David Mandl on Tue, 21 Sep 2004 17:04:53 +0200 (CEST)

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<nettime> Citibank forced to suspend private-banking operations in Japan

This is quite a serious penalty (unless it gets overturned).  U.S.
regulators take note.

The proof that the authorities in Japan, the EU, etc., are actually feared 
is in Citibank's respectful, no-bullshit response (ditto Microsoft, for 
example--though of course they contested the charges against them).  The 
Financial Times reported that officials of Citibank Japan "sincerely 
apologized" in their statement.  In contrast, Morgan Stanley was so flip 
about a fine imposed on them in the U.S. last year that they were actually 
scolded by the government and made to issue another statement apologizing 
for the first one.



Citigroup Is Dealt Blow
By Japanese Regulators

September 17, 2004 1:48 p.m.

TOKYO -- Japanese financial authorities ordered Citigroup Inc. to
suspend its private-banking operations, in one of the harshest
penalties ever handed down against a bank in Japan.

The Financial Services Agency on Friday it would revoke subsidiary
Citibank N.A.'s effective license to serve high net-worth customers.
In a strongly worded statement, the financial regulatory body
criticized the unit for not having properly functioning internal
controls, adding that it found a long list of "serious violations of
laws and regulations" and "extremely inappropriate transactions."

The order shuts down one Tokyo branch, as well as satellite offices
in three major cities.

The FSA said that over a three-year period, Citibank employees misled
customers about the risk involved in some products, tied loans to the
purchase of specific investments, allowed transactions that looked
like money laundering and extended loans that would later be used to
manipulate publicly traded stock, it said. Regulators also said
Citibank's Japanese operations had ignored warnings from Citibank
branches in other countries about problems with some clients.

The punishment is the strongest against a bank since a Credit Suisse
unit had its license pulled in 1999, according to FSA officials. The
officials said that details of the investigation had been passed on
to another regulatory body that might consider criminal charges

The closure of the private-banking business in Japan will have little
material impact on Citigroup's overall performance. Citigroup posted
net profit of $17.9 billion in 2003, of which only 3% came from the
global private banking business. Though the unit's services are
heavily promoted in Japan, they have fewer than 5,000 customers.

Still, the severity of the punishment and the nature of the
complaints will certainly further damage Citigroup's
already-tarnished reputation. Earlier in the week, the financial
services giant acknowledged that a huge trade it conducted in thinly
traded European government bonds was problematic and had invited the
scrutiny of local regulators, as well as the ire of other banks that
lost millions of dollars in the trade.

It's likely that Citigroup's other businesses in Japan will suffer in
the wake of the FSA's actions. Japanese clients often halt business
transactions with group companies when one unit falls foul of
regulators. Citibank, which has been operating in Japan since 1902
and has 9,000 employees, also has a retail banking business and a
securities arm in Japan.

Citigroup has been on a campaign to rehabilitate its image after
scandals involving controversial financing arrangements for troubled
clients like Enron Corp. and WorldCom Inc. brought regulatory
inquiries and shareholder lawsuits. Citigroup's reputation is also
scuffed by a research scandal in which a high-profile analyst wrote
glowing reports of companies Citigroup was doing business with.

The FSA investigation portrayed a culture within Citigroup's Japan
operations that tolerated lax and potentially criminal practices as
long as aggressive sales targets were met. FSA officials said that
Citibank salespeople routinely took advantage of Japanese customers,
many of whom were wealthy, suggesting unrealistic returns on
investments and encouraging them to purchase complicated, derivative
products they didn't understand.

In some cases, the salespeople sold derivative products based on U.S.
Treasuries and Japanese government bonds at prices well above what
the market would have indicated their price should be. Though FSA
officials declined to say how much higher than fair value the prices
were, they indicated Citibank salespeople put unreasonably high
markups on the products.

The private-banking arm also violated Japanese banking law by
brokering and soliciting unauthorized products, including foreign
real estate investments, foreign life insurance policies and deals
involving art.

Citibank said it was taking the appropriate measures to prevent the
situation reoccurring. Six officers, including former chief country
officer for Japan Charles Whitehead and head of private banking
Koichiro Kitade, have left the company to take responsibility for the

"Citibank Japan is taking the measures necessary to enhance its
governance and internal control systems in order to meet the
requirements of local law and regulation and to address the
deficiencies identified by the FSA," the bank said in a statement.

The FSA's action affects all of Citibank's private-banking operations
in Japan, which will begin an orderly one-year wind-down beginning
Sept. 29. As of Sept. 30, 2005, the approval orders -- permissions to
operate that are similar to licenses -- issued to one of the Tokyo
branches and three satellite offices in other major Japanese cities
will be revoked.

Dave Mandl

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