The Daiwa scandal Japanese coverup: U.S. authorities cannot allow U.S. banking laws to be violated.


FOR JAPAN, its prestigious Ministry of Finance and its entire banking industry, the decision of U.S. authorities to throw the book at Daiwa Bank Ltd. in a $1.1 billion bond trading scandal and cover-up is an unprecedented humiliation.

Resulting criminal indictments will further strain relations between the United States and Japan and raise concerns about the stability of a Japanese financial system already staggering under the weight of an estimated $800 billion in non-performing loans.

Yet the U.S. Department of Justice had no choice. Daiwa was playing fast and loose with securities worth hundreds of millions of dollars that were the property of its New York branch customers. In 1993 it had promised the Federal Reserve to divide its trading and custodial operations as required by law, and had not done so. Over a period of 11 years, it had supposedly overlooked the operations of a "rogue" trader, Toshihide Iguchi, who used forged statements and illegal transactions to hide $1.1 billion in losses. It had learned officially of Mr. Iguchi's transgressions in July, but with the collusion of a worried Finance Ministry did not notify the Fed until eight weeks later.

The Federal Reserve may have been remiss in failing to follow up its 1993 finding that Daiwa had not separated its trading and custodial functions, which remained in Mr. Iguchi's care. But its laxness was minimal compared to the Japanese Ministry of Finance's failure to notify U.S. authorities promptly of the Daiwa case.

This is one more irritant in a relationship currently roiled by the alleged rape of an Okinawa schoolgirl by three G.I.s and %J disclosures of CIA industrial espionage aimed at Japan. President Clinton will have a heavy agenda when he visits Tokyo later this month.

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