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

Administrative Actions on JPMorgan Chase Bank, N.A., Tokyo Branch

I. Description of the Administrative Actions

Business Improvement Order based on Article 47 (2) and (3) and Article 26 (1) of the Banking Law

1.   In order to introduce a framework to comply with laws and regulations, and to screen bank transactions properly with independent monitoring and checking functions into JPMorgan Chase Bank, N.A., Tokyo Branch (hereinafter referred to as the "Branch"), and to develop and reinforce the market risk and operating risk management framework, the appointment of responsible officers and staff in charge, who are either governed by the concurrent duties arrangement between the Branch and JPMorgan Securities Japan Co., Ltd. (hereinafter referred to as the "Securities Company"), etc., ,or assume duties concurrently under the said arrangement, must be eliminated, and necessary staff must be secured and maintained.

2.   Governance and an internal control framework for compliance (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 the management's commitment, and a system of responsibilities predicated upon compliance with laws and regulations.

(2)   Development and reinforcement of governance and an operational framework clearly under the Branch's responsibility, the delegation of authority and the clear definition of responsibility in the context of the relationship between the Branch and the head office/regional headquarters/Group affiliates (in Japan) of JPMorgan Chase Bank, N.A. (hereinafter referred to as the "Bank") in managing the business operations of the Branch.

(3)   Establishment of a clear system of responsibility over the development and reinforcement of an internal control system (compliance; analysis, screening and control of bank transactions and lending; market risk and operating risk management).

(4)   Thorough understanding of and compliance with laws, regulations and rules by officers and employees, and clarification of causes of and responsibilities over failure to make operational improvements, and the conducting of reviews voluntarily, in a proper and speedy manner.

(5)   Enhanced execution of audits and thorough implementation of follow-ups.

3.   Responsibilities of the officers 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 reporting order (based on Article 24-(1) of the Banking Law) must be clarified.

4.   A plan to improve business operations pertaining to 1, 2 and 3 described above, as well as matters that are described in the notice of inspection results and the reporting order (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 internal control framework to ensure the implementation of the plan, as well as a clear assignment of responsibilities to ensure the effectiveness of the plan.)

5.   Subsequent to the implementation of 4 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

1.   According to 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, the Branch received a Business Improvement Order pursuant to Article 26 (1) of the Banking Law due to violations of laws and regulations, etc., in March 2004, and subsequently engaged in continual discussions with the FSA on taking the necessary measures to improve the operations concerned, and on the legality of other operations. Yet, basic improvements and reviews of operations have not been progressing after a long period of time, and organizational problems, such as that voluntary improvements were not made in a proper and speedy manner, have been identified, in addition to risks of violating the Banking Law, etc. In the background a managerial problem has been found in the management of the Branch: the operational circumstances in the Branch and the JP Morgan Chase Group are being given priority in the Branch while compliance efforts are being left subordinated.

2.   Internal control (compliance, credit administration and control, market risk and operating risk management) operations in the Branch, with the approval of exemption of firewalls with the Securities Company (notes to Article 45 of the Securities and Exchange Law), were found to have operational problems, and insufficient members with practical experience and staff, etc., and problems were found to have arisen based on the concurrent duties arrangement with the Securities Company, etc.

(1)   In the Branch's non-recourse loan business operations targeted at special-purpose companies, etc., linked with the arrangement for liquidation and securitization of real estate by the Securities Company (Real Estate Financing Department), the credit division's preliminary surveys and assessment did not function properly and the Branch extended non-recourse loans while overlooking the crucial matters of underlying assets (real estate) subject to liquidation, including defects, illegality, overvaluation, issues with accounting procedures, and the appropriateness and validity of the structure's objective and substance. It has been identified that the Branch's management did not exercise proper oversight and fulfill its duty of care to the loan operations.

(2)   It has been confirmed that some of the transactions by the Securities Company violated laws and regulations with respect to the Branch's non-recourse loans secured by real estate and specific corporate bonds bought by the Branch with real estate serving as the underlying asset for which the Securities Company served as an intermediary to sell them to institutional investors, etc. Yet, legal and compliance divisions were found to have problems in having a framework (staffing, organization and structure) that cannot point out, check or rectify the problems involved or conflicts of interest inherent in transactions between related parties including the Branch and the Securities Company, etc., and lending transactions by the Branch.

(3)   The Branch's market risk management framework was found to have problems in its organization and structure required by the middle office division for improving the monitoring and checking of the front office division's operations, insufficiencies in staffing, and even after receiving the previous Business Improvement Order by the FSA, it was found to have failed to make thorough improvement efforts and caused errors, problems, etc., relating to operational and risk management.

3.   Moreover, basic problems are continually found in the Branch and the Bank's head office in accounting procedures relating to inter-group transactions, expenses, etc., and it is deemed necessary to review and improve the control methods, etc., in view of compliance.

Contact:

Financial Services Agency, Government of Japan
Tel +81-(0)3-3506-6000 (main)
Banks Division I, Supervisory Bureau (ext.3751, 3752)

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