6 MIN. DE LECTURA
* Bank fined $180 mln for AML violations, lax Panama oversight
* Taiwan prosecutors gathering documents for local probe
* Mega Financial chairman says bank didn't launder money
* Says bank failed to declare a rejected suspicious remittance (Adds travel ban on Mega Financial's ex-chief, assistance of current chief)
By Liang-Sa Loh and J.R. Wu
TAIPEI, Aug 23 (Reuters) - Taiwan is investigating if Mega Financial Holding Co and its banking unit broke local criminal laws in a case that led to U.S. authorities fining the state-controlled group $180 million for anti-money laundering violations.
New York authorities on Friday slapped Mega International Commercial Bank with the fine for violations that included lax attention to risk exposure in Panama, the first time in a decade that a Taiwan-based financial institution has been penalized by U.S. authorities.
The fine is a major embarrassment for the Taiwan government because Mega Financial, whose management has close ties to key government officials, is an industry pillar in the island's financial system.
The disciplinary action comes as anti-money laundering (AML) controls at banks in Greater China are under intense scrutiny abroad, following a series of high-profile judicial investigations and regulatory probes in the United States and Europe.
Taiwan authorities are examining documents from Mega Financial and its banking unit as part of the investigation, Chang Chieh-chin, deputy head prosecutor with the Taipei District Public Prosecutors Office, told Reuters by telephone.
The former chairman of Mega Financial Tsai Yeou-tsair is a defendant in the case and has been banned from travelling outside of Taiwan, Chang said, adding that current Chairman Shiu Kuang-si was asked into the prosecutors office late on Tuesday to assist with the investigation.
Tsai has quit as a board director of Cathay Financial Holding Co, another Taiwanese firm, due to personal reasons, Cathay said in a statement Tuesday.
Prosecutors also are reviewing information from the island's finance ministry and Financial Supervisory Commission regarding the matter.
"We are gathering information and will review it to see if there has been any violation of criminal law in Taiwan," Chang said.
The New York State Department of Financial Services (DFS) said Mega's U.S. compliance program was a "hollow shell" with insufficient transaction monitoring and reporting controls and inconsistent compliance policies.
The bank's compliance staff also lacked familiarity with U.S. AML regulations while several were also conflicted because they held multiple roles, the DFS said in a court document.
The DFS found that nearly $11.5 billion of credit transactions took place between Mega's New York and Panama branches in 2013 and 2014. "The bank's head office was indifferent toward risks associated with transactions involving Panama," despite the fact it was recognised as a high risk jurisdiction, the DFS said in a statement.
Mega Financial chairman Shiu defended the bank's conduct, saying it did not help customers launder money overseas. Mega International Commercial's New York branch failed to report a "suspect transaction" to U.S. authorities, as required by law, he told Reuters.
Mega's branch in Colon, Panama, had closed an account by a customer from Central or South America because it was deemed a suspicious account, he said.
When money was remitted to the shuttered account, the branch rejected and returned the funds to the originating bank, he said. However, under U.S. rules, remittances involving suspicious accounts must be declared to New York financial authorities, which Mega failed to do, he said.
Mega Financial said in a statement that about 200 corporate customers are mentioned in the Panama Papers, most of whom are Taiwanese firms with offshore banking accounts. It said it was checking the identities of these customers.
The leak earlier this year of more than 11.5 million documents, the so-called Panama Papers, put a spotlight on the shadowy world of offshore companies used for tax evasion, prompting authorities across the world to investigate possible financial wrongdoing by the rich and powerful.
Mega Financial shares slumped 6.3 percent on Monday, after news of the U.S. fine. They were down 0.2 percent on Tuesday.
Mega International Commercial has two branches in Panama: one in Panama City since 1974 and one in the Colon Free Zone since 1982, according to the bank's website.
The bank, which was created from the merger of two state-run local banks more than a decade ago, is one of Taiwan's largest banks by asset size. It is viewed by analysts as a well-connected financial group and its head is appointed by the government.
Shiu, the brother-in-law of Taiwan's central bank governor, was appointed by the finance ministry this month as chairman of Mega Financial. He had been its president till 2014, before leaving to join other state-run banks in Taiwan.
Chinese banks' aggressive overseas expansion has met with a number of regulatory hurdles in recent years.
Last year the U.S. Federal Reserve instructed both Bank of China (BoC) and China Construction Bank Corp to improve their anti-money laundering (AML) procedures.
In Spain, six Industrial and Commercial Bank of China bankers were arrested in February, suspected of facilitating money laundering and fraud. The bank has said it implemented AML regulations and operated strictly within the law.
Many Chinese banks are now beefing up their risk management and compliance controls in response to the crackdown, Reuters reported in June. (Additional reporting Faith Hung and Emily Chan in TAIPEI and Michelle Price in HONG KONG; Editing by Muralikumar Anantharaman)