Administrative Action against the Shoko Chukin Bank, Ltd.

Section 1. Contents of the Order

Order based on the Article 59 of the Shoko Chukin Bank Limited Act (Act No. 74 of 2007)

 

１．In order to prevent occurrence of misconduct and inappropriate administration , drastically re-examine and make necessary changes to the Bank’s preparedness for compliance systems, business management, and internal control, including the following:

（１）Clarify of responsibility among the executives and employees who caused these problems since the first occurrence of the problem until now

（２）Work out and implement drastic measures to prevent recurrences, including reinforcing  audit functions and optimizing administration of the company’s organization, against potential recurrence of the problem.

（３）Build and implement a sustainable business model that reflects the Shoko Chukin Bank Limited Act’s purpose of complementing the role of private-sector entities¹

（４）Reorganize the business management structure, including reinforcing the board of directors and hiring or appointing experts from outside.

２．For matters not corresponding to the requirements for crisis-response loans, procedures should be properly and promptly carried out to avoid detrimental effects on business partners through transfers to other loans, etc., and suitable measures such as cancelling guaranty insurance agreements with the Japan Finance Corporation Ltd. should be implemented, and the interest rate compensation already paid should be promptly refunded to the Japan Finance Corporation Ltd.. Report it as early as possible when these measures have been taken.

３． Build plans operation improvement pertaining to 1. (1) and (2) above and submit them as early as possible. Also, Build and submit an plans for operation improvement pertaining to 1. (3) and (4) in accordance with the outcome of deliberation at the Council to Rethink the Role of Shoko Chukin Bank to be set up by order of the Minister of Economy, Trade and Industry.

４．Report the progress and the status of implementation of the plans for operation improvement pertaining to 1. (1) and (2) above first at the end of December 2017 and then every three months over the period of the plan until the completion of the plans. The deadline of each quarterly report shall be the 15th of the month following the third month of each reporting period. Also, report the progress and the status of implementation of the plans for operation improvement pertaining to 1. (3) and (4) above first at the end of the fiscal year that includes the month in which the plan is submitted and then every six months over the period of the plan until the completion of the plans. The deadline of each half-yearly report shall be the end of the month after following the sixth months of each reporting period.

Section 2. Reasons for the Administrative Action

 １．The investigation Shoko Chukin conducted on all potentially relevant deals in response to the order issued on May 9, 2017 in accordance with the provisions of Article 59 of the Shoko Chukin Bank Limited Act (hereinafter, the “Act”) found that 444 individuals were involved in a total 4,609 instances of misconduct in which they either falsified or fabricated data in trial balance sheets and other accounting documents to make them qualify in the screening process for crisis-response loans. These happened at 97 of Shoko Chukin’s total 100business offices, and amounted to a total 264.6 billion yen in terms of the total value of loans executed.

 ２．The 0n-site inspection conducted by the competent ministries in accordance with the provisions of Article 58 of the Act identified inappropriate administration including the following:

（１）Although the crisis-response loans are supplied to the small and medium enterprises under circumstances when it is difficult that the private-sector financial institutions lend under normal loan terms by theirself , there are many cases that diverged from the stated purpose of the loans, including:

Ａ． Cases in which the loans were extended to companies that were performing normally and faced no particular issues regarding their financial standing²

Ｂ． Cases in which Shoko Chukin’s staff actively solicited deals with companies by taking advantage of interest rate compensation even though they were aware that private financial institutions had already made proposals to extend loans to them³

（２）When a case of data falsification came to light at the Ikebukuro Branch, Shoko Chukin ’s Compliance Management division and Internal Audits divisions had employed inappropriate ploys in their investigation for internal audit, such as intentionally limiting the scope, to draw the conclusion that no misconduct had been found. The executives had been deeply involved in this process⁴.

（３）The inappropriate administration of the banking services crisis-response loans has done about falsification and fabrication of documents⁵.

３．Based on the outcome of the 0n-site inspection by the competent ministries and Shoko Chukin’s investigation of all relevant deals, the background to the inappropriate administration as described in 1. and 2. above and their fundamental causes can be explained as the following:

（１）The management and headquarters saw extending crisis-response loans as Shoko Chukin’s main duty. The management and headquarters assigned an execution target for these loans to each branch and excessively pressured each branch to achieve these targets. They were also found to have sought to maintain the level of deals for crisis-response loans even during periods when there was less demand for the crisis-response loans.

（２）Even though the role of government-affiliated financial institutions is to complement the role of private-sector counterparts, Shoko Chukin’s management and headquarters perceived crisis-response loans as giving them a competitive advantage over other financial institutions, and used them to maintain or expand its revenue and business bases.

（３）The management and headquarters encouraged staff or excessively pressured staff to try to make any deal qualify for crisis-response loans at least in form even when staff were aware that doing so is against the purpose of Shoko Chukin ’s stated purpose, and tolerated such operations. Such a stance by the management and headquarters is believed to have lowered the staff’s mental guard against misconduct, weakening their awareness of the importance of compliance.

（４） Shoko Chukin  lacks the internal control and governance structures necessary to prevent inappropriate operations. In particular, important management decisions were made by a group of relevant directors from the level of vice president and down, who typically have a long history with Shoko Chukin . This turned Shoko Chukin’s board of directors meetings into a place where reporting and approval were mere formality, with no effective checks or oversight by outside directors.

４．There is an urgent need to fundamentally review the Bank’s systems to comply with the compliance systems, business manage operations and maintain internal control under the competent ministries’ oversight.

 

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¹ The Supplementary Provisions of the Shoko Chukin Bank Limited Act specify: "Special consideration shall be made to ensure that Shoko Chukin  does not undermine the optimum competitive environment between Shoko Chukin  and Shoko Chukin’s rivals as long as the government holds a stake in it."
² For example, identified cases included those in which Shoko Chukin extended crisis-response loans to affiliated subsidiaries of the listed companies with strong performance and companies with virtually no debt as they had cash and deposits exceeding their debt.
³ For example, in an identified case, Shoko Chukin  extended a crisis-response loan to a company with strong performance and virtually no debt to which a private financial institution had proposed a loan at an interest rate of 1.2%. Shoko Chukin ’s loan was executed at virtually a 1.0% interest rate by applying interest-rate compensation of 0.2% to the loan’s interest of 1.2%.
⁴ A special investigation into the misconduct at the Ikebukuro Branch, which came to light in December 2014, found that Shoko Chukin’s executives advised staff on the method of investigating the case and received reports on the progress of the investigation on a daily basis but used inappropriate methods to examine the findings and conclude that there had been no misconduct.
⁵ For example, in performing the service as an organization accredited to support business innovation and other efforts, specified by the Act for Facilitating New Business Activities of Small and Medium-sized Enterprises, Shoko Chukin ’s staff were found to have falsified or fabricated documents as a way of achieving internal performance objectives.