By Selwyn Parker
The Bank of Tokyo Mitsubishi is based
nearly 6,000 miles away from London and conducts most of its business in its
home country through 750 domestic branch offices. Therefore BTMU’s management
might have once expected to be answerable only to Japanese regulators.
But this is the post-2008 world of banking. And Japan’s
biggest lender has an important branch in London that is responsible for Europe,
the Middle East and Africa. And, as BTMU has learned to its cost, those
activities also make it answerable to regulators around the world.
In February 2017, the Bank of England’s Prudential Regulation Authority
(PRA) slammed a £17.85m penalty on BTMU and another £8.925m fine on London-based
subsidiary MUFG Securities EMEA for breaches of its rule book relating to
The offence? A failure to keep the PRA informed of
troubles it was having with the much-feared New York Department of Financial
Services (DFS). Essentially, BTMU’s transgressions were about its failure “to
organise and control its affairs responsibly and effectively in respect of its
handling of information” relating to a settlement with the New York
Thus a matter that originated in New York has
brought down on the bank’s head a regulator on the other side of the Atlantic.
As such, it serves as a reminder of a global bank’s international obligations.
BTMU’s was an informational
lapse rather than an executional one. In short, it did not advise the Bank of
England that it was having problems with the New York regulator. As the PRA
points out, the Japanese firm breached the rule which requires it to be “open
and cooperative with the PRA”. Even so, it’s unusual for a regulator to punish a
bank for this reason – normally, an institution has to do something patently
illegal to suffer a penalty of this kind.
The fines, which
are the heaviest that the PRA has applied on a foreign bank, arise out of
post-2008 regulation. Since the financial crisis BTMU has been designated as a
“systemically important financial institution” (SIFI) because it has operations
in the United Kingdom and around the world. Indeed, BTMU runs 117 overseas
branches, enough to put it easily among the ranks of SIFIs. Clearly, the
compliance function within BTMU and its London affiliate failed to grasp fully
the principles of openness and cooperation that have become fundamental in the
new regulatory world.
The whole point of the PRA’s
supervision of the finance sector is to monitor not just current risks but
also, as the regulator puts it, those that “could plausibly arise further
ahead”. Thus the PRA expects firms to engage in an open and candid dialogue.
And as the fines prove, that dialogue includes details of dealings with
overseas regulators that may affect a firm’s reputation and the conduct of
Further irritating the PRA, the BTMU
kept Japanese and US regulators informed of all its dealings with the DFS, but
not the Bank of England. The authority only learned of the matter after a
settlement notice was published in New York.
Two separate but related issues embroiled BTMU
and its affiliate with the New York regulator, sometimes labelled “the scourge
of Wall Street”. In 2013 the bank was fined $250m for sanctions-breaking
transactions with Sudan, Myanmar and Iran, the last being at that time a pariah
nation under American law.
Later however, digging deeper,
the DFS decided BTMU had other questions to answer. Its investigators concluded
that pressure had been brought to bear on a report prepared by PwC to water
down the evidence of these transactions. For that, BTMU agreed another
settlement, this time of $315m, and also agreed to impose employment
restrictions on three senior employees.
Under the Bank of
England’s senior persons regime, which gives regulatory responsibility to named
executives, this would have been of considerable interest to the PRA.
It was in early October 2014,
two years after the violations that first attracted the attention of the DFS,
that BTMU’s London operations became aware that a senior officer with compliance
functions was facing restrictions on his banking activity in America.
It was here that the Japanese bank made its mistake. There
was an opportunity to brief the PRA on the New York issue on October 21, 2014,
when MFUG had a routine meeting with the Authority. The purpose was to brief the
Authority on plans for a new chairman. However, the senior executives of MFUG
did not mention the impending New York settlement at that time, even though the
parent bank was conducting an internal investigation of the behaviour of a dozen
individuals and the London-based directors of MFUG had been made aware that one
of them had been cited in New York.
The timing now becomes important. Nearly a month later, on November 18,
the New York regulator released details of the second $315m settlement. It did
so at 4.12pm London time. Exactly 48 minutes later, at 5pm London time, senior
individuals from MFUG and BTMU notified the PRA of the matter. (If nothing else,
this reveals the PRA keeps phone records.)
Now, the Japanese
bank had some excuse for being tight-lipped. The DFS had insisted its
investigation remain secret, a restriction that BTMU took seriously in view of
how tough the regulator can be. Indeed the DFS wouldn’t even allow BTMU to show
the settlement to the Japanese regulator. This restriction provoked a flurry of
messages to and fro between Tokyo and London about whether the PRA should be
brought up to date. As one noted, “the DFS would not be pleased to learn of
So the conclusion was to keep the PRA
out of the loop. However the London regulator considers senior BTMU officials
should have sought a waiver from the DFS and spilled the beans. And, one might
add, the DFS could have kept the Bank of England informed throughout.
Meantime there are lessons to learn. As Mike Blake, legal head of the
PRA’s regulatory action division, points out: “The procedural matters in Annex D
[of the BTMU judgement] are important.” For compliance officers, they’re
compulsory reading. And so are the PRA’s Fundamental Rules 6 & 7, which
relate to the importance of being open.
The conclusion from
this four-year saga is that it’s better in the long run to speak up at the
earliest opportunity. The regulators like to know what’s happening.
About the author: Selwyn
Parker is an author of books on finance and business topics, a specialist in
financial history, and regular contributor to newspapers and magazines. Based in
Spain, France and the UK, he focuses mainly on European developments. His latest
book, The Great Crash, is a new history of the Great Depression that among other
things explains the rise of regulation in the form of the SEC and related
authorities. Selwyn is a regular contributor to Wolters Kluwer Financial