By Nathan Layne
TOKYO (Reuters) - Japan's securities market watchdog is investigating whether Deutsche Bank AG
The Securities and Exchange Surveillance Commission (SESC) found evidence of potential infractions during a regular audit of Deutsche Securities Inc, the German bank's investment banking arm in Tokyo, said the sources, who spoke on condition they not be identified because the investigation is ongoing.
The employees had booked large expenses for entertainment involving pension fund executives, they said. This raised red flags for the regulators because the pension fund executives involved are legally considered public employees, subject to anti-bribery statutes, since they handle part of the national pension scheme.
Deutsche had already started its own investigation into the matter before the SESC began its audit in May, and has stopped marketing directly to such pension funds as part of a review of its sales and compliance practices, sources said.
The bank's efforts to address the problem could be a mitigating factor when the SESC makes a decision in coming weeks on what action to take. It is possible the regulator will not pursue public sanctions, which could range from an order to improve compliance to harsher penalties, the sources said.
Details of the alleged expenses, including the amounts spent and the identities of the pension fund executives, were not immediately available. The sources said the expense reports of a handful of Deutsche employees who market products and strategies to pension funds are being scrutinized as part of the probe.
The SESC has put employee pension funds under the spotlight since Tokyo-based money manager AIJ Investment Advisors was shut down by regulators and its top executive arrested for defrauding pensioners out of more than $1 billion in 2012. The scandal triggered an industry-wide review by regulators of companies that manage pension money that is continuing.
The SESC is also checking the entertainment of pension fund clients in a regular inspection at Goldman Sachs
Deutsche Bank and Goldman Sachs declined to comment. The SESC said it was its policy not to comment on individual cases under investigation. The individuals involved in the cases could not be immediately reached for comment.
Given the risk of regulatory and criminal sanctions, companies should in principle never pick up the tab for a public official, said Tomoki Debari, a partner at Anderson Mori & Tomotsune and expert on Japan's anti-bribery laws. Debari was asked about the law in general terms without being aware of the names of the companies involved.
An exception would be a reception, where the setting is more public and no one official receives special treatment, he said.
Debari said this guideline would apply to securities companies seeking to do business with employee pension funds: "My advice would be you shouldn't dine together at the same table," he said. "Unless you split the bills."
Wining and dining by brokers and late-night drinking sessions have traditionally been a regular practice in cementing business ties in Japan.
Tokyo created a code of ethics for public employees after a 1998 scandal in which finance ministry officials were arrested for accepting special treatment - mostly meals - from officials of banks they were supervising.
That prompted the financial industry to tighten its policing of client entertainment. But guidelines for entertaining pension fund executives were rarely enforced, financial industry sources said.
In June the SESC recommended sanctions against Tokyo-based investment firm KTOs Capital Partners for spending 2.6 million yen ($26,000) to entertain the board chairman and others at an employee pension fund in the northern prefecture of Hokkaido over a two-year period, citing the chairman's status as a quasi-public official.
It marked the first time the SESC had sought to punish a company for excessive entertainment. Based on that recommendation the Kanto Local Finance Bureau ordered KTOs to shut down for three months.
In the KTOs case, the SESC invoked a provision in the financial instruments law that prohibits companies from providing "special benefits" to clients in connection with the forging of business contracts. The "special benefits" can include entertainment that is considered beyond social norms.
Working in co-ordination with the SESC, prosecutors in Hokkaido also brought a criminal case and indicted the pension fund chairman and two KTOs executives in July on separate bribery charges. According to the indictment, the KTOs executives paid the pension fund chairman 2.5 million yen ($25,000) in cash in return for giving the Tokyo investment company business.
The pension fund chairman and KTOs executives could not be reached for comment. The first court hearing is scheduled for Friday.
(Additional reporting by Noriyuki Hirata, Chikafumi Hodo and Emi Emoto; Editing by Neil Fullick and Mark Bendeich)