Japanese Official Encouraged Daiwa Cover-Up, Ex-Banker Says : Scandal: Bank disputes former managing director’s story. Finance Ministry executive’s office says he will have no immediate comment.

A key Finance Ministry official encouraged Daiwa Bank to delay announcing a $1.1-billion trading loss at its New York branch this summer, a former bank official alleged in an interview published Sunday.

Former Daiwa Managing Director Hiroyuki Yamaji, 54, who resigned earlier this month because of his role in the scandal, also admitted that the bank asked the trader responsible for the loss to continue covering it up through illegal false bookkeeping for more than a month after Daiwa knew of the problem, according to the report by Asahi Shimbun, a leading Japanese newspaper.

During the period before financial markets learned of Daiwa’s trouble, bank employees were instructed to replace short-term funding with long-term borrowing, Yamaji told the newspaper.

“If the incident had been revealed immediately after we learned of it, our bank would have been hurt very badly and financial markets would have been thrown into chaos,” Yamaji said. “I thought it would be very serious if our bank became unable to acquire funds, so I placed priority on that.”

Daiwa’s decision to continue the cover-up and delay informing U.S. authorities of the loss was taken with the apparent encouragement of Finance Ministry Banking Bureau Chief Yoshimasa Nishimura, Yamaji charged in the interview.

U.S. authorities have expressed displeasure with Daiwa’s actions and the Finance Ministry’s failure to take more aggressive action when it first learned there may have been a problem. Any Finance Ministry encouragement of an illegal cover-up by Daiwa would add to the seriousness of the incident.

The trader, Toshihide Iguchi, 44, pleaded guilty Thursday in New York to charges of embezzlement, money laundering, falsifying records and conspiracy. He accused at least two senior Daiwa managers of encouraging him to continue covering up the scheme after he confessed his hidden losses in a July letter to Daiwa’s president.

In his interview with Asahi Shimbun, Yamaji passed some of the blame to the Finance Ministry. When Nishimura was informed of the $1.1-billion loss in an Aug. 8 meeting with four top Daiwa executives, including himself, Yamaji said, the banking bureau chief responded that “for this to get out now would be bad timing.”

Yamaji said he understood the comment to be a reference to the recent failure of the Tokyo-based Cosmo Credit Union, which had raised concerns about the stability of the Japanese banking system, and to be an indication that Nishimura wanted Daiwa to delay public revelation of the scandal.

Nishimura’s office said he would have no immediate comment on Yamaji’s allegations.

Daiwa Bank spokesman Osamu Shiota confirmed that Daiwa had recently increased its long-term borrowing, but he said this was based on ordinary business considerations and was not a response to the $1.1-billion loss in New York.

Shiota questioned Yamaji’s allegation that Nishimura told the Daiwa executives it would be “bad timing” for word of the loss to come out immediately. “We haven’t confirmed this comment at all,” Shiota said. “Since Yamaji is entangled in this now, he may be confused.”

Shiota reiterated that the reason Daiwa delayed notifying U.S. authorities and giving a formal report to the Finance Ministry was that the bank needed time to figure out the amount of the loss.

Daiwa admitted in a statement released Friday that it had allowed Iguchi to continue trading even after the bank learned of the huge loss, but denied that this was part of a cover-up.

At a news conference earlier this month, after the Finance Ministry first came under fire for failing to promptly tell U.S. authorities all it knew of the Daiwa scandal, Nishimura portrayed the Aug. 8 meeting as a private meeting between himself and Akira Fujita, Daiwa’s then-president, who also resigned earlier this month because of the scandal.

Nishimura said Fujita told him of receiving a letter from Iguchi confessing to years of concealment of unauthorized bond trades, with accumulated losses of $1.1 billion. Fujita’s explanation was based on this private letter and the Daiwa president said he had not yet confirmed whether Iguchi’s claims were true, Nishimura said.

He asked Fujita to investigate the matter and report back to him, Nishimura said.

Daiwa reported back to the Finance Ministry on Sept. 12, Nishimura said, and the U.S. Federal Reserve Board was informed Sept. 18.

Yamaji said in the interview published Sunday that by Aug. 7, Daiwa clearly understood that the losses totaled $1.1 billion and that the problem could be dealt with by taking a write-off on the bank’s books at the end of the first half of the fiscal year on Sept. 30. It was only at that point that bank executives asked to meet with Nishimura to inform him of the problem, Yamaji said.