc.’s plan to improve internal controls and penalize executives including President Yasuhiro Sato after the Tokyo-based bank was reprimanded for ignoring 200 million yen ($2 million) in loans made to members of criminal groups. The FSA will look closely at Mizuho and its report, Kato said.

“Megabanks clearly need to take responsibility for a wider array of issues ranging from management to compliance as they have many companies under their umbrellas,” said Takehito Yamanaka, an analyst at Credit Suisse Group AG in Tokyo. “The FSA’s inspection is likely to check if the banks’ top managers are handling things in a responsible manner.”

Spokesmen for Mizuho, Sumitomo Mitsui and Mitsubishi UFJ declined to comment yesterday.

Pay Cuts

Sato will give up six months’ pay for failing to stop the loans, Mizuho said after submitting the report on Oct. 28. Takashi Tsukamoto will resign as chairman of Mizuho Bank Ltd., while keeping the post at the parent company, and take a similar pay cut. A total of 52 other current and former executives will also be penalized, the lender said.

The bank’s business improvement report outlined measures such as database sharing and the addition of an outside director to prevent further transactions with yakuza crime syndicates. Lawyers commissioned by Mizuho to investigate the loans said the bank’s shortcomings stemmed from lax internal controls rather than attempts to mislead regulators.

Financial Services Minister Taro Aso said on Oct. 28 that his agency will examine Mizuho’s plan and determine any punishment after taking the lawyers’ findings into account.

Shares of Mizuho, Japan’s third-largest bank by market value, rose 1 percent to 209 yen at the close of trading in Tokyo. They have dropped 5.9 percent since the bank was reprimanded by the regulator on Sept. 27.

Mitsubishi UFJ, the nation’s biggest lender, gained 1.1 percent and Sumitomo Mitsui added 1.4 percent. The benchmark Topix Index rose 0.9 percent.

Auto Loans

The FSA’s order to Mizuho last month was based on 230 transactions, mostly automobile loans made through its Orient Corp. consumer credit affiliate. Mizuho said it will share its database of crime groups with Orient and help it improve its system for verifying customers applying for loans.

Orient submitted a report to Japan’s trade ministry earlier this month to clarify the Tokyo-based company’s role in lending to yakuza gang members with Mizuho, its biggest shareholder.

Masayuki Saito, Orient’s president, apologized in a press conference today and said an internal investigation is ongoing. It will decide on penalties for employees after reviewing results of the probe, he said.

‘Limited Resources’

Sato has said he was in a position to have found out about the loans as early as July 2011, when reports mentioning them were circulated at executive meetings. He said this week he doesn’t recall seeing the issue highlighted in the reports.

Lawmakers have been seeking to scrutinize Sato and the FSA’s handling of the investigation. Yuzuru Takeuchi, a member of the ruling coalition’s New Komeito party, yesterday said Sato should be summoned to Parliament. Isshu Sugawara, chairman of the ruling Liberal Democratic Party’s finance committee, said Oct. 18 he wants Sato to appear before his panel as it examines whether the FSA’s supervision of Mizuho was adequate.

The FSA “has limited time, limited resources and limited staff, so we need efficiency” in inspecting and supervising financial institutions, Financial Services Minister Aso said yesterday.

Mizuho 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 that delayed transactions after the March 2011 earthquake and tsunami.

In 2007, the FSA found that a Mitsubishi UFJ branch did business with an “antisocial institution” for more than 30 years. The agency penalized the company by ordering it to halt new lending to corporate clients for a week and barred it from opening branches for six months. Mitsubishi UFJ cut executive pay and established an anti-money laundering office.

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