Sept. 17 -- Citigroup Inc., the world's largest financial company, was ordered to close its private banking operations in Japan after serious breaches were found by the country's regulator.
Japan's Financial Services Agency ordered Citigroup to halt business at four private banking branches after failing to conduct proper checks against money laundering. It also uncovered fraud in Citigroup's retail unit. Citigroup, which has about 400 employees catering to wealthy individuals in Japan, said it will shut its private banking business in the country and sincerely apologized.
It's the second time this week the New York-based bank expressed regret for its actions. Citigroup apologized on Tuesday for 10 billion euros ($12.2 billion) of European bond sales that roiled markets and sparked an investigation in the U.K. Chief Executive Officer Charles Prince has said he plans to put an end to the regulatory problems and lawsuits that have dogged the firm in recent years.
"This is going to damage Citigroup's image in Japan and may hurt their other businesses there," said Yoji Takeda, who helps manage $250 million as head of Japanese equities at RBC Investment Management (Asia) Ltd. in Hong Kong. "Private banking is new in Japan, but it's lucrative and Japanese companies are starting to get into it."
Failing to Check
The private bank provides services for wealthy customers who have more than 100 million yen ($909,256) of financial assets in the word's second-biggest economy. Japanese households held 1,426 trillion yen of financial assets at the end of June, the highest in three years, according to the Bank of Japan.
The infractions by Citigroup included failing to properly check clients. The bank handled transactions for a client who had been reported by affiliates overseas about suspicious transactions.
It "allowed transactions that could be suspected of being associated with money laundering by permitting an account to be opened without proper account procedures," the FSA said.
Citigroup also advanced a loan to clients in Japan who were subsequently prosecuted for manipulation of a publicly traded stock with proceeds from the credit, the regulator said.
Citigroup's consumer banking department in Japan was told to suspend taking new foreign currency deposits from new customers for one month while it improves controls. The FSA said a branch manager "fraudulently accepted" more than 1.8 billion yen of deposits over a seven-year period.
Uncovering Breaches
"A number of acts injurious to public interests, serious violations of laws and regulations and extremely inappropriate transactions were uncovered," the FSA said.
Citigroup's private bank operates out of a branch in Marunouchi in central Tokyo and offices in Nagoya, Osaka and Fukuoka, according to its Japanese Web site.
Citigroup's global private banking unit had profit of $551 million in 2003, the fifth year of record earnings, about 3 percent of group net income, according to its annual report. Citigroup doesn't give figures for Japan in the report.
Citigroup, which has about $1.4 trillion of assets and 260,000 employees globally, opened its first Japanese branch in Yokohama in 1902. It had 3.7 trillion yen of deposits in Japan in 2003, up from 1.9 trillion yen three years earlier.
No other action was taken against Citigroup's retail bank. Its investment banking operations were unaffected.
Suspending Operations
Citigroup's private banking business was suspended from Sept. 29 for one year to allow it to close existing transactions, regulators said. After that the approvals for the four offices will be revoked. Citigroup can apply to reopen the business at a later date. The bank will be subject to close scrutiny, officials said at a press conference to announce the sanctions.
The penalty is among the harshest handed out by Japanese regulators. Credit Suisse Financial Products, a former unit of Credit Suisse Group, had its license canceled in 1999 for obstructing a regulatory probe. The unit was later found guilty of violating securities rules and blocking a government investigation, the first criminal conviction of a bank in Japan.
It's the third time this year Citigroup has been sanctioned by Japanese regulators.
NikkoCiti Trust and Banking Corp., a venture between Nikko Cordial Corp. and Citigroup, was told by the FSA in April to halt part of its trust banking business from the end of that month.
NikkoCiti was found to have failed to have segregated assets sufficiently and didn't properly reconcile investment profits in client accounts, the FSA said in a statement on April 23. The breaches "caused actual losses," the FSA said.
Regulators in June ordered its Citibank NA unit to improve its data management operations after customer information was lost. The bank had to submit a business improvement order to the FSA.
Starting Investigation
The U.K.'s Financial Services Authority on Aug. 18 started an investigation into bond trades by Citigroup on Aug. 2 that were equivalent in size to about all government debt sales by Germany, Europe's biggest economy, in the past two months.
Citigroup sold the bonds and bought some of them back half an hour later at lower prices giving traders at other firms who bought the bonds little time to protect themselves against the decline.
In the U.S., Citigroup agreed in May to pay $2.65 billion to investors in WorldCom Inc., the U.S. telecommunications company that in 2002 filed the biggest bankruptcy. WorldCom investors accused Citigroup of hiding financial risks when it helped the phone company sell $10 billion of debt in 2001.
In June the bank was fined $70 million by the Federal Reserve for violating a U.S. law on deceptive lending and lying to banking regulators.
