Deutsche managers knew about, didn't stop entertainment of Japan pension funds: regulator

TOKYO Mon Jun 16, 2014 4:41am EDT

Men walk past a logo of Deutsche Bank AG in Tokyo September 9, 2013. REUTERS/Toru Hanai

Men walk past a logo of Deutsche Bank AG in Tokyo September 9, 2013.

Credit: Reuters/Toru Hanai

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TOKYO (Reuters) - A pattern of spending on hostess bars and overseas junkets for local pension fund officials went unchecked by senior managers at Deutsche Bank's Japanese securities arm, who failed to prevent or turned a blind eye to expenses that could be prosecuted as bribery, previously undisclosed details of a regulatory investigation show.

Deutsche Securities was ordered by Japan's Financial Services Agency in December to bolster its compliance after the Securities and Exchange Surveillance Commission (SESC) found it spent the equivalent of almost $62,000 to entertain officials at three pension funds between 2010 and 2012.

The wining and dining was deemed problematic because the three funds belong to a class of pension fund that manage public money as part of their investment portfolios. Japanese law says that senior officials at such funds are the equivalent of public servants, meaning that spending to entertain and win favor from them can be prosecuted as a form of bribery.

In a parallel criminal investigation, public prosecutors arrested a former Deutsche sales executive, 37-year-old Shigeru Echigo, for charging around $9,000 in expenses to the bank, Germany's biggest, for entertaining a former executive at a pension fund affiliated with trading house Mitsui & Co Ltd.

In acknowledging compliance lapses, Deutsche announced in December that it would revamp its system of oversight and said it was dismissing some employees involved in the entertaining. It also cut the salaries of its chairman, president and chief operating officer.

But an internal report prepared by the SESC and not made public sheds light on the extent to which senior managers, including some still with the bank, were aware of or involved in the practice. A copy of the report was reviewed by Reuters.

The report illustrates what bankers across Japan's financial industry say was a widespread practice of spending on entertaining to win business from pension fund officials before regulators and prosecutors began to crack down in 2012.

On one occasion cited in the SESC report, the chairman of Tokyo-based Deutsche Securities Inc, Norimichi Kanari, was present at the entertaining of a pension fund official in October 2011. Mitsuhisa Murata, now the head of the German bank's asset management operations in Japan, was aware of such entertaining and the manipulation of expense receipts, but gave the practice his "tacit consent, believing it necessary to promote the business," the report said.

The SESC had no comment. A spokesman for Deutsche in Tokyo, Takayuki Inoue, said the bank had no comment. Kanari and Murata also declined to comment, Inoue said. They could not be independently reached for comment.

CLUB CHICK

Echigo escorted the Mitsui pension executive, Yutaka Tsurisawa, to various restaurants around Tokyo, including Jojoen, which specializes in "yakiniku" Korean barbecue, and Osteria Nakamura, which serves Italian food and fine wine. Their evenings out sometimes concluded at Club Chick, a high-end hostess bar in the Roppongi district that is a popular destination for bankers and their clients, according to a person with knowledge of the matter.

Echigo has pleaded guilty to bribing a public official for paying for these nights out. But at a hearing in April, he said that he was acting on the direction of his superiors and that the practice of entertaining such officials was company-wide. A hearing in his case, which could be the last before sentencing, is set for Tuesday.

Both Echigo and his lawyer declined comment. The former banker faces a possible jail sentence, although defendants in white-collar cases in Japan are typically given suspended sentences. Tsurisawa was convicted earlier this year for accepting a bribe. He was fined and handed an 18-month prison sentence, suspended for three years. Tsurisawa's lawyer said his client could not be immediately reached for comment.

The entertainment of pension fund managers came under the spotlight after a scandal in early 2012 in which the financial regulator found that fund manager AIJ Investment Advisors had lost more than $1 billion in pension money and falsified reports to investors to cover up its losses. The SESC found evidence that AIJ executives had used lavish entertainment as a way to keep pension officials investing with it, and began probing entertainment policies across Japan's financial industry, people with knowledge of those investigations have said. In June 2013, it recommended sanctions against a Tokyo-based investment advisory firm for entertaining a pension official, marking the first case of its kind.

COMPLIANCE BREAKDOWN

Kanari, who became chairman in 2008 after a long career at Mitsubishi UFJ Financial Group, realized that pension officials could be considered public servants and that entertaining them was a problem after the AIJ scandal, the SESC report said.

But even after that scandal, Deutsche's pension sales team continued to woo business by entertaining officials, according to the report. Sales staff manipulated entertainment expense receipts to get around compliance checks, and in 2012 the team spent the equivalent of almost $108,000 entertaining pension officials, more than in either of the previous two years, the report said.

While Kanari maintained that he was not aware of the problem of expense receipts being falsified to avoid compliance checks, he failed to report his own involvement in pension fund entertainment or to order any internal investigation in the wake of the AIJ revelations, the SESC's investigation found.

For his part, Echigo had been promoted to a management position in the pension sales team in March of last year, two months before the SESC began an audit of Deutsche and less than a year before his arrest. He told SESC auditors that he had informed two managers at a meeting on the issue, including a compliance officer, that the executives they were entertaining were the same as public servants under the law, according to the report.

The investigation also raised questions about the conduct of Chief Operating Officer Bret Dandoy, who approved Deutsche picking up about $15,000 in expenses to take pension fund executives on a trip to Frankfurt to visit the bank's home office to learn more about its funds and do some sightseeing. Dandoy was unaware that the officials were considered public servants under the law, the report said.

Deutsche spokesman Inoue said Dandoy, like the other bank executives, would not comment. He could not be independently reached for comment.

It's not clear why prosecutors chose to charge only Echigo and not other executives. The Tokyo District Public Prosecutor's Office declined to comment, citing its policy not to discuss pending cases before a sentence is imposed.

In April 2013, a month before the SESC began its audit, Deutsche created new compliance guidelines which put a per-person cap of about $100 on meals with pension officials, according to an internal memo seen by Reuters.

In December, the bank announced it had closed the Pension Sales Group department at the heart of the problem and outlined a raft of measures to bolster compliance. These included new guidelines that outlawed offering entertainment to quasi-public officials or paying for clients' travel and accommodation on overseas trips.

($1 = 101.7900 Japanese Yen)

(Editing by Kevin Krolicki and Ian Geoghegan)

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