begin of the main contents

(Provisional Translation)
April 5, 2006
Financial Services Agency
Government of Japan

Administrative Actions on JPMorgan Trust Bank Limited

I. Description of the Administrative Actions

Order based on Article 26 (1) of the Banking Law, Article 8 (2) of the Law for Trust Business in Financial Institutions, and Article 9 of the Law concerning the Identity Verification of Customers, Etc. by Financial Institutions, Etc. and Prevention of Improper Use of Bank Accounts, Etc. (hereinafter referred to as "Know-Your-Customers (KYC) Policy Law")

1.   Operations engaging in new business associated with real estate trusts and real estates must be suspended from April 13, 2006 to October 12, 2006.

2.   In compliance, operating and information risk management, the concurrent responsibilities arrangement for internal control operations between JPMorgan Trust Bank Limited(hereinafter referred to as the "Bank")and JPMorgan Securities Co., Ltd. (hereinafter referred to as the "Securities Company"), etc., must be eliminated and its system must be improved. Also, a system of analysis, screening and managing trusts must be established, staff required to run the operations properly must be secured and maintained, and a clear system of responsibility must be established.

3.   In order to realize fair and proper operations as a trust bank, proper governance and compliance systems (including adequate staffing and the construction of a proper organization and structure) must be established with due emphasis on the following points:

  • (1)An unequivocal statement of commitment by management regarding compliance with laws and regulations, construction of responsible management and checking of systems by directors and auditors of the Bank, and re-evaluation of the organization, framework and operational methods to unfailingly realize such goals.

  • (2)Re-evaluation of operational oversight of the Bank by the JPMorgan Chase Group, creation and development of independent governance and internal control systems, and establishment of a clear system of responsibility in the Bank.

  • (3)Thorough understanding of and compliance with laws, regulations and rules by officers and employees.

  • (4)Fundamental re-evaluation of organizations and operations relating to personal identity verification affairs and customer control systems in order to rectify the breach of duty of personal identity verification pursuant to Article 3 of the KYC Policy Law and the duty to create records of personal identity verification pursuant to Article 4 thereof.

  • (5)Creation of a system to provide appropriate explanations and disclose information properly to clients of the trust business in the asset liquidation division.

  • (6)Development and reinforcement of segregation of business and firewalls required in operations for information management and a customer information management and control system (including the development of an adequate control system for IT system management).

  • (7)Development and reinforcement of a system to ensure unfailing, proper identification of operational failures, clerical errors, etc., in operations, as well as investigation of the causes of such problems, prevention of problem recurrence, and establishment of a clear system of responsibility.

  • (8)Development of a system to properly conduct audits, and implementation of proper audits and follow-ups.

4.   Responsibilities of the executives and employees who gave rise to the problems described in "II. Reasons for the Administrative Actions" hereunder, and the matters stated in the notice of inspection results and the report ordered based on Article 24-(1) of the Banking Law, including violations of laws and regulations, must be clarified.

5.   A plan to improve business operations pertaining to 3 and 4 described above, as well as matters that are described in the notice of inspection results and the report ordered based on Article 24-(1) of the Banking Law, must be submitted by May 8, 2006 and implemented promptly. (The improvement plan must encompass the development of a governance and an internal control system to ensure the implementation of the plan, as well as a clear assignment of responsibilities to ensure the effectiveness of the plan.)

6.   Subsequent to the implementation of 5 described above, and until the plan to improve such operations is fully carried out, a summary outlining the progress and implementation of the plan, etc., and the status of improvement must be prepared every three months, starting at the end of September 2006, and is to be submitted by the 15th day of the following month.

II. Reasons for the Administrative Actions

The on-site inspection (notified on September 22, 2005) conducted recently by the Financial Services Agency (hereinafter referred to as the "FSA") and the subsequent reporting order revealed the following serious problems in compliance and governance systems, etc., in the Bank.

In particular, it was confirmed that the Bank needs to concentrate on fundamentally re-evaluating and improving its action policies and creating and developing a system (including adequate staffing and the construction of a proper organization and structure) with respect to sales, investigation and screening, administration and management after entrustment etc., in its asset liquidation and securitization business division.

