Japan Shuts Citigroup Private Bank Unit - Money Laundering

[Steve Bildermann]

Japan on Friday ordered Citigroup Inc. (C.N: Quote, Profile, Research) to close its Japanese private banking offices after uncovering a series of problems, including failing to prevent suspected money laundering.

The sanctions effectively shut the world's largest financial services company out of the lucrative private banking business in the world's No. 2 economy. It also marks the third time this week that Citigroup either apologized for or acknowledged missteps that drew the ire of international regulators.

http://www.reuters.com/newsArticle.jhtml?type=businessNews&storyID=6268062&src=rss/businessNews&section=news

Regulators said they had found a long list of problems at the private banking operation, including failing to prevent suspected money laundering, lax screening of customer information and improper trading practices.

The bank has one year to terminate accounts at the offices, at which point their licenses will be revoked.

[Blah Pete]

Well, it looks like I'm fucked.
I have my paycheck sent from the US to Citibank, monthly bill payments going out of Citibank and my main credit card with them too.
I hope they send their smoothest talkers with bags of cash down to Nagata-cho and get this mess taken care of the Japanese way.

[Steve Bildermann]

The Finance Ministry has lusted after closing the *entire* Citibank operation for many years (several reasons too long to go into here) however because several former ministers have family members on the board hey have managed to dodge the bullet so far. Unfortunately from what I hear and read *this* time it's a keeper.

[omae mona]

Well, it looks like I'm fucked.

Dude, if you are a Citigroup Private Banking customer, you ain't gonna convince any of us that you're fucked, no matter what happens to your bank.

Our Business
Over 120 offices spanning 30-plus countries, and serving more than 25,000 of the world's most successful and influential families.

This is *not* Citibank N.A., the bank that many of us peasants use.

[Dhee]

Japan watchdog penalises Citibank

TOKYO: Japan's financial watchdog yesterday ordered Citibank's private banking division for high net worth clients to shut for amassing profits illegally and for misleading customers and inspectors.

Four branches, one in Tokyo's Marunouchi business district and three sub-branches in Fukuoka, Nagoya and Osaka, which represent Citibank's entire private bank division in Japan and employ 400 people looking after clients with more than $1 million each to invest, are to close.

They must begin winding down business starting on September 29 and will have their banking licences revoked on September 30, 2005, the Financial Services Agency (FSA) said.

Citibank N A Japan has a total of 23 branches and 11 sub-branches in Japan according to the regulator.

The bank would not reveal the value of assets the affected branches handled.

"A number of acts injurious to public interest, serious violations of laws and regulations and extremely inappropriate transactions were uncovered," the FSA said. "This is a very serious situation," FSA deputy director Isao Yoshitomi said.
http://www.gulf-daily-news.com/Story.asp?Article=91913&Sn=BUSI&IssueID=27182

[Mulboyne]

The FSA has a habit of going after foreign financial companies but, unfortunately, foreign financial companies have made their job easier with some very poor internal oversight and and a tendency to ignore local rules. The Citigroup violations are serious and would be slammed by regulators in any country. As Steve Bildermann says, the authorities here have kept an especially close eye on their business and they got the excuse they needed to clip the bank's wings.
Banking and stockbroking businesses used to be very separate in Japan and the US. It was illegal (under the Glass-Steagal Act in the US; Article 65 in Japan) for any company to conduct both. This used to mean that any product bought at a bank was "less risky" - meaning you might not make any money but you probably didn't lose it - while products bought at a brokerage often carried a high risk. However, the rules have loosened considerably.
One of the things the Citibank unit apparently did was to lend money to clients who were subsequently prosecuted for illegally manipulating share prices. While it may sound like the fault lies with the clients, that kind of lending policy would have the SEC screaming in the US. The FT reports that they also continued to handle transactions for a client even though another unit of the bank had filed reports labelling them "suspicious".
There is undoubtedly a double standard: financial policy evolves too slowly to match the pace of change in the development of new financial products and so a lot of "regulations" are no more than informal guidance from the Ministry of Finance or FSA. This leaves a vast grey area where you are basically told "That isn't strictly legal but it might be a good idea so we'll see how it goes".
The main advantage foreign companies have over their Japanese counterparts is innovation. This means they operate extensively in the grey areas and often get tripped up because of that.
In this case, however, Citibank seems to be guilty of wanting to grow their private bank quickly and so handing management over to a bunch of bandits with very dodgy connections. They walked right into this one.

