Citigroup, or rather, its Japan subsidiary Citibank Japan, has gained the dubious distinction of being censured twice by Japan’s financial watchdog for what appear to be similar misdemeanours.
Much of the problem stems from the inclusion of what could only be described as some very unsavoury customers in Citi’s rather curious database (the sort who might possibly sport missing pinkies and lurid tattoos) who, according to the FSA, could have been conducting money-laundering operations through Citibank.
Worse still, some of these customers are apparently the same – or related to those – singled out back in 2004 when Citi first got into hot water with Japan’s authorities over compliance issues.
Japan’s Financial Services Agency on Friday banned Citi from selling retail financial products in Japan for a month, saying it had failed to take sufficient measures to prevent “suspicious transactions, including money laundering”. The group has been ordered to revamp its governance, internal controls and management structure, and has been barred from advertising retail banking products or soliciting retail business in Japan during the ban, which begins on July 15.
The penalty will not affect business with institutional clients, according to Citi, but as the FT noted, it’s a huge embarrassment for the group, which was forced to shut its Japanese private banking business in 2004 after being similarly accused of breaking rules and having lax controls. The earlier punishment cost Citi dearly in missed business opportunities.
This time the penalty is milder, but it’s exactly what Citi doesn’t need right now. The FSA’s action came just days after Ajay Banga, the head of Citi’s Asia-Pacific arm, announced he was quitting to join MasterCard, leaving Citi leaderless in the region.
They also come as Citi shrinks its presence in Japan – which it once saw as a leading market – by selling businesses to bolster its battered balance sheet and repay billions of dollars in US government aid.
Citi is currently poised to sell Nikko Asset Management, one of Japan’s largest asset managers, most likely to Sumitomo Trust. Citi has made no secret of its eagerness to clinch the deal before the end of June – not least in order to include the sale’s proceeds in its second-quarter results.
Stepping up the pace, Citi may also announce a buyer for its Japanese trust bank unit as early as next month, with interested parties including Nomura Holdings and Sumitomo Trust & Banking, Bloomberg reports on Monday, citing the Nikkei newspaper.
The sales follow Citi’s deal in late April to sell Nikko Cordial, Japan’s third-largest broker, which it acquired for $11bn just two years ago, to Sumitomo Mitsui Financial Group.
So how does a nice bank like Citi end up with a client list like that? Apparently by not bothering to purge its client list of blackbanned customers from 2004. The FSA said Citi had failed to develop adequate control systems for the detection, monitoring and follow-up of suspicious deals – not least because it was relying on a database of “extremely limited input” that had not been updated since 2004.
The watchdog also noted that Citi had failed to implement an “improvement plan” it had submitted to the FSA five years ago, when it was first ordered to adopt stronger internal controls, and that the lack of compliance showed Citi executives “lack an understanding of the rules applied in Japan, such as laws and regulations, and an awareness of improvement”.
The irony in all this is that Citi’s breach of Japanese rules came to light after the US bank alerted authorities to a suspicious bank account, which it believed might be connected to laundering. The group investigated with the regulator and uncovered more accounts – said to be less than 500 – suspected of being linked to “criminal entities” (meaning yakuza, Japanese mafia syndicates).
Oh dear.
In a very Japanese response, Citi said: “We apologise deeply and take the situation seriously”, noting it would comply with the regulator’s order and submit an improvement plan by July 31, “focusing all necessary resource to implement every necessary measure to prevent further occurrence”.
We’re presuming that SMFG and Sumitomo Trust – if it clinches the NAM deal – will approach their Citi purchases in the same spirit and take a good close look at the client lists they inherit.
Related links:
Citi faces retail sales ban in Japan – FT
Citigroup orders to suspend some operations in Japan - Bloomberg