## Facts

- Daiwa Bank, Ltd. (Daiwa) was a Japanese bank that conducted banking business in New York through its New York Branch.
- Toshihide Iguchi, a senior employee at the New York Branch, confessed to Daiwa’s president that, over about 11 years, he:
  - engaged in unauthorized trading of U.S. Treasury securities,
  - misappropriated securities belonging to Daiwa and Daiwa’s customers to cover trading losses, and
  - concealed the activity by falsifying records and making misstatements to auditors and regulators.
- Iguchi’s conduct caused losses of approximately $1.1 billion at the New York Branch and allegedly went undetected for years.
- After the confession, Daiwa notified the Federal Reserve Bank of New York.
- Federal Reserve Regulation K, including 12 C.F.R. § 211.24(f), required foreign banks operating in the United States to report suspected criminal activity to law enforcement and the Federal Reserve within a specified period (described in the enforcement materials as 30 days); Daiwa did not file the required criminal-referral form.
- The Board of Governors of the Federal Reserve System initiated an administrative enforcement proceeding under the Federal Deposit Insurance Act (FDIA) against Daiwa and its New York Branch by issuing a Notice of Charges and Notice of Hearing.
- The Federal Reserve charged that Daiwa and the New York Branch engaged in unsafe and unsound practices by permitting the unauthorized trading and by maintaining deficient supervision and internal controls, including inadequate separation between trading activities and back-office/custodial and recordkeeping functions that allowed the scheme to continue and be concealed.
- The Federal Reserve also charged a violation of Regulation K based on the failure to make the required criminal referral/report regarding the apparent criminal activity.
- The enforcement materials also stated that Daiwa and the New York Branch may have knowingly submitted a misleading and inaccurate report of the branch’s condition as of June 30, 1995.
- The Federal Reserve scheduled a hearing before an administrative law judge to determine whether to issue cease-and-desist relief and require affirmative corrective action under the FDIA.

## Issues

1. Whether Daiwa and its New York Branch’s internal-control and supervisory failures—allowing long-running unauthorized Treasury trading, misappropriation of securities, and concealment—constituted unsafe and unsound practices subject to an FDIA cease-and-desist order and affirmative corrective action.
2. Whether Daiwa violated Regulation K, 12 C.F.R. § 211.24(f), by failing to submit a timely criminal-referral report after learning of suspected criminal activity connected to the $1.1 billion loss.
3. Whether the alleged submission of a misleading or inaccurate report of condition (by omitting the known loss) supported supervisory charges and interim relief pending a final administrative decision.

## Decision

- The Board of Governors issued a Notice of Charges and Notice of Hearing under the FDIA, initiating formal administrative proceedings against Daiwa and its New York Branch.
- Pending the hearing, the Board issued a temporary order to cease and desist based on the charged unsafe and unsound practices and the charged reporting violation under Regulation K.
- The matter proceeded to a scheduled administrative hearing before an administrative law judge to determine whether a final cease-and-desist order and affirmative corrective measures should be imposed.

## Legal Principles

- Under FDIA § 8, the Federal Reserve may bring administrative enforcement proceedings and seek cease-and-desist relief and affirmative corrective action when a covered institution or U.S. branch of a foreign bank engages in unsafe or unsound practices or violates applicable laws or regulations.
- The FDIA authorizes a temporary cease-and-desist order before a final administrative determination when statutory requirements for interim relief are met and immediate action is warranted pending completion of the proceeding.
- Regulation K, including 12 C.F.R. § 211.24(f), requires foreign banks operating in the United States to make a timely criminal referral to law enforcement and the Federal Reserve upon learning of suspected criminal activity; failure to file the required referral is an independent basis for enforcement.
- Material weaknesses in internal controls—such as insufficient segregation between trading and back-office/custody and recordkeeping functions, and inadequate supervision that allows falsified records and concealment—may be treated as unsafe and unsound banking practices.
- Providing regulators with reports that are misleading or inaccurate, including by omission of known losses, can support enforcement charges and remedial orders.

## Conclusion

In *In the Matter of Daiwa Bank, Ltd.*, the Board of Governors of the Federal Reserve System commenced an FDIA administrative enforcement action after a senior employee at Daiwa’s New York Branch confessed to an 11-year scheme of unauthorized U.S. Treasury trading and concealment that produced roughly $1.1 billion in losses, and after Daiwa failed to submit the required Regulation K criminal-referral report; the Board issued charges, entered a temporary cease-and-desist order, and set the case for an administrative hearing to decide whether to impose final cease-and-desist relief and affirmative corrective action.


In the Matter of Daiwa Bank, Ltd., 1995 WL 580439 (1995)