[Dhee]

[Mulboyne]

The WSJ Asian Edition (subscription only) carries an editorial today wondering out loud if there might be double standards in the FSA actions against foreign firms. However, they are forced to concede that

it would be hard to have much sympathy for the American bank if the FSA charges were soundly based.

The finance community always runs to the press to cry "victim" when they get punished but they would have a much stronger case if they paid a bit more attention to the rules.

A couple of news items in a quick google:

Reuters, Dec 2002: Shares in Dutch financial services group ING fell more than six percent on Thursday after news that a Japanese financial watchdog was seeking to fine the group's Tokyo unit. The SESC said ING's Tokyo branch violated securities rules by recommending Japanese financial institutional clients put off incurring losses on a bond by investing in a separate transaction during the late 1990s.

These are the kind of stand-up guys runing the show:

May 2004: former employee with Dutch financial group ING's Japanese unit is being investigated by police for allegedly embezzling one billion yen (9.1 million dollars) in securities, a report said.
Former employee Takashi Ito, 37, is suspected of having embezzled 500 million yen worth of Japanese government bonds, 450 million yen in stocks and 50 million yen in investment trust shares, the Yomiuri Shimbun reported.
Police plan to charge the man, who was recently arrested on an unrelated charge, and pursue how he used the stash, which had mostly been converted into cash, the paper said.
The former section chief at ING Securities's Tokyo branch abused his position to steal the securities and then cover his tracks, the paper said.
ING discovered the missing securities in June 2002 after an internal probe, it said. Ito went missing shortly after the probe and the company fired him the same month.
The suspect was arrested in February in Tokyo on an unrelated charge of attempting to extort his landlord, the paper said.
It came more than a year after the company made a report to police accusing the man of stealing 238 million yen in stocks.

Japan is tougher than overseas regulators?

LONDON, Dec. 19 (Reuters, By Mark Bendeich) - Britain's financial watchdog slapped a $6.4 million fine, its highest ever, on investment bank Credit Suisse First Boston (CSFB) on Thursday for trying to mislead Japanese regulatory and tax authorities. The Financial Services Authority said CSFB's London-based derivatives unit had tried to mislead Japanese authorities between 1995 and 1998 by concealing and removing evidence about the extent and type of its Japanese businesses. Actions in Japan by CSFB, part of Swiss banking giant Credit Suisse Group, dealt with years ago by regulators there, also breached UK rules requiring it to keep proper internal records and to deal openly with regulators anywhere. The UK fine of four million pounds is almost 20 times larger than a penalty meted out to CSFB by the Tokyo District Court over the affair in March last year.

[Taro Toporific]

Now here's a grrrreat gossip from a Japanese guy, Masaki Yamashita, about what the Japanese tabloid papers are insisting....

....The question is, however, whether or not the [Citibank shutdown] decision was made based purely on compliance with the law.. Any dark plot behind that? My favorite analysis is this - one some tabloid papers insisting. This is funny, but I like it! According to what these sources say, the Bush Administration set this up by getting Koizumi on a string because it was wanting to crack down on Citigroup that is known as a huge supporter of the Democratic party! ( Is that true?? )
---TOKYO2015 / Sept 24

[Mulboyne]

Asia Times: Citibank in Japan: Crime and punishment

The underlying story is that Citibank was offering pricey products in a market that is not teeming with the very rich. The bank tried to nickel-and-dime customers to enhance profitability at any cost.

Asia Times: Japan's foreign banks: Outside chance

There is one major barrier for foreign banks in Japan, says a senior analyst with a US bank-rating agency: The Japanese mainstream bank system protects its customers. Foreign banks have made little headway in penetrating those close relations that have been built over time. That in turn has prompted banks such as Citibank to venture into businesses outside the mainstream, such as private banking.

Professor Nicole Pohl, in a Stanford University discussion paper, argues that Japanese financial markets offer a bizarre playing ground for foreign competitors. The challenge of being a foreign bank operating in Japan has changed little despite overdue reforms, poor periods for the stock market, bad ratings for credit and other problems that might help a few strong foreign banks with superior global capabilities. The problem is to overcome their liability of foreignness, Pohl says.

