Shinsei Bank failed to withhold 3 billion yen in the late 1990s for income tax payments on interest paid to clients overseas, sources close to the case said Saturday.

The Tokyo Regional Taxation Bureau filed a complaint with the government and asked the bank to pay a penalty and additional tax, the sources said.

In the 1990s, Shinsei Bank, then called the Long-Term Credit Bank of Japan, engaged in corporate-bond redemption, which included paying interest to bond buyers on behalf of debt-issuing companies.

Banks involved in debt redemption are obliged to collect withholding tax on the bond interest when it is paid domestically, but they are exempt from the obligation when interest is paid overseas.

Following the exemption rule, the LTCB did not collect tax from bond buyers because its London branch was entrusted with the business.

When the LTCB was placed under state control in 1998, the bank transferred the bond-redemption operations from London to a tax-haven island in the Caribbean and continued to refrain from collecting tax.

The Tokyo taxation bureau has determined the Caribbean branch did not handle actual transactions for bond redemption because interest payments were made by the LTCB's Tokyo headquarters, the sources said, adding the bureau concluded that the branch operations were designed to avoid tax payments.

The LTCB was owned by the government in October 1998, when it collapsed under the weight of bad-loan losses.

It was taken over by a consortium of U.S. and European financial institutions in March 2000 after all the bank's shares were sold to the group. The bank renamed itself Shinsei Bank in June that year.

Aozora Bank, formerly Nippon Credit Bank -- which went bankrupt and was nationalized in December 1998 -- is also alleged to have failed to withhold 500 million yen in income tax on interest paid overseas.