Citibank Japan ordered to close four offices over legal breaches

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Citibank Japan, part of U.S. banking giant Citigroup, has been ordered by regulators to close four key offices in connection with multiple violations of laws and regulations, the Financial Services Agency said Friday.

The move, which hits those offices central to the bank’s strategy of catering to affluent customers, represents a fierce rejection of Citibank’s decades-long drive to pioneer retail banking services in Japan.

Citing compliance and governance problems, the FSA ordered Citibank to suspend all new operations beginning Sept. 29 at its branch in the Marunouchi business district of Tokyo, and at its offices in Nagoya, Osaka and Fukuoka. All of these offices deal exclusively in private banking for wealthy customers who have more than 300 million yen in net assets.

The FSA will then revoke the licenses of the four branches on Sept. 30, 2005, thereby finalizing their closure.

The FSA ordered Citibank to stop accepting new foreign currency deposits for one month, from Sept. 29 to Oct. 28. It also slapped the bank with orders to improve its surveillance both in Japan and in Citibank’s New York headquarters, to catch compliance violations.

An FSA investigation, undertaken between November and April, has revealed that bank employees on different occasions violated laws and regulations.

These acts included providing money to clients who were subsequently prosecuted for stock price manipulation; defrauding customers of more than 1.8 billion yen in foreign currency deposits; lending money to beef up documents to borrow public funds from a municipality; and taking customers’ passwords out of the office.

The FSA ordered the bank to submit a program aimed at correcting its business practices and report progress to the FSA every three months.

The FSA’s orders will not affect services to existing retail customers at other branches. Private banking customers who choose to stay with Citibank will have their accounts transferred to other branches, where account management will be subject to strict internal controls, the bank said.

Citibank said it “accepts the basis for the orders” and “places the utmost priority on complying with the FSA’s directives.”

It has created a new chief executive officer position to oversee all businesses in Japan, dismissed six officers, cut pay for eight employees and issued formal reprimands to others.

Earlier this week, the Securities and Exchange Surveillance Commission urged the FSA to take punitive measures against Citibank for misleading customers into investing in structured bonds, a complex financial product, and thereby infringing on Japan’s Securities and Exchange Law.

Friday’s action comes in the wake of a string of compliance problems at the world’s largest financial services company.

In June, the FSA ordered Citibank to improve its management of customer information after losing data on 123,690 banking, credit card and investment transactions during shipment to the bank’s Singapore data center.

The agency said Citibank took about a month to inform customers of the data loss.

“We found so many rampant and repeated abuses, the punishment had to have considerable weight,” an FSA official said.

As to why Citibank made such repeated abuses, the official said New York headquarters imposed unrealistically high targets for private banking operations in Japan. The bank tied salaries closely to sales performance, giving incentive to managers and employees to break rules if it meant large profits, he said.

Citibank, which opened its first Japanese branch in Yokohama in 1902, shifted its focus to retail banking in the 1980s.