Tokyo joins US in punishing Daiwa

Within hours of being ordered out of the US and indicted on criminal charges, Daiwa Bank was dealt a further blow with a harsh list of punitive sanctions from the Japanese government.

Japan's Ministry of Finance banned Daiwa from opening new overseas offices and ordered it to scale down its overseas lending and securities business. Deprived of a presence in the world's biggest financial centre, and with its reputation in tatters, the bank admitted that it has discussed the possibility of a merger with Sumitomo Bank.

In New York on Thursday the Federal Reserve Board and the state banking department gave the bank 90 days to close all its banking operations in the US, citing "unsafe and unsound banking practices and violations of law over an extended period of time". The order accused senior Daiwa managers of falsifying bank reports in order to conceal the losses of $1.1bn (pounds 690m), which were incurred over 11 years and finally reported on 18 September.

US prosecutors announced a 24-count criminal indictment against the bank, and arrested Masahiro Tsuda, the former general manager of its New York branch. The charges, carrying a maximum fine of $1.3bn, include conspiracy, wire and mail fraud, obstructing inspectors, falsifying records, and failure to report criminal offences.

"The message to the financial community from today's indictment should be clear and unambiguous," said Mary Jo White of the US Attorney's Office. "Law-enforcement will not tolerate financial authorities who unlawfully attempt to mislead regulatory authorities and cover up criminal misconduct by their employees," she said.

At Daiwa Bank's London office, the headquarters of its European operations, Peter Clarke, deputy general manager, said there was no information yet about cutbacks. "We have not heard anything specific yet. We are just waiting to see what happens," he said. Daiwa employs 110 people in London, with a personal Japanese customer base as well as wholesale lending operations.

At his headquarters in Osaka, Daiwa's president, Takashi Kaiho, accepted the closure order, but insisted that responsibility for the losses lay entirely with Toshihide Iguchi, the New York-based trader who made the illegal trades. "Our bank is the sole victim of illicit transactions by Iguchi," he said. "We did not intend to cover it up, but our knowledge and interpretation of US laws were somewhat inadequate."

Japan's Ministry of Finance, however, hinted that the bank had covered up the losses and acknowledged for the first time that it made serious mistakes of its own. The scandal has become a serious embarrassment to ministry bureaucrats who failed to notify US authorities, despite learning of the losses six weeks before they were made public.

Yesterday, Yoshimasa Nishimura, the director of the ministry's banking bureau, agreed that he "should have taken into account the characteristic American attitude" and notified authorities earlier.

Daiwa's 18 US offices, and the subsidiary Daiwa Bank Trust Co, made $30bn in operating profits last year. Mr Kaiho said the bank may close its branches in Seoul and Taiwan, and reduce operations in London, with a cost of 2,600 jobs.