Governance Problems in Citigroup Japan|Business Ethics|Case Study|Case Studies

Governance Problems in Citigroup Japan

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Case Details:

Case Code : BECG043
Case Length : 14 Pages
Period : 2001-2004
Pub. Date : 2004
Teaching Note :Not Available
Organization : Citigroup
Industry : Financial Services
Countries : Japan, US

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Problems in Citigroup Japan


The FSA conducted a routine inspection of Citigroup branches in Japan and found several violations of Banking Law and Securities and Exchange Law (BL & SEL). Between August 1997 and December 2000, Citigroup's Private Banking unit had acted as an intermediary for the sale and purchase of securities.

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...

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The Irregularities

According to media reports, enlarging the customer base and increasing the volume of business were given more importance by the Private Banking unit disregarding regulations. New bank accounts were opened without following proper procedures.

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...

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