This is due partly to regulatory practices and partly to specific Japanese socio-economic conditions, she says. That includes what is generally called a system of relationship banking. In a nutshell, people don't do most of their business with banks they don't know. Few foreigners have been able to tackle retail banking directly, and prefer forming relationships.

[Taro Toporific]

Citigroup Forces Resignations of 3 Senior Executives
NYTimes.com 9PM 19 Oct
by Landon Thomas Jr. (Business)The executives were forced to resign on Tuesday in the wake of Citigroup's private banking operations being shut down in Japan last month. ...The three who resigned are Deryck C. Maughan, the chairman of Citigroup's extensive international operations; Thomas W. Jones, the head of the bank's asset management division; and Peter Scaturro, the chief executive of private banking. ....
....Mr. Maughan's departure could be seen as all the more embarrassing because he styled himself as a Japan expert of sorts. He is a trustee of the Japan Society in New York and worked in Japan as a fast-rising executive at Salomon Brothers in the 1980's. Until recently, he was responsible for all of Citigroup's business in Japan. He was also recently knighted.

[Mulboyne]

Maughan's departure is huge news. And ironic. When Salomon Brothers was heavily censured for illegal practices in the US treasury market, Warren Buffet - then a major shareholder of Salomons - promoted Maughan to CEO as a "Mr. Clean" figure to help rehabilitate the company. Now he has to fall on his sword to help Citigroup (Salomon's current owners) rehabilitate. To be honest, though, he has to go. He always sold himself as Mr. Japan so to have such gross ethical breaches occur on his watch is unacceptable. I think he let himself get distracted and turned into a Japanese-style, hands-off senior manager

In March, he appeared in a Japanese-government sponsored television commercial series which also featured Japanese Prime Minister Junichiro Koizumi, which was broadcast in the U.S. and Europe to promote investment in Japan.

Also ironic, given the huge failings of Japanese banks, is that he is probably the most senior banker to get fired since the bubble burst. He'll still be a non-executive director of Glaxo Smithkline, though - a post he assumed a few months ago.

[Ol Dirty Gaijin]

Chase your corporate links...
They Rule

[Mulboyne]

The Wall Street Journal (subsciption only) carries a feature on Thomas Jones who feels his dismissal from Citigroup was unfair.

Citigroup's Jones Denies Blame For Problems at Japan Operations
"Do I feel there is anything more I could have done?" asked Mr. Jones, former chief executive of Citigroup investment and asset-management units, "The answer is 'no.'"
Over the three years since regulatory problems first cropped up in Japan, Mr Jones said, he was repeatedly assured by Mr. Scaturro [Peter Scatturro, also fired from his post as head of Citigroup's global private bank] and managers in Japan that the private-banking problems were being rectified. But the compliance and control overhauls that Citigroup had promised regulators they would make never took place, he said, and internal auditors failed to conduct a timely follow-up audit to determine whether the problems were being addressed.
"The failure of global audit to detect the problems also contributed to why I didn't detect the problems," he said.
When he visited Japan, he said, he was consistently told by those in Japan that "they were on top of legal, regulatory and compliance issues. This was corroborated for me by the fact that there were never any audit issues raised."

To summarize - "The guys reporting to me were screwing up but no-one told me that they were screwing up so it must be someone else's fault, not mine"

[Mulboyne]

Business Week looks at what Citigroup is doing to clear up the problems.
Damage Control in Japan

[Mulboyne]

Reuters: Japan FSA penalises State Street Japan trust unit

Japan's Financial Services Agency on Friday ordered the Japanese trust unit of State Street Corp. to halt some operations from Feb. 6 to March 5. The FSA said State Street Trust and Banking Co. would be barred from engaging in new businesses associated with the management of trust assets. The bar does not cover business with existing customers. The regulator also ordered the Tokyo branch of State Street Bank and Trust Co. to improve operations after finding that it failed to abide by relevant regulations.

