The enforcement order issued by the Federal Reserve Board of Governors and the New York State Banking Department reflected anger that Japan's 10th biggest bank had deliberately ignored US regulations by delaying to report the circumstances surrounding the $1.1bn losses run up by Toshihide Iguchi in unauthorised bond trading.
Mr Iguchi confessed to Daiwa headquarters in Osaka in July about the massive unauthorised trading, apparently conducted over an 11-year period. The bank then moved discreetly to conduct its own internal investigation and apparently sell off assets to cover the loss. The regulatory authorities in New York were only informed in mid-September. In addition to the failure to inform the authorities of a severe breakdown in controls and supervision, Daiwa Bank "may have knowingly submitted a misleading and incorrect report of the branch's condition" as of 30 June, the New York authorities declared.
Daiwa Bank was ordered to conduct a "detailed, forensic review" of the transactions that led to the $1.1bn of bond trading losses, and to provide an in-depth internal review of its actions from the time it learned of the loss in July until it notified the banking authorities.
Daiwa must also submit, within five days, an acceptable written plan to reduce all of its New York trading activities "to the minimum levels necessary to service customers, conduct asset-liability management and manage the risk in the existing trading position of the New York branch".
The US authorities were scathing about the unsound practices that allowed Mr Iguchi to deceive his superiors for such a long time. The regulators said "prompt interim action" was needed to control Daiwa's local activities, and permanent enforcement action may be necessary. This will be decided at a hearing on 27 December.
The Fed said that in November 1992 and November 1993 regulators criticised controls at the New York branch. Regulators said they were led to believe by Daiwa officials that lines of authority were changed in November 1993 so that Mr Iguchi was no longer responsible for the branch's trading and custodial operations. The Fed now believes reporting lines were not changed.
In his written confession to Daiwa, Mr Iguchi said that because he was responsible for the branch's custodial department, he was able to sell securities from Daiwa's own accounts, as well as securities of customers to cover his trading losses. He was also in a position to falsify accounting and other branch records to hide the losses.