U.S. Prosecutors Are Said to Be Investigating Japan’s Largest Bank
Posted November 21, 2018 10:12 a.m. EST
Japan’s largest bank has already been penalized by the state of New York for letting countries on sanctions lists like Iran and Myanmar route payments through its systems, but a current inquiry is more serious: It is a federal case involving North Korea.
The bank, Mitsubishi UFJ Financial Group, was subpoenaed by federal prosecutors in New York City late last year as it was locked in a court fight with the New York Department of Financial Services, according to two people who were briefed on the investigation but not permitted to speak publicly. That litigation involves the department’s attempts to punish the bank, known as MUFG, for breaking anti-money-laundering rules.
The subpoena was issued after the state said in a court filing that the bank had intentionally ignored an internal filter designed to keep it from doing business with companies and people on international sanctions lists. The Department of Financial Services said the bank had also failed to set up a system for checking the identities of some of its Chinese customers doing business along the North Korean border, a hot spot for money laundering.
It was not clear whether prosecutors had found any evidence that North Koreans laundered money through the bank, but the holes in the system meant to trace such transactions were a chief concern of the Department of Financial Services.
A spokesman for the U.S. Attorney’s Office for the Southern District of New York declined to comment. MUFG also declined to comment.
The federal investigation arose from the state’s latest legal confrontation with the bank, which was called Bank of Tokyo-Mitsubishi UFJ until this year.
In 2013, the Department of Financial Services fined the bank $250 million for removing information from its records about transactions that involved parties in countries like Iran and Myanmar. A year later, the state fined the bank an additional $315 million for trying to hide information about that misconduct.
MUFG reclassified itself as a national bank a year ago and says the state regulatory agency no longer has the authority to punish it. The bank said it had reclassified for efficiency reasons; the regulators counter that the bank is trying to evade penalties by seeking out a different oversight body: the federal Office of the Comptroller of the Currency.
That office is led by a former MUFG employee, Joseph M. Otting, who was President Donald Trump’s nominee for the position when the bank made its switch. In a speech at a conference in Japan last week, Otting said his agency provided “more complete, more efficient and, importantly, more thorough regulation” than states could.
A spokesman for the federal agency said the decision to approve the bank’s conversion to a national charter had been made before Otting became comptroller. “Mr. Otting was not involved in that process,” the spokesman added.
According to the state regulator, MUFG has long used an electronic screening system, HotScan, to sort through its financial transactions for signs of involvement by people or countries barred from doing business with the United States. New York has claimed the bank knew — but never disclosed — that for 10 years HotScan occasionally cut off information about the countries where certain transactions originated.
The state said the system also did not allow users in some locations to enter North Korea as a country involved in the transaction, which meant the transaction would not be flagged for closer scrutiny.
The bank told New York in 2016 that it had found more than 30 branches around the world where these glitches existed, according to the court filing.
After fining MUFG, New York installed an independent monitor in the bank to inspect its system for catching criminals and sanctions evaders. In a March 2017 report, the monitor said a former bank employee responsible for its anti-money-laundering program had described the program as a “dumpster fire.”
Then, last November, MUFG made the switch to a national charter, after giving New York just eight days’ notice that it was considering the move. (Regulators in Texas, where the bank also had a state license, found out about the switch only when it was reported in the news media.)
When MUFG traded its state charter for a national charter, it expelled the state monitor without demonstrating that the problems identified in the report had been fixed, New York regulators claimed in court filings. MUFG and the New York regulator continue to argue over whether the bank was allowed to transform itself into a national bank while the state was still investigating its money-laundering controls.
A spokesman for New York’s regulator said he could not comment on pending litigation, but added: “The states safely and soundly regulate banking activities while the current federal government works to misguidedly dismantle financial services regulation and scale back consumer protections.” MUFG is not the first bank to have gotten in trouble this year for, at the very least, skimping on reporting suspicious activity to authorities. In February, U.S. Bank agreed to pay more than $600 million in penalties after senior bank officials were found to have ignored red flags raised by its screening systems about certain customers because it did not have enough employees to handle the reports.
One reason for the intense scrutiny of money-laundering controls at banks is that bank transactions are sometimes the only points at which sanctions are enforced, said Elizabeth Rosenberg, a senior fellow at the Center for a New American Security whose research focuses on sanctions and North Korea.
In the case of North Korea, she said, the United States and the European Union have not been as strict as they could be enforcing their own sanctions.
“They have not battened down the hatches to constrain North Korea’s use of the financial system,” Rosenberg said. “Perhaps we shouldn’t be surprised that large, sophisticated banks are having trouble wrapping their arms around this issue.”
MUFG’s new federal overseers said in a regulatory filing that the bank was working to fix its alert systems. This is a particularly delicate time for big banks, which are trying to convince lawmakers and regulators that anti-money-laundering rules are too hard for them to follow. Trade groups want Congress to relieve banks of the responsibility of determining a client’s true ownership and to change the requirements for reporting suspicious transactions. They also say banks are punished too severely for failing to report suspicious activity.
“The banking sector wants to help in ferreting out any terrorism, money laundering — they want to cooperate — but they want to do it in a way that actually works,” said Paul Merski, the top lobbyist for the Independent Community Bankers of America, a trade group. Right now, he said, “they are overwhelmed.”