TOKYO, Oct 28 (Reuters) - Mizuho Financial Group looks likely to escape serious penalty in a loans-to-mobsters scandal after an outside panel said on Monday that Japan's second-biggest bank by assets did not intentionally cover up the shady lending.
But while Mizuho's president and CEO, Yasuhiro Sato, is now expected to keep his job and resume his efforts to unify the fractious "megabank" and improve its governance, Mizuho faces an uphill battle in catching up with its expanding peers.
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 "yakuza" 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.
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.
The Financial Services Agency (FSA) 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.
"NO COVER UP"
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 the March 2011 earthquake and tsunami. This 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.
Sato will likely remain president and CEO of the financial group and its core Mizuho Bank unit, people familiar with the matter told Reuters last week, allowing him to resume his reform drive and seek to bring its compliance under tighter control and establish the lender as "Asia's core bank".
The relatively light judgment from the outside panel appeared to support that outcome.
Mizuho will likely suspend Sato's pay for some period, while Takashi Tsukamoto is expected to step down as Mizuho Bank chairman, the sources said.
The bank is expected to announce its response to the findings later on Monday.
But while Mizuho wants to move beyond the scandal, the pressure may not abate quickly. 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.
Finance Minister Taro Aso, who heads the FSA, said on Friday the regulator would decide what action to take based on Monday's panel report.
LEFT BEHIND BY RIVALS
More than 30 executives will take pay cuts, and Mizuho will ask about a dozen former executives to return some of their compensation, Japanese media said.
The scandal, in addition to highlighting the pervasive reach of "yakuza" 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.
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.