[Mulboyne]

WSJ: Japan To Sanction Citigroup on Money Laundering

Japan's Financial Services Agency will sanction Citigroup Inc. over lax money-laundering controls, a person familiar with the situation said Friday. The Financial Services Agency believes Citigroup did not catch and report money laundering by a Japanese criminal syndicate known as the yakuza, the person said. No further details were available, including the severity of the sanction, but a press conference will be held later Friday. Citigroup has fallen foul of Japanese regulators before. In 2004 the FSA shuttered its private banking business for violations that ranged from failure to follow guidelines to prevent money laundering to overly aggressive sales tactics. Charles Prince, Citigroup's chief executive at the time, bowed deeply for seven seconds, as a sign of his contrition over the incident.

[Bucky]

Is this like Deja Vu all over again?

Authorities ordered Citibank's Japan unit to suspend all sales operations at its retail banking arm for one month after it failed to improve anti-money laundering measures that target crime syndicates and other shadowy groups.
The order Friday is the second time in five years that the Financial Services Agency has reprimanded Citibank Japan Ltd. for insufficient monitoring and control of "suspicious transactions."
The suspension comes as the Japan lender's parent company Citigroup - one of the banks hardest hit by the financial crisis - scales back its presence in the world's second-biggest economy.
Last month it agreed to sell its Japanese brokerage businesses to Sumitomo Mitsui Financial Group, Japan's third-largest bank, for about 545 billion yen ($5.7 billion).
Citibank, a relatively small player in Japan's consumer banking market, will shut all sales operations at its Japanese retail division from July 15 to Aug. 14. The suspension covers advertising, sales campaigns and solicitation but does not restrict customers seeking a transaction with the bank.

[Mulboyne]

[gkanai]

[INDENT]But given the absolute size of the Japanese market, it is possible to have a profitable, large business in Japan that is a niche business relative to the local players.[/INDENT]

With all due respect to this dude, he's only saying this because that's the hand that he has in front of him. If the previous Citi Japan execs (not to mention Vikram "Bandit" and the Citi execs in NY) didn't make all of the bad decisions that led to the penalties and the sales of the non-core businesses, Citi Japan would be in a much better position relative to the competition in Japan.

[Mulboyne]

...With all due respect to this dude, he's only saying this because that's the hand that he has in front of him...

It astonishes me that foreign banks were unable to make much of an impact on the Japanese consumer market while the local banks were on their knees.

[wuchan]

It astonishes me that foreign banks were unable to make much of an impact on the Japanese consumer market while the local banks were on their knees.

The local banks claimed to be on their knees. The truth is business has been going on as usual and the back room deals were, and always have been, more important than publicly announced income.
My current loan came out of nowhere. We applied to all the major banks, even ones that we have our income deposited in but we were turned down over and over. The salesman told us there was only one bank that would accept our application and of corse it was a friend of his. Between the two of us we make more than tripple the average japanese household but in the end that didn't matter because we were trying to fight the "wa".

Bottom line: What japan shows the world is not the real face of business here. Protectionism is alive and well in japan, in most industries it is welcomed and encouraged.

Citi never had a chance.

[Bucky]

They're back

Citigroup to Expand Retail Banking in Japan

NEW YORK (TheStreet) -- Citigroup(C Quote) plans to open four retail branches in Japan in 2010, a report says.
The first two locations will open in the second quarter in the central Tokyo districts of Marunouchi and Nihonbashi, Citibank Japan said, the Associated Press reports.

Citigroup's move would mark its first expansion in Japan since selling several of its Japanese finance businesses last year to pay back bailout money it received from the U.S. government.

In July, Citigroup reached an agreement to sell its asset management operations in Japan to Sumitomo Trust and Banking in a deal valued at about $1.26 billion. It also reached a deal the same month to sell NikkoCiti Trust and Banking Corp. to Nomura(NMR Quote). In May, Citigroup agreed to sell Japanese brokerage Nikko Cordial.

The new branches would add to Citibank's current 31 branches, AP says.

Citigroup will use the four new locations to experiment with smart banking services that incorporate "new concepts and technology," the bank said, AP reports.

Citigroup still operates the largest foreign-owned retail bank in Japan, AP notes.

[Mulboyne]

They're back

They have never really retreated from retail banking, just didn't expand. Their consumer efforts were focused on non-bank lending instead and that bet backfired. They are still banned from private banking.