(Provisional Translation)

May 20, 2004
Financial Services Agency
The Government of Japan

Administrative Actions on the Deutsche Trust Bank Limited

  1. According to the inspection result [issued on February 2004] by the Financial Services Agency [hereinafter referred to as the ''FSA''] of the Deutsche Trust Bank Limited [hereinafter referred to as the ''Bank'] and the Bank's subsequent report to the FSA in response to the FSA's Reporting Order based on Article 24 (1) of the Banking Law and other related trust laws, it is confirmed that there exist violations of laws and serious problems concerning the management's commitment and internal control with regard to compliance in the areas of operating and control of the trust business.
[1] Although the Bank received the previous inspection result from the FSA [issued on February 2000] and took corrective measures planned by the Bank itself, it is confirmed by the FSA's inspection this time around that the Bank has not taken necessary measures to improve operation and control of the trust business, and there exist serious problems on compliance, operational control, client information control and preparation of information and explanation for beneficiaries despite trust agreements with clients.
[2] In particular, on May 2003, the Bank transferred all operations for control, settlement and clearing of fiduciary properties to another trust bank. With regard to this operation transfer to outside of the Bank based on the joint-trust and re-trust agreements with the other trust bank, the Bank transferred trust accounts to the other trust bank without obtaining beneficiaries' consent [without concluding necessary contracts with beneficiaries in advance], and this violates Article 26 (1) of the Trust Law which stipulates the duty that trustees should manage and control fiduciary properties by themselves based on each trust agreements with beneficiaries.
[3] When the operational transfer mentioned in [2] above was executed between the Bank and the other trust bank, the mutual outsourcing contract between the two trust banks did not sufficiently define details of responsible areas, operational procedure, control and direction of trust accounts so that the Bank could implement its operational transfer to the other trust bank with proper supervision and control systems which enabled the Bank to operate and control fiduciary properties appropriately for the related beneficiaries.
[4] Moreover, even after it was pointed out by the previous FSA inspection that a large amount of funds for beneficiaries' profits were not properly reconciled, the reconciliation procedure of transactions for trust accounts was not sufficiently established, and the Bank did not book correctly proceeds received in beneficiaries' accounts of the trust, and operational mistakes have continued when calculating trust fee and withholding tax from the trust accounts. The failures of control, settlement and clearing for the fiduciary properties have been continued and not been corrected for long time and this constitutes violations of Article 20 of the Trust Law which stipulates the duty that trustees should exercise sufficient caution when managing fiduciary properties.
[5] As a result of the improper operational control and settlement of trust accounts by the Bank, there has been cases where the beneficiaries of the trust had to pay excessively and where unidentified receipt was found, and where the Bank was obliged to compensate losses for the beneficiaries, which have caused actual losses and negatively affected against the beneficiaries' interests and also the Bank's management.
[6] It is also confirmed that there were problems concerning firewall with respect to the operational controls between the Bank and the Deutsche Bank Group and the confidential clients' information have been jointly held and inappropriately used among the group companies in Japan.
[7] With regard to the unidentified beneficiaries' funds which were found by the FSA at the previous inspection and which occurred as a result of inappropriate reconciliation of the investment profits from the fiduciary properties, the Bank did not give proper and correct explanation to each beneficiaries about the reason why long delays in settlement of dividends for each trust accounts and improper operation for the trust accounts occurred when the settlement and refund of the funds were adjusted.
In addition, in conjunction with treatment and control of soft dollar brokerage, and collection of trust fees, it is confirmed that the cases where the Bank did not give proper explanation to beneficiaries and that there exist a lack of fairness in the Bank's operation among each beneficiaries.
  1. With the findings above, the FSA today took the following administrative actions to the Bank based on Article 26 (1) of the Banking Law and other related trust laws.

    Business Improvement Order based on Article 26 (1) of the Banking Law and the related laws for trust business in financial institutions
[1] The FSA suspends the Bank from engaging in business deals with new clients for control, settlement and clearing of fiduciary properties. Simply maintaining the existing accounts and beginning new deals with existing customers shall continue to be allowed. The suspension shall become effective as of May 27, 2004 until August 27, 2004.
[2] To install fair and proper operations, the FSA ordered the Bank to enhance the compliance functions [including the enhancement of human resources and organizational aspects] with due emphasis on the following points;
 
1] to clearly show the management commitment on compliance with laws and other related regulations and to clarify who should be responsible for the trust business in the Bank
2] to strengthen the functions of the legal and compliance departments
3] to take measures to make sure that relevant laws and regulations are properly understood and followed by the management and employees
4] to establish the firewall between the Bank and other Deutsche Bank Group Companies in Japan, and to take thorough measures for proper clients' information control
[3] To establish proper control, settlement and clearing of the fiduciary properties and related substitutions of those operations for the trust of beneficiaries, the FSA ordered the Bank to enhance proper operations and internal controls [including the enhancement of human resources and organizational aspects] with due emphasis on the following points;
 
1] with regard to the Bank's joint-trust and re-trust agreements with the other trust bank, to make a fundamental review of the current operational control and its directing systems and resources to implement necessary improvement, and to clarify who should be responsible for each issues for completion of the business process improvement
2] to rebuild the control systems of operations and processing apart from 1] above and to clarify the people in charge
3] to establish internal controls under which swift correspondence and appropriate explanation against beneficiaries of the trust will be made when the failures of control, settlement and clearing for the fiduciary properties take place and are found
4] to familiarize the management and employees with the operations and controls for trust business
5] to enhance and strengthen the internal control and monitoring functions in the Bank
6] to build and enhance the internal audit system, and to execute the follow-up of internal audit
[4] The Bank must submit the Business Improvement Plan to the FSA by June 21, 2004 and implement it promptly. The plan should follow the above-mentioned [2] to [3] and other issues and findings in the inspection result by the FSA and the subsequent report from the Bank to the FSA [including points to enhance and establish management control for implementing the improvement plan steadily, and to clarify who should be responsible for its completion].
[5] The Bank must report the progress in the implementation of the plan to the FSA on a quarterly basis until its completion.

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