Governance Problems in Citigroup Japan

The FSA investigation report, dated August 09, 2001, noted serious irregularities in the Private Banking unit. The report said that the Private Banking unit had violated regulatory provisions of BL & SEL by promoting financial products that could only be sold by securities companies in Japan and not by banking companies. The report further added that the legal & compliance and internal control functions, including the business management and risk management, of the unit were 'inadequate.' FSA took administrative action against Citigroup which involved a suspension order and a Business Improvement order for the Private Banking unit. As per the suspension order, all business of alternative investment strategies was suspended between August 10 and August 16, 2001...

Before advancing a loan, the management did not sufficiently review the risk profile of customers. Moreover, no screening measures were adopted to investigate and confirm the reasons for which the loan was sought. The reports also stated that customers misused loan funds for manipulating the price of publicly traded stocks. This amounted to money laundering by the bank. Apart from that, bogus loan were sanctioned to customers so that they could file for a financial grant of public funds from a regional government entity. The Banking Law of Japan considered that such 'bogus loans' constituted infliction of injury to public interests. Money was solicited from depositors and the sale of deposit schemes to customers was done without providing information on the features and inherent risks...