Japanese version

February 15, 2011
Financial Services Agency

Administrative Actions against Standard Chartered Bank, Japan Branches

The Financial Services Agency (FSA) took the following administrative actions today against Standard Chartered Bank, Japan Branches.

I. Description of Administrative Actions

Orders based on Article 47, Paragraphs 2 and 4 and Article 26, Paragraph 1 of the Banking Act

• 1. Establish an internal control system (including adequate staffing and the construction of a proper organization and structure) in regards to compliance with laws, regulations, etc., from the following perspectives:

  • (1) An unequivocal statement of the management's commitment and responsibilities with respect to compliance with laws and regulations, etc.;

  • (2) Reconstruct and develop legal and compliance functions;

  • (3) Ensure a thorough understanding of and compliance with laws and regulations by officers and employees, and foster and improve their awareness of compliance with laws and regulations; and

  • (4) Fundamentally re-evaluate the structure, method, etc. of audits to ensure that business operations are properly run and controlled in compliance with laws and regulations, and implement effective audits and post-audit follow-up reviews.

• 2. Submit a business improvement plan (including the evaluation of the effectiveness of business improvements with respect to matters pointed out in the previous inspection) pertaining to the matters pointed out in 1. above as well as in the notice of the inspection results and the order for reporting, by March 15 2011, and execute the plan immediately. Also take any and all measures to protect customers as necessary.

• 3. Subsequent to the implementation of 2. above, report the progress and implementation status of the business improvement plan and the status of improvements made as a result by the fifteenth day of the following month, every three months starting the end of May 2011 (1st report), until the business improvement plan is completed.

II. Reasons for the Administrative Actions

In light of the FSA's on-site inspection (notification of June 29, 2010) and reports, etc. submitted by the Japan Branches pursuant to Article 24, Paragraph 1 and Article 48 of the Banking Act, the following fundamental problems, etc. with the compliance and governance systems, etc. of the Japan Branches were recognized in relation to the management and control of their business operations:

• 1. The following violations of laws and regulations as well as problems, etc. in the compliance system, were recognized.

  • (1) The Japan Branches acted as an agent or intermediary in relation to the custody operations of their overseas branches, etc. without obtaining the authorization of the Prime Minister under the provision of Article 52-2, Paragraph 1 (Authorization of Foreign Bank Agency Services, etc.) of the Banking Act.

    The Japan Branches failed to take necessary measures even though the person responsible for the Legal Compliance Department had made inquiries regarding the aforementioned custody operations to an outside consultant and received a response that said custody operations might be in violation of laws and regulations.

  • (2) The Japan Branches engaged in banking business without obtaining the authorization of the Prime Minister under the provision of Article 47-2 (Establishment, etc. of Secondary Branch Offices of Foreign Bank) of the Banking Act at an office rented in Osaka City.

    Contrary to the Japan Branches' explanation to the FSA that no staff was permanently stationed at said rented office, staff was in fact permanently stationed. Even though the person responsible for the Legal Compliance Department had been aware of the actual situation, no actions were taken such as re-examination of the necessity of the approval.

  • (3) In July 2009, the Japan Branches changed the text of the terms and conditions of the overdraft agreement relating to the increase in the applicable interest rate and the reasons for the forfeiture of benefit of time.

    However, the Japan Branches' system for providing an explanation to customers was found to be inadequate, as the terms and conditions were replaced by giving customers only an explanation of the increase in the applicable interest rate, without providing any explanation of the changes in the text regarding the reasons for the forfeiture of benefit of time which might be disadvantageous to customers.

• 2. As the backdrop of the problems referred to in 1. above, the following fundamental problems with the governance system were recognized.

  • (1) Internal control managers, such as the person responsible for the Legal Compliance Department in the compliance system, failed to fulfill his/her duties.

  • (2) The management team of the Japan Branches, which is given the authority to direct and oversee their banking business in Japan, failed to fulfill their management responsibilities, including the failure to require internal control managers to make adequate reports on the actual status of business operations of the Japan Branches.

  • (3) Even though a Risk Management Committee had been established to discuss issues in risk management, the risk management system was found to be malfunctioning, as exemplified by the failure of internal control managers to report the violation of laws and regulations revealed in this case.

• 3. Internal audits conducted in the Japan Branches failed to detect the aforementioned violation of laws and regulations. The internal audit function is thus deemed ineffective.

• 4. The Japan Branches had been making business improvement efforts and developed internal rules in response to the results of the previous on-site inspection conducted by the FSA (notification of March 12, 2007). However, the effectiveness of business improvements made to date is not being ensured, as exemplified by the situation revealed in the latest on-site inspection, where internal rules are not being observed or have become a dead letter.