DAIWA BANK SCAM MONIL MATHUR J070

CHAYAN MEHROTRA J072

On July 13, 1995, Daiwa banks Toshihide iguchi confessed, in a 30
page letter to president of his bank in japan, that he had lost around
$1.1 bn while dealing in US treasury bonds.
THE STORY
Toshihide iguchi joined daiwa new York branch in 1977.He joined
the back office.
During 1980s new York desk became primary market dealer.
When he was promoted as trader he did not relinquish his back
office duties.
US treasury bonds was managed through sub custody account atr
bankers trust.
Daiwa and its customers kept track of account through transaction
reports that flowed through Iguchi.
..

FBI stated He concealed

his unauthorised sales
from the custody He kept on losing money
Iguchi lost few hundred
account by falsifying and it became hard to
dollars so he sold off
Bankers Trust account keep this parallel 11 years and 30000 slips
some bonds in bankers
statements so that the reporting alive. But were forged.
trust sub custody
statements would not internal auditors never
account.
indicate that the confirmed the statemnts.
securities had been
sold.
IGUCHIS STATEMENT
To me, it was only a violation of internal
rules, he said. I think all traders have a
tendency to fall into the same trap. You
always have a way of recovering the loss. As
long as that possibility is there, you either
admit your loss and lose face and your job, or
you wait a little a month or two months, or
however long it takes.
THE CYCLE
Sold
Change
security
more
on his
record
own

Customer
Sold more need to
security sell or
on his need to
own be paid
interest
$377 mn securities of customer.

$733 mn securities of Daiwas own investment.

Daiwa made some limited efforts to split up its trading

and back-office function in 1993.

He managed to survive yet another two years.

CONFESSION AND COVER
UP
Iguchi sent confession letters to Daiwa in mid summer 1995.
Superiors kept the losses secret until appropriate measure could be
taken.
Few managers connived with iguchi to cover up the losses.
During sept 1995 Iguchi was told to pretend to be on holiday so
that scheduled audit would have to be postponed.
After Daiwa told regulators about the loss on September 18, Iguchi
was taken to a motel and questioned directly by the US Federal
Bureau of Investigation.
CONFESSION AND COVER
UPS
After Daiwa told about fraud to regulators , Iguchi was taken to a
motel and questioned.
After all the confession Bank was shocked to find itself facing a 24-
count indictment for conspiracy, fraud, bank exam
obstruction,records falsification and failure to disclose federal
crimes.
Daiwa argued that not a single customer
had lost money.

It had hidden profits on balance sheet

due to legit historical accounting method.

Bank pumped back into defrauded

securities account.
TIMELINE
Dec 1996
Sep 15- 18 Iguchi
reports sentenced
the loss to to 4 years Feb 1996
July 13 the US Sept 26 in prison Daiwa
1995 federal Iguchi and $2.2 pays $340
Iguchi reserve fired by mn mn in
confessed board. Daiwa fines

August 8 Sept 23 Oct 2 Us End jan 20th sept

Japans Iguchi authorities 1996 2000
finance interviewe order Daiwa Osaka
ministry d by FBI Daiwa to sells court
was and end its US assets and orders
informed arrested operations offices in senior
. US executives
to pay
$775
million as
restitution
to
sharehold
ers
POLITICAL ISSUE
US regulators
were deeply
unhappy due
to

Ignorance of One senior

the regulatory member of
Cover up warnings over finance
number of ministry knew
years about scandal.
..
It went on to an international political stage.
Telephone conversation in which Japans finance minister,
Masayoshi Takemura, was obliged to make apologetic noises to US
Treasury secretary Robert Rubin for his staffs failure to pass on the
information.
THE ACTIONS..
In November 1995, the Federal Reserve ordered it to end all of its
US operations within 90 days.
Daiwa had agreed to sell most of its assets in the US, totalling
some $3.3 billion, to Sumitomo Bank and to sell off 15 US offices.
In February 1996, Daiwa agreed to pay a $340 million fine a
record amount for a criminal case in the US.
Senior management resigned and management cut its own pay for
six months and forgo bonuses as sign of contrition.
..
In December 1996, Iguchi was sentenced in New York to four years
in prison and a $2.6 million penalty.
Iguchis managers being sent to prison for a number of months and
fined a few thousand dollars.
AFTERMATH
general
a criminal Daiwas forced reputational
charge against exit from US damage to
the bank markets Japanese banks
and regulators

a diplomatic
senior
spat between
resignations at
the US and
Daiwa
Japan.
 Japanese court had
ordered 11 current
Japans ministry of
Standard & Poors and former board
finance imposing
downgraded Daiwas members and
certain restrictions
credit rating from A executives from the
on the banks
to BBB bank to pay the bank
activities for a year
$775 million in
damages,
close down many of
Daiwas its international
management to offices to
refocus the bank on concentrate on its
its traditional retail role as a super-
and trust banking regional bank in
Southeast Asia.
LESSONS LEARNED
Risk taking functions must be segregated
from record keeping

Structural problems in risk management

dont put themselves right.

Massive fraud can continue for many years

in an environment of lax controls
If senior mangmt acted inappropriately
their personal finance can get affected
even till years later.
THANK
YOU!!!