* Mizuho didn't intentionally deceive over mob loans, panel finds
* Bank president keeps job; pay suspended for six months
* FSA tipped to avoid harsh penalty but pressure may grow
By Taiga Uranaka
TOKYO, Oct 28 (Reuters) - Mizuho Financial Group did not intentionally cover-up loans to "yakuza" mobsters, an outside panel said on Monday, a verdict that increases the likelihood Japan's second-biggest bank by assets will escape serious penalty over the scandal.
Mizuho said its president and CEO, Yasuhiro Sato, would keep his job but have his pay suspended for six months. While that should allow him to resume his efforts to unify the fractious "megabank" and improve its governance, Mizuho faces an uphill battle in catching up with its expanding peers.
"It's extremely regrettable that we failed to do enough to eliminate transactions with anti-social forces," Sato told a news conference, using a common euphemism for organised crime. "I would like to apologise from the bottom of my heart for causing confusion."
The external panel of lawyers hired by Mizuho said in a report that Mizuho's management was lax in its handling of the loans to gangsters, but did not intentionally mislead regulators with an initial false report on the extent of the problem.
"We can say there is no possibility" of a cover-up by the bank, said panel leader Hideki Nakagome, announcing the results of the three-week investigation.
Finance Minister Taro Aso withheld judgment on the report and Mizuho's response, but people familiar with the matter have said the Financial Services Agency, which Aso heads, was unlikely to impose further penalties on the bank as the panel did not find intentional evasion.
But Mizuho is not off the hook yet.
While the bank wants to move beyond the scandal, some members of parliament have called for Sato to testify on the affair and, people familiar with the matter say the FSA is under pressure to appear tough, as questions arise over why it did not uncover the shady loans earlier.
In the latest scandal involving a major Japanese company's ties to the underworld, regulators disclosed in late September that Mizuho had learned in late 2010 of the $2 million in mob loans. The 230 small transactions, mostly car loans, were made by Mizuho consumer-finance affiliate Orient Corp and were among bulk loans the bank later bought from Orient.
"NO COVER UP"
The FSA last month ordered Mizuho to improve business practices after the bank did almost nothing about the mob lending for more than two years.
Mizuho initially said that knowledge of the loans went only as far as the bank's compliance officers, but days later the bank acknowledged that the transactions had been reported to top officials, including Sato, at board meetings.
Sato said he had been "in a position to know" about the mob loans but had not noticed them.
The panel of lawyers said there was no intention to cover up the responsibility of the top management from the FSA or malfeasance in keeping the mob loans after discovering them.
The bank failed to "recognise the gravity" of dealing with organised crime and failed to consider the loans as the bank's own, even though it had bought them from Orient, the panel said.
In addition, the panel said, the bank was preoccupied with addressing a massive technical-systems failure in the wake of a March 2011 earthquake and tsunami. That prevented management from prioritising the need to break ties with mobsters, it said.
The scandal hit Mizuho just as it was seeking to improve its corporate governance and accelerate growth, especially in overseas markets.
Mizuho's financial ties to mobsters were "an extremely serious problem and the bank needs to make sure it won't happen again," Finance Minister Aso told reporters. He said the regulator would carefully review the panel's report in deciding what, if any, further action to take.
While Sato kept his job, Takashi Tsukamoto resigned as chairman of Mizuho's core banking unit, while remaining chairman of the holding company. The company imposed pay cuts on 42 executives and will ask 12 former employees to return some of their compensation.
LEFT BEHIND BY RIVALS
The scandal, in addition to showing the pervasive reach of crime syndicates and other underworld elements throughout Japan Inc, highlighted the lapses in corporate governance that Sato himself has been struggling to fix.
The bank, 13 years after its formation in a merger during Japan's financial crisis, remains riven by factions associated with its legacy banks: the Industrial Bank of Japan, Dai-Ichi Kangyo Bank and Fuji Bank.
Sato denied that the poor level of corporate governance was a hangover from the three-way merger. But the tussling fiefdoms have fostered a culture of protecting turf and refraining from taking broad responsibility for problems, Mizuho bankers say.
As a result of this disunity and other factors, the company has failed to match its main competitors, Mitsubishi UFJ Financial Group and Sumitomo Mitsui Financial Group , in key measures of profitability.
Even if Mizuho escapes the mob scandal without crippling penalties, it may find itself constrained.
"I don't think Japanese regulators will willingly approve overseas acquisitions by Mizuho for a while, given the scandal," said a financial industry analyst in Tokyo, who declined to be named given the sensitivity of the matter.
Sato denied that Mizuho lagged its rivals in international operations. But, he acknowledged, "For the past month, I have not been able to make overseas trip at all, so there has is an impact on what the expansion I am promoting with my top-level counterparts overseas."