Bank's shift to federal charter amid state investigation raises oversight concerns
This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (November 16, 2017).
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Japan's biggest bank sidestepped a New York investigation into its compliance with U.S. sanctions regulations, kicking state bank examiners out of a Manhattan branch the same day it switched from a state charter to a federal one, according to a state regulator's letter.
The federal Office of the Comptroller of the Currency approved the conversion from a state license for Bank of Tokyo Mitsubishi UFJ, a unit of Japan-based Mitsubishi UFJ Financial Group, on Nov. 7, prompting an angry letter from state regulators.
The license conversion was a "precipitous action," according to a letter to the OCC from the New York Department of Financial Services, "taken with a week's notice and "without the full factual record of [the bank's] compliance deficiencies."
The New York state regulator says it still has authority over the bank, which has challenged that assertion in court.
The OCC move raises concerns about "regulatory arbitrage," in which banks switch supervisors to seek easier oversight, according to the letter from the state agency, which is led by New York Superintendent of Financial Services Maria Vullo.
An OCC spokesman said "the decision to operate under a state or federal charter is a business decision by the bank" and MUFG met the standards for converting its license. OCC supervisors, who have taken actions against banks for sanctions violations in the past, are overseeing the branch. The agency has ordered the firm to follow requirements that are "substantively identical" to those it faced from the state regulator, the spokesman said.
"Consolidating regulatory oversight under one primary regulator...is more effective and is consistent with the regulation of other institutions of similar scale," the bank said in a statement, adding "we have been working diligently to comply" with the state regulator's orders and "we will complete all of the remaining remediation actions required."
To be sure, other foreign-owned banks have recently consolidated their U.S. footprints, as U.S. regulators pressure them to simplify their legal structures.
When the New York branch converted its license, Ms. Vullo's department was preparing to reprimand the firm over concerns it wasn't doing enough to scrutinize whether clients are evading U.S. sanctions targeting countries such as Iran and North Korea, the letter said. The bank was fined a total of $565 million in 2013 and 2014 for similar issues.
The bank kicked state supervisors out of the branch on Manhattan's Avenue of the Americas on Nov. 7, the day of the license conversion, according to the letter. The supervisors hadn't finished an examination of the bank's compliance programs, but the bank was aware they had concerns, according a person familiar with the matter.
MUFG has significant U.S. operations, including California-based MUFG Union Bank, which is regulated by the OCC. The New York branch in question held about $135.3 billion in assets as of March, according to a recent legal filing.
Keith Noreika, a former banking lawyer who has been implementing a deregulatory agenda since he became acting leader of the OCC in May, counts MUFG as a former client. His status as a temporary government employee has raised bipartisan concerns because it allows him to skirt ethics restrictions that would normally apply to someone in his position.
Mr. Noreika wasn't involved in the MUFG license decision, the OCC spokesman said, adding that the comptroller recused himself "out of an abundance of caution because he had represented MUFG on a similar matter." The spokesman didn't answer a question about the nature of the "similar matter."
This week may be Mr. Noreika's last on the job if the Senate takes an expected vote on President Donald Trump's permanent nominee for comptroller, former banker Joseph Otting.
Tensions between federal and state bank regulators have a long history in the U.S. The two groups share oversight authority, and banks can choose their primary regulator through a web of licensing rules. Regulatory agencies also may win or lose funding depending on the banks they oversee, creating an incentive for them to expand and defend turf.
To prevent banks from gaming the system, regulators have promised to consult one another when a bank wants to switch its supervisor. That process is supposed to take into account whether a bank has outstanding issues with its current regulator.
The OCC's licensing manual says that in considering an application from a state-licensed branch of a foreign-owned bank, it "draws heavily on information received from the office's current U.S. supervisor and other confidential and supervisory information available to the OCC."
MUFG notified the New York regulator on Oct. 31 that it had applied for an OCC license, according to the state regulator's letter. The next day, the OCC asked the state regulator for information about the New York branch within five business days, or by Nov. 7, the letter said.
The New York regulator asked for an extra week, citing in part the continuing examination, the letter said. On Nov. 7, the OCC approved the bank's application.
"Clearly, [the state regulator] was not given any reasonable opportunity to provide any input whatsoever," the letter says. "The precipitous nature of this approval...is without precedent and raises significant questions as to both the process and substance of the OCC's decision."
The OCC spokesman said the agency had "sufficient information" and noted that it already oversees MUFG Union Bank. "Such integrated supervision provides a more holistic view of the company."
The Nov. 13 letter details what the state regulator was preparing to tell the OCC: An independent monitor had reported the bank was "taking actions that are inconsistent with complying" with a consent order it had agreed to in 2014 related to hiding illicit transactions involving Iran and other countries, including "the termination of a competent and cooperative Chief Compliance Officer" in March and a "lack of transparency" with the monitor about transaction data problems.
The bank was about to have its supervisory rating downgraded, the letter says. That is a concern for any firm because it can be a precursor to regulatory punishment. The supervisors felt the bank hadn't resolved several issues identified in a 2016 exam, the letter said.
The monitor had also been investigating what the letter describes as a "'repeat transaction' program for certain high-risk clients in Chinese cities bordering North Korea" that "provides for not more but less scrutiny of these clients' transactions."
The monitor, hired by the state, was gathering information in the bank's Tokyo offices Nov. 8, the letter says. After the bank received its new license, it demanded the monitor exit the premises.
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November 16, 2017 02:47 ET (07:47 GMT)