An SEC Warning to Japanese Banks

FOR THE FIRST TIME SINCE pulling out en masse in the early 1990s, Japanese banks are poised to come back to the American capital markets. Their ambition is to compete head-on with U.S. and European investment banks a few years down the road, structuring deals, selling exotic investment instruments and trading for their own accounts, as well as offering loans. They are awash in money that they rake in at close to zero interest from Japanese depositors, who believe that a bank savings account is by far the safest place to put a nest egg.

But to compete credibly with their American counterparts, Japan's banks will have to get up to speed with dramatically tougher regulatory and governance practices. The giant Mitsubishi- UFJ Financial Group is a case in point. The Securities and Exchange Commission is investigating its U.S. subsidiary, Bank of Tokyo-Mitsubishi UFJ Trust, and the group's New York branch for their outdated computer monitoring system, which has apparently failed to stay on top of Russian money laundering transactions, a senior official of the group told Directorship recently.

The SEC has told its Japanese counterpart, the Financial Services Agency (FSA), that it would send investigators to Tokyo in October to conduct a joint investigation, the official said. The FSA and Mitsubishi- UFJ Financial Group spokesmen declined to comment on the record.

It's not the first time that the group has been reprimanded by the SEC. In 2004, the SEC told Union Bank of California International of Los Angeles, the group's Los Angeles-based subsidiary, to improve its anti-money- laundering monitoring system. But the latest swoop comes at an inopportune time for Mitsubishi- UFJ. It is gearing up to launch a U.S. financial holding company to support its ambition of expanding its investment banking business. "The only reason why the SEC hit Mitsubishi- UFJ is that its shares are listed on the New York Stock Exchange, while those of Sumitomo- Mitsui and Mizuho financial groups are not," speculated one foreign banker in Tokyo. "All the Japanese banks have been out of the global capital market since the early 1990s because of the busting of the bubble economy. They are very disoriented."

The SEC penalty, likely by year-end, may be a slap on the wrist on Mitsubishi-UFJ, with little immediate impact on its business. Even so, it should be enough to send a message to all Japanese bankers to clean up their compliance acts.