International Business; Will Regulators Penalize Daiwa? No Answers Yet
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By waiting nearly two months to tell regulators that it had learned of a $1.1 billion loss from unauthorized trading, Daiwa Bank Ltd. apparently violated Federal and New York State regulations, banking lawyers say. But whether it will face punishment beyond a requirement to improve its internal controls is unclear. New York banking regulations require all entities supervised by the state, including branches of foreign banks, to report “immediately” any embezzlement, larceny, forgery, fraud, dishonesty or similar misconduct, regardless of whether it is determined that a crime has been committed. Federal regulations are similar. Spokesmen at the Federal Reserve and the New York State Banking Department said yesterday that they would not discuss the Daiwa case until their investigations were complete. In addition, banks are required to alert regulators if they have reason to believe that their quarterly financial statements are inaccurate. Daiwa’s discovery that an executive vice president in New York, Toshihide Iguchi, had created $1.1 billion in trading losses over the last 11 years would surely have a material effect on those statements, the lawyers said. An official of Daiwa Bank in Japan said the bank had probably violated American regulations by waiting to report the case. The official, who spoke on the condition of anonymity, said that until the bank brought the matter to the attention of its American law firm, Sullivan & Cromwell, early this month, the bank was “not familiar with U.S. regulations.” The lawyers advised Daiwa to report the incident quickly, he said. But this official said Daiwa saw the law firm’s words as an opinion, not a requirement, and it waited until Sept. 18 before notifying the Federal Reserve because it needed time to ascertain the facts of the matter. As a result of the delay, the Federal Reserve and the New York State Banking Department are likely to require a written agreement with Daiwa, in which the bank commits to improve its internal controls and to take other specific actions, banking lawyers and former regulators said. The Federal Reserve has wide authority to fine banks it oversees and to impose other restrictions. For example, it could restrict a bank from making acquisitions or engaging in other new activities, although it is not clear that Daiwa has any such aspirations in the United States. Whatever action is taken by regulators, it will likely be influenced by how much they believe that management knew about the case. Some former regulators pointed to the case of Salomon Brothers, which in 1991 submitted false bids in Treasury bond auctions. The penalties for the firm and its managers were far more harsh because it did not report the violations for months after they were discovered. One specific issue will be the financial statement for the quarter ending June 30. Daiwa would typically have filed that statement at the end of July, just after it received the letter from Mr. Iguchi. “When you file a report, you have to put in numbers that you know to be true,” said Martin Lowy, a banking lawyer in New York. “The regulators can’t just let this pass.” Source : query.nytimes.com |