1.   Violations of Laws and Regulations, etc.

  • (1)The Bank promoted sales to gain proceeds from entrustment without conducting investigation, screening and appraisal, etc., on real estate to be taken on (without adequate staffing and construction of a proper organization and structure) in its real estate trust operations involving the liquidation and securitization of real estate serving as underlying assets, by passing on the resulting defects and risks of the target property to the trust beneficiaries, etc.

    Verification of the status and the portfolio of trust assets (real estate) entrusted to the Bank based on the latest on-site inspection conducted by the FSA, etc., resulted in the confirmation of many cases involving illegal constructions that are difficult to restore to a lawful state, overvaluation of properties by using the capitalization method, etc., financial transactions using real estate and seed lots that are unfit for liquidation, development, etc., and tax avoidance based on short-term buying and selling of properties in which the trusts were used as conduits. The Bank was also found to have valuations of the trust principal or the beneficial interest amounts in trust that substantially differ from the actual value of the real estate, and to have approved the transfer of the said beneficial interest in trust to other parties, and engaged in sales that give rise to conflict of interest.

    The Bank, as a bank concurrently conducting trust business, failed to establish risk management and internal control systems to prevent its credibility from being tarnished, and which resulted in a situation where the Bank could not perform its fundamental duty of care, which evidenced significant problems in business management. Therefore the Bank does not discharge its responsibilities as trustee of real estate trust agreement and violates Article 20 of the Trust Law and Article 28 (2) of the Trust Business Law (so-called duty of care).

  • (2)Furthermore, the Bank was found to have committed many violations, including the breach of duty of personal identity verification set forth in the KYC Policy Law (Article 3 (1) and (2)) and the breach of duty of keeping records of personal identity verification (Article 4 (1)) when opening accounts for trusts involving the liquidation and securitization of real estate, due to its failure to establish a proper internal control system and clerical procedures.

  • (3)In addition, in the situation where the real estate trusts were rapidly increasing by business promotion stated in (1) above, the Bank failed to establish proper clerical and internal control systems to process them in an appropriate manner and report accidents in trust affairs, etc., to the FSA, and was found to have breached the duty to report pursuant to Article 53 of the Banking Law and Article 12 (2) (Article 31 (4) after the revision) of the Enforcement Regulations of the Law for Trust Business in Financial Institutions.

2.   Compliance System

The Bank does not appoint executives or employees with sufficient experience and knowledge of trust business to take charge of legal affairs and compliance. Instead, operations are carried out by executives and employees with no practical experience in real estate business, etc., who take duties concurrently, based on the approval of exemption of firewalls with the Securities Company, etc., in internal control operations (notes to Article 45 of the Securities and Exchange Law). For this reason, necessary checks and monitoring are not in place, resulting in the constant violation of laws and regulations, etc., referred to in 1 above.

3.   Governance System

In the Bank, the President & Representative Director oversees the asset management division according to JPMorgan Chase Group's operational oversight relationship, whereas the asset liquidation and securitization business division (real estate trust business) is operated under the executive authority and responsibility of a different representative director. However, due to the Group's vertically-segmented oversight and execution framework, the state of operations executed by the said representative director is neither monitored nor checked properly by the President & Representative Director, other directors or the Board of Directors. For this reason, problems in the governance system have been identified in that the violation of laws and regulations, etc., referred to in 1 above has been left unaddressed.

4.   System and Information Management System

In response to the problems, etc., in internal control pointed out in the previous on-site inspection conducted by the FSA regarding the administration of the operation system and database as well as information management, the Bank reported to the FSA that it had formulated an improvement plan and implemented the improvements. However, some problems, etc., were still found in the latest on-site inspection: the Bank failed to develop the necessary control system (adequate staffing and proper organization and structure) because of its insufficient efforts in practice and inadequate oversight and confirmation.

5.   Auditors and Board of Auditors

The auditors and the board of auditors-whose basic duty is to ensure the bank's sound and sustainable growth-are not properly functioning. In particular, no operational audits are effectively being conducted by auditors. For this reason, the problems, etc., referred to in 1 through 4 above have been identified by the FSA, and the issue of making operational improvements has been left unaddressed.

Site Map

top of page