* Deutsche employee spent $8,800 to entertain client-police
* Japan securities watchdog sanctions Deutsche Securities
* Deutsche Securities violated financial laws -SESC
* Deutsche Bank says "cooperating fully" with investigators
By Nathan Layne and Chang-Ran Kim
TOKYO, Dec 5 (Reuters) - Japan's securities regulator sanctioned the domestic investment banking unit of Deutsche Bank on Thursday and one of its employees was arrested for lavishly entertaining pension fund clients, an act considered bribery under the law.
The moves mark the latest crackdown by Japanese authorities on pension fund executives who are subject to the same anti-bribery laws as government employees because part of the money they manage is invested in the national pension scheme.
Officials at the Securities Exchange and Surveillance Commission (SESC) told a media briefing that Deutsche Securities had allowed its pension sales team to "run amok" in their pursuit of revenues. They also blasted the bank for failing to catch falsified expense receipts.
Deutsche Bank apologised and said in a statement that it was "cooperating fully" with investigators while taking necessary steps to bolster compliance.
It said it had launched its own probe into the matter before the SESC began a regular audit of the German bank's Japanese business in May. The pension marketing division in question had already been effectively shut down, it added.
The president, chairman and chief operating officer of Deutsche Securities will also take a temporary pay cut of up to 30 percent, said a person with knowledge of the matter who declined to be identified as the details were confidential.
Many of the overseas trips expensed by the pension sales teams were to Europe and were aimed at gathering information about mainly index-linked products, the source said.
The Tokyo Metropolitan Police earlier said it had detained Deutsche Securities pension sales executive Shigeru Echigo, 36, and 60-year-old Yutaka Tsurisawa, a former official at a corporate pension fund affiliated with Mitsui & Co.
Last year, Echigo spent 900,000 yen ($8,800) to wine and dine Tsurisawa and to pay for overseas trips and golf outings, rewarding him for Mitsui's investment of 1 billion yen ($9.7 million) in Deutsche's financial products, police said.
In a parallel civil case, the SESC said Deutsche Securities had spent a total of 6.3 million yen ($61,400) entertaining three pension fund clients between 2010 and 2012, providing them with "special benefits" in violation of financial laws.
That amount includes the money spent on the Mitsui pension executive being detained by police.
The SESC has put a spotlight on pension funds since Tokyo-based AIJ Investment Advisors was found to have defrauded pensioners out of more than $1 billion last year, often using lavish entertainment to attract investors.
The scandal led to the arrest of AIJ's top executive and triggered an ongoing industry-wide review by regulators of companies that manage pension money and the brokers that serve them as clients.
An SESC official who declined to be identified noted that some of the entertaining by Deutsche had taken place after the AIJ scandal became public.
"This involves quasi-public officials and that's what makes the infraction so grave," the official told the briefing. "This is something that should be regulated by the company, it's against company policy and the law."
The Financial Services Agency, which carries out the recommendations of the SESC and decides the punishment, is expected to issue an order to Deutsche Securities to improve its compliance, sources familiar with the matter said.
Wining and dining by brokers and late-night drinking sessions have traditionally been a regular practice in cementing business ties in Japan.
Tokyo created a code of ethics for public employees after a 1998 scandal in which finance ministry officials were arrested for accepting special treatment - mostly meals - from officials of banks they were supervising.
That prompted the financial industry to tighten its policing of client entertainment, but guidelines for entertaining pension fund executives were rarely enforced until the AIJ scandal put a spotlight on the issue, financial industry sources say.