Citigroup Inc. was ordered Friday to close its private banking operations in Japan after a regulator there found serious breaches.
The Financial Services Agency told Citigroup to halt business at four private banking branches because of failure to conduct proper checks against money laundering. It also uncovered fraud in the retail unit.
Citigroup, which has about 400 employees catering to Japan's wealthy, said in a statement Friday that it "accepts the basis for the orders" and said it would shut the private banking business.
[Citi named a new chief executive for the Japan operations, Douglas L. Peterson, and said it would review its compliance and sales practices.
Analysts said that the shut down would minimally diminish Citi's earnings. The Japan private banking unit is estimated to contribute less than 1% to total earnings. But analysts say it does serve as another blow to the reputation of Citi.
Jeffrey Harte, an analyst at Sandler O'Neill & Partners LP noted that Citi would not be the first global bank to exit private banking in Japan. UBS AG voluntarily left in the last few years, he said, and Credit Suisse was asked to leave.]
For a year starting Sept. 29 Citi's business will be merely suspended, so pending transactions can be completed, regulators said. Then permits will be revoked, though Citi can apply to reopen the offices later.
The penalty is among the harshest ever handed out by Japanese regulators. No action was taken against Citi's retail bank, and its investment banking operations were unaffected.
Three days earlier Citigroup expressed regret for another embarrassment - $12.2 billion of European bond sales that roiled markets and sparked an investigation in the United Kingdom.
Citi's chief executive, Charles Prince, has said he wants to put an end to the regulatory problems and lawsuits that have dogged the company in recent years.
The Japanese action will "damage Citigroup's image in Japan and may hurt their other businesses there," said Yoji Takeda, who helps manage $250 million as the head of Japanese equities at Royal Bank of Canada's 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."
Citi's private bank provides services for customers who have more than $910,000 of financial assets. Citi's infractions included failing to properly check customers; it handled transactions for one whom affiliates overseas had reported for suspicious transactions.
The bank "allowed transactions that could be suspected of being associated with money laundering by permitting an account to be opened without proper account procedures," the Financial Services Agency said.
Citigroup also advanced a loan to clients in Japan who were later prosecuted for manipulation of a publicly traded stock with proceeds from the loan, the regulator said.
The company's consumer banking department in Japan was told to suspend taking foreign currency deposits from new customers for one month while it improves controls. The Financial Services Agency said a branch manager "fraudulently accepted" deposits over seven years.
"A number of acts injurious to public interests, serious violations of laws and regulations, and extremely inappropriate transactions were uncovered," the agency said.
