The Financial Supervisory Commiss-ion yesterday fined Chinatrust Commercial Bank (中國信託商銀) NT$10 million (US$305,500) for poor internal control and demanded parent company Chinatrust Financial Holding Co (中信金控) remove Jeffery Koo Jr (辜仲諒) from the chairmanship of its banking arm for taking advantage of regulatory loopholes to trade offshore debt.
The commission also demanded Chinatrust Financial cut its shareholding in larger rival Mega Financial Holding Co (兆豐金控) after uncovering new evidence of irregularities in the company's internal control mechanisms.
According to the commission's requirements, Chinatrust Financial needs to examine the feasibility of continuing to have Koo serve as both chairman and a board director at Chinatrust Commercial and report its findings to the regulator within one month.
Koo's vice chairmanship at Chinatrust Financial however remains intact, the commission said.
Chinatrust Financial should offload 3.9 percent of its stake in state-controlled Mega Financial to the open market within the next 12 month to buyers other than its interested parties, the commission added.
The punishment will cut the total shareholding controlled by Chinatrust Financial and its affiliates to about 11 percent from the current 15.63 percent. But it would not affect the four Mega Financial board seats that Chinatrust Financial controls, the commission said.
Apart from the NT$10 million fine, Chinatrust Commercial's Hong Kong branch will also be banned from trading stock-linked derivatives in the next year.
Prior to its announcement that it had bought as much as a 10 percent stake in Mega Financial in February, Chinatrust Financial last October bought a tailor-made package of US$390 million in structured notes through its Hong Kong branch from an unnamed foreign securities house, with a majority of the derivatives linked to Mega Financial stocks, equal to a 3.9 percent stake.
The bank funded the purchase using the US$500 million it had raised through the issuance of subordinated bonds, the money which it had said earlier would be used in overseas lending.
But, the bank then sold the derivatives to an interested third party based in Hong Kong, which was suspected of having connections to the financial group.
"After questioning him, we found that Koo exceeded his authority in approving the sale of derivatives to benefit the interested third party and had knowledge of the illegitimate use of the funds the bank had raised," the commission said.
As a result, Chinatrust Commercial has to retrieve the US$27 million profits the interested party made from the transaction, it added.
Last month, the commission announced a freeze on its approval of Chinatrust Financial's applications for the establishment of new outlets and fundraising plans.
"We hope the punishments will strengthen the financial sector's sense of legal compliance," the commission's acting chairman Lu Daung-yen (
Also yesterday, Lu penalized a number of financial institutions on his 63-year old birthday as the commission demanded that Taishin Financial Holding Co (台新金控) remove Wu Tung-hsiung (吳統雄) from his position as company supervisor over his questionable integrity and fined King's Town Bank (京城銀行) NT$2 million for having illegitimate collateral.