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Friday
Dec272013

Mizuho boss to quit over mob loans

Yasuhiro Sato, President and Group CEO, Mizuho Financial Group, Inc.The chairman of Mizuho Financial Group Inc., Takashi Tsukamoto, will leave his post in March following a scandal linking the lender to organized crime groups.

President and Group CEO Yasuhiro Sato will take a self-imposed salary cut for the year, and the bank will restructure its board and improve its corporate governance in an effort to address the failures leading to the loan problems.

Japan's regulator, the Financial Services Agency (FSA), has taken steps to punish Mizuho for making ¥200 million ($1.9 million) of loans through its consumer-finance affiliate to criminal organizations, referred to as yazuka crime groups. The FSA has also ordered the bank to suspend loans through its affiliates from January 20 to February 19 and submit plans by mid-January explaining how it will tighten internal controls.

The scandal first emerged in September when a first round of penalties was imposed after Mizuho admitted that some senior executives had been aware of the problem for more than two years before it was uncovered by a routine regulatory inspection. Mizuho later retracted the admission, but the FSA conducted a rare second round of investigations, leading to its issuance of a business improvement order that noted Mizuho's failure to take action on its knowledge of links to organized crime.

'The case is an interesting one because of the curious place that organized crime groups have in Japanese society, where they are widely accepted and sometimes even revered,' notes Sandy Boucher, a senior manager at Grant Thornton LLP specializing in corruption and fraud investigations.

'In the West, we have learned that such criminal networks have to be identified, shown for what they are, and broken up, but this is still a long way off in Japan. The issues at the bank seem relatively minor, and there is a strong suspicion that many other banks may be doing the same thing.

'On the other hand, it marks a small step on the journey to address a corruption problem in Japan that has been ignored for too long. It would be nice to imagine that Japanese authorities plan to deal with the intertwined issues of organized crime and corruption, and that may happen over time. For now, it will be interesting to see if this spreads any further,' Boucher says.

Mizuho plans to improve governance by forming new board committees of outside directors -- so-called consultative committees focused on risk management and compliance. It will also select an outsider to chair its board. The bank said it will propose these changes to shareholders when they meet in June.

Mizuho is Japan's second-largest lender by assets and was formed by a three-way merger in 2000. The 230 transactions at issue were largely made up of car loans by its affiliate, Orient Corp., all of which Mizuho acquired as part of the bulk loans it bought from Orient.

'If all it amounts to is a bunch of personal car loans, it could be an over-reaction,' said Edward A. McDonald, a partner at Dechert LLP and a former federal prosecutor who served as Attorney-in-Charge of the Federal Organized Crime Strike Force in New York.

Mizuho released several reports Thursday on its website pertaining to the FSA's investigation, penalty order and the company's proposed corporate governance changes.

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Julie DiMauro is the executive editor of FCPA Blog and can be reached here.