FUKUSHIMA (TR) – A third-party committee tasked with unraveling the covered-up fraudulent practices of a credit union in Iwaki City revealed last week that the institution created fake loans with a total value of nearly 25 billion yen over a two-decade period.
On May 30, the third-party committee, composed of lawyers and others, said in a report that credit union Iwaki Shinkumi Bank made fraudulent loans in the names of 263 persons without their knowledge along with 1,316 accounts. Of those accounts, three were for so-called “paper companies,” meaning companies with no actual business.
The misappropriation, which began at the latest in March 2004, was intended to support the cash flow of large borrowers in financial difficulty.
The committee concluded that the scandal was covered up for so long through the usage of various manipulation techniques to avoid the eyes of external auditors, reports the Yomiuri Shimbun (May 31).
Not subject to annual audits
The total amount of fraudulent loans was 24.7 billion yen through last November, when the scandal surfaced.
Of the 1,293 fraudulent loans discovered in the investigation, 1,288 were kept below 50 million yen. Crucially, loans under that amount are not subject to external audits.
For these cases, the credit union did not request financial documents from borrowers unless there were special circumstances. Instead, they assessed the credit risk based on whether repayments were in arrears.
As a result, the company was not subject to annual audits by accounting firms. The report from the committee stated that “the company controlled the amount of fraudulent loans and avoided an increased possibility of becoming the target of an audit.”
Another cover-up technique was for many executives and employees to fill out loan application forms for fictitious loans so that no two were written in the same handwriting.
A seal was also created in each depositor’s name. However, seal impression certificates or other items typically needed for a loan were not included in the loan applications.
“Unavoidable”
Established in 1948, Iwaki Shinkumi Bank had 15 branches and around 41,800 members as of March. The credit union had total deposits of 204.1 billion yen 121.5 billion yen in loans. A large portion of its customer base is composed of small and medium-sized enterprises.
Former chairman Jiro Ejiri played a leading role in the cover-up. He insisted in interviews with the third-party committee that “[The fraud] was unavoidable in order to protect the union. We could allow the union to collapse for the sake of small and medium-sized enterprises.”
The report pointed out that “pressure and justification that fraud was unavoidable in order to defend the organization were the cause of the incidents and long-term cover-ups.”
“It is truly inexcusable”
On May 29, the Tohoku bureau of the Ministry of Finance issued a business improvement order to Iwaki Shinkumi Bank. The ministry is requesting a clarification of management responsibility, a further investigation into the truth and an improvement to a corporate culture that lacks compliance awareness.
That same day, the bank said that its then chairman, Yohachi Honda, and other executives will resign to take responsibility. “It is truly inexcusable,” Honda said.
According to the ministry, Iwaki Shinkumi Bank repeatedly made fraudulent loans to its large clients through the accounts funded by the aforementioned fictitious loans opened without the permission of their account holders. They also utilized so-called “indirect lending” to the large clients through paper companies.
Indirect lending is an illegal lending technique in which a lender passes funds through an individual or another company when they are unable to lend directly to a business. This technique is often used by companies that are struggling with cash flow.
Katsunobu Kato, the Minister of Finance, said on May 20, “This is extremely regrettable. We strongly urge the credit union to thoroughly investigate the cause and implement effective measures to prevent recurrence. We will respond strictly in accordance with the law.”
The bureau said that corporate governance did not function due to the massive influence held by former chairman Ejiri.
The chair of the third-party committee, lawyer Hiromichi Niitsuma, said on May 30, “The whole picture is far from being revealed.”
The third-party committee also pointed out: “This case, which involved many executives and employees over a long period of approximately 20 years and involved numerous criminal fraudulent loans, is an unprecedentedly heinous case in the history of financial institutions in Japan.”
