March 3, 2006
Financial Services Agency
The Government of Japan
Administrative Actions on Korea Exchange Bank, Japan Branches
I. Description of the Administrative Actions
Business Improvement Order based on Article 47 (2) and (3) and Article 26 (1) of the Banking Law
- Operations being associated with foreign exchange and remittance transactions with new corporate customers must be suspended from March 10, 2006 to June 9, 2006 (excluding business with existing corporate customers).
- Any transactions with remittance agents who receive remittance requests made by foreign residents in Japan, etc. and organize conversion of money into foreign currencies and overseas remittance to a recipient in a foreign country specified by a client in advance via a legitimate bank (so-called underground banks which operate without a license in violation of the Banking Law) must be eliminated. Also, a system to prevent involvement in illegal remittance, etc. (including adequate staffing and the construction of a proper organization and structure) must be established.
- An internal control system for compliance (including adequate staffing and the construction of a proper organization and structure) must be established with due emphasis on the following points:
(i) An unequivocal statement of the management's commitment and responsibilities with respect to compliance with laws and regulations.
(ii) Thorough understanding of and compliance with laws, regulations and rules by officers and employees, and development and improvement of awareness of compliance.
(iii) Development and reinforcement of legal and compliance functions.
(iv) Development and reinforcement of a system to precisely fulfill the duty to report suspicious transactions pursuant to Article 54 of the Law for the Punishment of Organized Crimes, Control of Criminal Proceeds and Other Matters and creation of a system to control, monitor and eliminate reported transactions, etc.
(v) Development of an internal control system, including the re-evaluation and reinforcement of functions of the Bank's head office, to control and monitor the operations of the Bank's Tokyo Branch and Osaka Branch (hereinafter referred to as ''Japan Branches'') as well as system administration and back-up systems.
(vi) Re-evaluation of the method, frequency, etc. of audits to ensure that operations are properly run and controlled in compliance with laws, regulations and rules, and execution of effective audits and follow-ups.
- 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 report ordered based on Article 24 (1) of the Banking Law, including violations of laws and regulations, must be clarified.
- A plan to improve business operations pertaining to 2, 3 and 4 described above, as well as matters that are described in the notice of inspection results and the report ordered based on Article 24 (1) of the Banking Law, must be submitted by April 3, 2006 and implemented promptly. (The improvement plan must encompass the development of a governance and internal control system to ensure the implementation of the plan, as well as a clear assignment of responsibilities to ensure the effectiveness of the plan.)
- Subsequent to the implementation of 5 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 June 2006, to be submitted by the 15th day of the following month.
II. Reasons for the Administrative Actions
The on-site inspection (notified on December 19, 2005) conducted by the Financial Services Agency (hereinafter referred to as the ''FSA'') and subsequent reporting order from the Japan Branches under the provision of Article 24 (1) and Article 48 of the Banking Law revealed that monitoring, checking, etc. for compliance did not work properly at the Japan Branches, and identified the following violations of laws and regulations and basic problems, etc. in running and controlling branch operations.
1. Governance System and Handling of Customer Information
- The latest on-site inspection conducted by the FSA revealed that the Bank's Tokyo Branch had repeatedly and continually accepted illegal remittances of large sums of money brought in by a remittance agent (so-called underground bank which operates without a license in violation of the Banking Law) who was arrested by investigators between May 2001 and March 2005. The said agent had accumulated funds in small amounts in a transaction account at the Bank's Tokyo Branch in Japan under the name of the said agent, and repeatedly gave instructions and executed transactions to remit the money collectively to the Bank's branch in South Korea by disguising it as direct overseas investment between companies in Japan and South Korea (funding and transfer based on a loan agreement).
However, from the very beginning, the movement and settlement of these funds by the said agent were completely inconsistent with the amount of the loan, execution date, terms and conditions, period, etc. set forth in the said loan agreement that forms the basis of overseas remittances. Even though they were typical transactions exploited for money laundering, the Bank's Tokyo Branch completely failed to fulfill its duty to report suspicious transactions, which constitutes a violation of Article 54 of the Law for the Punishment of Organized Crimes, Control of Criminal Proceeds and Other Matters.
- Moreover, the Bank's Tokyo Branch had notified the FSA in October 2002 that it would establish in Tokyo an inquiry office that serves as a guide to the operations of the Bank and its branches (providing information, distributing application forms, etc.) and deal with inquiries on transactions, etc. However, contrary to the notification, an on-site inspection conducted by the FSA found that it had actually been engaged in operations that correspond to tasks performed by tellers at bank branches which are suspected of violating the provision of Article 47 (2) of the Banking Law (provision for the establishment of a subordinate branch by a foreign bank, etc.), including opening deposit and transaction accounts, accepting foreign exchange and remittance transactions, giving advices on transfers of deposits and money for foreign exchange transactions (cash) and receipts at the Bank, making contact and confirming with the Bank's head office, branches, etc. and calculating and receiving commissions, etc.
- The Japan Branches were found to lack an effective internal control system, due to their failure to formulate and update concrete administrative procedures, control methods, etc. which are indispensable in properly running and controlling the operations.
Furthermore, they were found to have basic problems and areas in need of improvements with respect to their systems to back up operation systems, manage information such as customer data and important documents, and report and control scandals and other such incidents, due to their failure to properly nurture the staffs' administrative and managerial abilities and to develop systems and support structures to reduce their workload and speed up and improve the efficiency of operations, which pose the risk of causing inconveniences to and having an impact on depositors, users, etc. of the Branches.
- The Japan Branches were found to lack the ability to point out and check the violations of laws and regulations and problems, etc. in the operations mentioned above, as self-inspection conducted by the Japan Branches has lost substance and the internal audit division of the Bank's head office does not audit the Japan Branches at adequate intervals based on sufficiently extensive techniques, etc.
Financial Services Agency TEL: 03-3506-6000 (Main)
Banks Division I, Supervisory Bureau
(Extension: 3751, 3398)
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