Bank of the Orient probed

By John Duchemin
Advertiser Staff Writer

Three years after the federal government seized the smallest bank in Hawai'i, its new owners have been enduring another round of scrutiny, this time by regulators who have determined the owners violated federal banking regulations.

San Francisco-based Bank of the Orient, which has two branches in Hawai'i, is operating under a federal "cease-and-desist" order since May 2002 requiring the bank to examine its assets for signs of criminal activity.

The federal action, according to government documents, casts a cloud over Bank of the Orient's future, despite the bank's success in rescuing a down-and-out Hawai'i bank. The federal government may issue stiff financial penalties, limit operations or open criminal investigations of banks that fail to obey money-laundering laws.

Bank of the Orient officials declined to comment about the federal action. John Ng, the bank's chief operating officer, called it a "dated issue."

A Bank of the Orient press release from May 2002 said the bank had hired Virginia-based consulting firm Secura Group to "assist us in correcting these deficiencies."

Bank officials did not say how much progress has been made over the year, or whether the bank had satisfied the federal government's demands.

The Federal Reserve has not yet lifted its order, which spokeswoman Lili Ruiz said would be the final sign the bank has satisfied the government. Ruiz declined further comment.

Bank of the Orient, a $500 million San Francisco bank that has branches in California, Hawai'i and China, bought the assets of Bank of Honolulu in October 2000, rescuing a local institution that had crashed so badly, the federal government had seized its branches.

Under its new owners, the former Bank of Honolulu, which had shrunk by hundreds of millions of dollars, reopened with a new low-key, unobtrusive image — as opposed to its old owner Sukamto Sia, a flamboyant Indonesian businessman who invested in skyscrapers, gambled in Las Vegas, went bankrupt and was jailed last year on a bankruptcy fraud conviction.

Since taking over, Bank of the Orient has carved out a tiny niche as the smallest bank in Hawai'i. It has closed two of the four former Bank of Honolulu branches, but $50 million in deposits have held steady in the two remaining branches, said Michael Higa, Bank of the Orient's Hawai'i manager.

The federal order, however, represents a setback for an organization that despite its small size was one of the first American banks to do business in China.

In May 2002, the Board of Governors of the Federal Reserve System — one of the government's main banking regulatory agencies — ordered Bank of the Orient to reform its systems.

The order said the bank needed to correct "deficiencies and violations" of the Bank Secrecy Act, a federal law designed to prevent money laundering and other criminal use of the banking system.

The Bank Secrecy Act requires banks to report any financial transactions above $10,000, and any suspicious financial activity, to the government.

Under the USA Patriot Act of 2001, passed in the wake of the Sept. 11 terrorist attacks, the Bank Secrecy Act has been further tightened, increasing reporting requirements.

Federal Reserve regulators ordered Bank of the Orient to hire an independent investigator to review its anti-money laundering compliance measures, and to conduct a "forensic review" of accounts and transactions between January 1999 and March 2002 to see whether "suspicious activity" was "properly identified and reported."

Regulators also said the bank had:

• An inadequate supervisory structure, with the bank's board not having enough supervisory power over its officers.
• Inadequate capital levels, and a need for improved loan loss reserve levels. In the wake of its purchase of Bank of Honolulu, Bank of the Orient's reserve of top-quality assets, known in banking as the "Tier 1 ratio," had dropped below 10 percent total assets, the federally mandated level for most banks of its size.
• Asset quality problems and a need for better credit and risk management procedures.

It is unclear what steps Bank of the Orient has taken to comply with the government's demands, since the bank declined comment on its progress. But the bank's asset quality has improved in recent months, with its Tier 1 ratio rising back above 10 percent of total assets. The level of overdue loans has dropped by two-thirds in the past year.

Reach John Duchemin by e-mail at jduchemin@honoluluadvertiser.com or by phone at 525-8062.