Citibank Japan reprimanded by regulators

The US bank is punished for inadequate internal controls in the third such disciplinary action since 2001.

Japan's Financial Services Agency (FSA) has issued an administration action letter against Citibank Japan for "fundamental problems" with its internal controls regarding money laundering and protecting the bank against organised crime. The letter, issued Friday, suspends "all sales operations pertaining to all products handled by the retail banking division" for the period ranging from July 15 to August 14 this year. Citibank Japan's wholesale banking operations in Japan are unaffected.

The action represents the third such reprimand for Citibank in Japan over the past decade, making it the most censured foreign bank in Japan when including the revocation of its private banking license in 2004. Behind Citi, Credit Suisse had its private banking license pulled in 1999, and received a reprimand regarding missing order tickets at its asset management business in 2006. What was then Credit Suisse First Boston also received a reprimand in 2002 regarding short selling.

The latest FSA statement emphasises that the problems were highlighted in a former administrative action letter in 2004 but have still not been resolved. The 2004 reprimand was itself partly a follow-up of a 2001 reprimand, which stated that Citi "needs a fundamental restructuring of its procedure of operations and management; ensuring the senior management to commit to the improvement plan and improving legal and compliance function, etcetera (pursuant to Article 26-1 of the Banking Law)". Article 26-1 was the same article invoked on Friday.

The latest punishment is not as serious as the one prompted by the 2004 infractions, when Citi lost its private banking license and had to close down its Marunouchi branch (from which the private banking business had been conducted) as well as three city branches. The main difference is that Friday's reprimand is based on the possibility that wrongdoing is occurring through lax controls, whereas in 2004 the FSA believed Citi was indeed responsible for lax controls leading to "serious violations of laws and regulations", according to the FSA press release at the time.  

Friday's letter argues that the database used for screening money laundering has not been updated since 2004, making it "meaningless". It also states that Citibank could be unwittingly dealing with organised crime organisations, since adequate notification systems on suspicious transactions are not in place.

The FSA singles out Citibank Japan's board of directors and management committee and instructs them "to clarify their business attitude towards the establishment and enhancement of governance and internal control systems". Internal control functions, review methods and audits are also required to be "restructured".

In May 2004, Douglas Peterson was appointed CEO of Citibank Japan (or Citibank N.A., Japan branches, as it was known before being locally incorporated and renamed Citibank Japan in 2007) to deal with the private banking issue. Several executives in Japan and the US left the bank in the wake of the scandal.

Today, Peterson is chairman of Nikko Citi Holdings after being replaced in September 2008 by Darren Buckley, current CEO and president of Citibank Japan. Fabio Fontainha is head of Citibank Japan's retail banking division, while Hiroaki Nigo is chief compliance officer. Nikko Citi Holdings and Citibank Japan are both 100% owned subsidiaries of Citigroup.

Some Japanese commentators were not surprised by the developments. "It makes you wonder if anything has changed in the world of US banking. You can see Citi getting into serious trouble in Japan for the third time in less than a decade, just as Wall Street banks are scaling up to pay record bonuses for the past year as if the banking crisis had never happened," one Nomura banker told FinanceAsia.

However, a foreign lawyer in Japan who deals frequently with Citi, said that "the situation [at the bank] has improved massively since 2001. They have spent a great deal of time and money on compliance issues and improving reporting lines."

One of the changes introduced after the 2001 reprimand was the creation of a country officer, although that failed to stop the problem in 2004. The country officer was supposed to oversee operations on the ground in Japan, as opposed to having the bank rely on directives from unit heads in the US.

In a press release issued Friday, Citi made a "sincere apology" and pointed out that it was Citi which first voluntarily alerted the regulator to a possible money laundering problem. Citi also promised to identify those responsible and take appropriate disciplinary action.

Stephen Church, the Japan economist at Japaninvest in Tokyo, noted that Citi has been in Japan for over 100 years and its powerful position was cemented by the US military occupation after World War II. "They have a rather colonial attitude to Japan," he said.

But Church said the FSA has its own agenda as well. "The timing of the reprimand in 2004 against Citi was partly motivated by fear that Citi was about to bid for UFJ Bank, which the Japanese authorities wanted to merge with Bank of Tokyo Mitsubishi. By reprimanding them, they sent them a strong signal that they didn't want full-line foreign banks competing in Japan."

Today Citi has a much weaker presence in Japan: the US bank has been forced to sell its retail brokerage, Nikko Cordial Securities, and is also selling off its asset management business. A couple of years ago, Citi had ambitious plans to double the number of its retail banking branches in Japan.

Following the latest apology, and "business improvement plan" ordered by the FSA, it will be interesting to see whether Citi resolves the issue once and for all, or whether it will further extend its lead at the top of the "bad boys" league table.

¬ Haymarket Media Limited. All rights reserved.
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