U.S. and Japanese regulators knew as early as 1993 about deceptive dealings by Daiwa Bank's New York operations--two years before a bond trader's $1.1-billion loss surfaced at the same office, the Japanese bank said Friday.
A Daiwa official in Japan said that the bank confessed to the U.S. Federal Reserve in 1993 that it hid some of its records and temporarily removed the bond trader and others from the New York branch, in order to pass a 1992 inspection by the regulators.
The disclosure details for the first time how the Osaka, Japan, bank deliberately manipulated its books and told federal regulators nearly two years ago about what legal experts say was a possible violation of record-keeping rules.
Previously, the Fed has said only in broad terms that Daiwa in the past lied to regulators and failed to make good on promises to reform a lax system of oversight. The loose oversight has been blamed for allowing the bond trader, Toshihide Iguchi, to conceal 30,000 allegedly unauthorized trades from regulators for 11 years.
Iguchi was arrested by federal authorities on Sept. 23 on charges of falsifying records, and the U.S. Attorney's office has said other employees are being investigated. But no further charges have been filed.
Meanwhile, Bloomberg Business News cited a Japanese news report saying Daiwa Bank President Akira Fujita will resign Monday and Chairman Sumio Abekawa will leave within a year in a management shake-up linked to the losses.
Managing Director Takashi Kaiho will succeed Fujita and two other high-ranking executives, banking director Hiroyuki Yamaji and international business director Kenji Yasui, will quit the bank, Nikkei English News reported, without citing any attribution.
Bank officials in Tokyo earlier this week denied news reports of Fujita's imminent departure, calling them "irresponsible."
Some experts in regulatory law expressed surprise that the Fed apparently didn't take more forceful action against the bank after its first confession--particularly after U.S. regulators toughened rules for foreign banks in 1991 in the wake of Bank of Credit & Commerce International's collapse.
According to Daiwa, the Fed in 1993 handed over the matter to Japan's Ministry of Finance, which took no direct action against the bank.
"Given the way they have treated deliberate violations of law in the past, it's astounding that the Fed wouldn't have taken more direct action," said Robert Tortoriello, a lawyer specializing in banking regulation with the New York law firm of Cleary Gottlieb Steen & Hamilton.
The New York Fed declined through a spokesman to comment on Daiwa's disclosure, except to say: "Generally speaking, we try to take the appropriate action when we learn of any appearances of wrongdoing."
The Daiwa official said that the bank temporarily removed records of bond dealings and shifted some personnel, including Iguchi, to another office in New York during an inspection by the Fed in 1992. The action was taken to hide evidence that Daiwa had failed to separate the trading and record keeping functions, the official said, speaking on condition of anonymity. The bank passed the Fed's inspection.
Daiwa confessed to the Fed during a 1993 inspection that it had manipulated the books in the previous inspection, the official said. The Fed notified Japan's Finance Ministry, and the ministry urged Daiwa in April, 1994, to improve its operations, he said.