(Provisional Translation)

September 21, 2005
Financial Services Agency
The Government of Japan

Administrative Actions on Philippine National Bank, Tokyo Branch

I. Description of Administrative Actions

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

(1)	Establish an internal control system for compliance (including the composition of personnel and construction of structures) in consideration of the following:
	(i) Clarify the management's stance and responsibility with respect to compliance; (ii) Construct and develop legal and compliance functions; (iii) Ensure that executives and employees thoroughly understand and comply with laws, ordinances and regulations, and cultivate and improve their awareness of compliance; (iv) Develop an internal control system and a system management framework, including reviewing and reinforcing the supervision and control functions of the Philippine National Bank, Tokyo Branch and Nagoya Business Office (hereinafter referred to as ''Branch, etc.'') by its head office in Manila; (v) Develop and enhance a framework for properly fulfilling the obligation of customer identification pursuant to the Law on Customer Identification by Financial Institutions and the obligation to report suspicious transactions under Article 54 of the Law for Punishment of Organized Crimes, Control of Crime Proceeds and Other Matters, and build a control and monitoring framework for refusing and reporting suspicious transactions and eliminating transactions, etc. reported on the grounds of being suspicious; and (vi) Conduct a radical review of the audit system, methods, etc. implemented for the purpose of ensuring proper operation and control in compliance with laws, ordinances and regulations, conduct effective audits and execute post-audit follow-ups.
(2)	Clarify the respective responsibilities of the executives and employees who caused the problems, etc. referred to in II. Reasons for Administrative Actions below and the matters stated in the inspection results notice and the reporting order.
(3)	Submit a Business Improvement Plan addressing the points described in (1) and (2) above and the matters stated in the inspection results notice and the reporting order (including developing a control system within the bank to steadily execute the Business Improvement Plan and clarifying how the responsibilities for ensuring its effectiveness are shared) by October 21, 2005, and implement the Plan immediately.
(4)	Subsequent to the implementation of (3) above and until the aforementioned Business Improvement Plan is carried out, the Bank shall prepare a quarterly report of the progress, implementation and improvement status of the Plan, etc., starting with the quarter ending December 31, 2005, and submit the said report by the 15th day of the following month.
(5)	Subsequent to the implementation of (3) above and until the aforementioned Business Improvement Plan is carried out, the Philippine National Bank shall not establish a subordinate branch, etc. set forth in Article 47 (2) of the Banking Law.

II. Reasons for Administrative Actions

(1)	The latest inspection (notified on June 16, 2005) conducted by the Financial Services Agency (hereinafter referred to as ''FSA'') revealed unlawful operations, etc. at the Branch, etc. in violation of laws and ordinances, including engaging in unauthorized operations associated with overseas remittance and foreign exchange business at a travel agent where foreigners (mainly Philippine nationals) gathered without obtaining the Prime Minister's approval under the provision of Article 47 (2) of the Banking Law (provision for the establishment of a subordinate branch by a foreign bank, etc.) and operations which might violate the said provision at churches and their ancillary facilities, variety stores, etc., and even selling at the Branch, etc. lottery tickets issued by the Bank's head office in the Republic of the Philippines.
(2)	The facts indicate that the Branch, etc. has failed to take proper action and make the necessary improvements despite being warned by the FSA since the last year about its efforts in properly fulfilling the obligation of customer identification and the obligation to report suspicious transactions as well as refusing and eliminating customers, transactions, etc. that actually became problematic, and despite being given specific instructions to make efforts to identify problems and make improvements in the clerical and internal control system at the Branch, etc. through the report order issued pursuant to Article 24 (1) and Article 48 of the Banking Law. The Branch, etc. has also accepted transactions at the risk of receiving criminal proceeds over an extended period of time: in particular, even after the management team of the Branch, etc. confirmed individuals, etc. who had taken out and/or remitted suspicious funds overseas through those individuals themselves, relevant parties, etc. and reported the suspicious transactions, the Branch, etc. repeatedly and continually accepted the transactions, etc. by such individuals rather than refusing them until they were pointed out by the FSA.
(3)	There are inadequacies in the sharing of operational responsibilities of the branch manager, assistant branch manager and other officers and in the reporting system. The foreign exchange and remittance business, which is the main business of the Branch, etc., is structurally cut off from the scope of monitoring and supervision of the compliance officer. Further, the assignment of the compliance officer and the officer in charge of internal audits is a mere formality, and problems have been found in their inability to stop unlawful operations, etc. Internal audits conducted by the Bank's head office that targeted the Branch, etc. cannot properly verify basic operational problems, etc., including the actual business status and system operation and administration.
(4)	The FSA had been approached by the Bank's Tokyo branch for consultation and received its application for approval needed by a foreign bank to establish a new subordinate branch or office as provided for in Article 47 (2) of the Banking Law. However, the latest inspection conducted by the FSA revealed the facts referred to in (2) and (3) above, which contradict the statements made in the application forms and the explanations provided during interviews, and found that the actual situation at the Branch, etc. substantially differed from them in relation to the system introduction status, control structure, etc. Accordingly, compliance risks were found in the Bank's Tokyo branch, in that without instructions from the FSA, it may have tried to gain approval for its branches and other offices by making misrepresented claims to the supervisory authorities.