Management Japan Shuts Unit of Citibank, Citing

Please read the following article, and then respond to the questions below.



Title: Japan Shuts Unit of Citibank, Citing



Violations.(Business/Financial Desk)



Author: Todd Zaun



Source: The New York Times, Sept 18, 2004 p. C1(L)



In one of the severest penalties ever imposed on a bank in Japan, regulators on Friday ordered Citigroup to close its Japanese private banking operations because of serious violations of the country's banking laws.



The Financial Services Agency ordered Citibank to shut the four branches in Japan where it offers private banking services to wealthy customers after the agency discovered a string of violations and improprieties over the last three years. The actions cited included failing to put in effect measures to prevent money laundering, overcharging customers for financial derivative products and making loans that helped clients carry out a variety of improper deals, regulators said.



''A number of acts injurious to public interests, serious violations of laws and regulations, and extremely inappropriate transactions were uncovered at the Private Bank Group, which led us to conclude that continued future operations are inappropriate,'' the Financial Services Agency wrote in its order. Citibank in Japan apologized for the violations and vowed to improve its management and its internal controls.



''Citibank Japan sincerely apologizes for the problems identified in the F.S.A. orders and is earnestly addressing the issues raised and working to prevent their recurrence,'' the bank said in a statement. It added that it ''is committed to doing everything necessary to restore the confidence of its customers.''



The bank was ordered to come up with a plan to improve its business operations by Oct. 22. Citibank will have a year to close its private banking business. Though it cannot accept new customers after Sept. 29, the bank can continue to serve its current clients until Sept. 30, 2005. On that date, regulators will revoke Citibank's license to operate the four branches and they must be closed. Citibank could reapply for those licenses, but that would probably take years. The bank said it did not know yet what would happen to the 400 employees working in the Japanese private banking division.



Citibank also has 25 retail branches in Japan, but those branches are not affected by Friday's order. It was the second time this week that Citigroup has expressed contrition for breaches in its overseas operations. On Tuesday, the company apologized for a huge bond trade in Europe that outraged competitors and led to an investigation by regulators in Britain; France and Germany are also looking into the trade. In early August, Citigroup traders sold 11 billion euros of European government debt ($13 billion) within minutes via an electronic trading system only to buy some of it back less than an hour later at lower prices. The transactions were not illegal, but rivals said Citigroup violated an unwritten rule among big bond houses not to use their trading heft to manipulate prices. Citibank's private banking business in Japan concentrates on customers with about $1 million to save or invest and emphasizes highly personalized service. But regulators said Citibank's private banking division often misled its well-heeled clients. Regulators said Citibank charged some customers above-market prices for publicly traded derivatives and failed to explain fully the risks involved in many of its financial products.



Regulators say Citibank also went beyond the scope of its banking license by brokering real estate and art deals for its rich clients -- activities not allowed under Japanese banking laws. Private banking employees were also reckless with client information, the bank regulators said. For example, some employees kept records of secret passwords



for the most forgetful clients. Regulators discovered no cases of employees using the passwords to steal money. Toshihide Endo, director of the Financial Services Agency's supervisory bureau, said that employees of the private banking group might have been tempted to take shortcuts when screening clients because ''their salaries and performance evaluations were closely linked to sales targets.'' That might be one of the main reasons this kind of misconduct happened atCitibank,'' he said.



In one case, the private banking unit in Japan accepted a customer who had been flagged repeatedly as suspicious by another unit of Citibank, the agency said in its statement. In another, the private banking group made a loan to a group of clients who used the money in a stock manipulation scheme. One of those same clients received a short-term loan from Citibank to inflate his account balance temporarily in a scheme to secure a government grant, Mr. Endo said. Citibank said on Friday that six executives in Japan had left the company because of the problems made public Friday and that it had reprimanded other employees.



In July, Citigroup appointed its chief auditor, Douglas Peterson, to succeed Charles Whitehead as chief executive of the Japan operations. A Citibank Japan spokesman, Toru Ichikawa, would not comment on whether Mr. Whitehead's departure was related to the troubles at the private banking division.Citigroup does not provide figures on how much the private banking business in Japan contributes to its overall revenue or profit, but overseas private banking contributed only about 3 percent of Citigroup's net income in 2003. Citibank's retail banking unit was also ordered to stop taking new foreign-currency deposits for one month, beginning Sept. 29, and to improve management controls. This suspension came for failing to detect a case in which a Citibank employee embezzled 1.8 billion yen (currently $16.4 million) from depositors over seven years, beginning in 1997. The only other bank to face shutdown orders from Japanese regulators was Credit Suisse Financial Products, which had its banking license revoked in 1999 for blocking an investigation into whether it was engineering financial products specifically to help companies conceal losses on their accounting statements. The company was a unit of the Credit Suisse Group.



Required:



As a group of experts in business ethics, you have been hired by Citigroup to assist in this unfortunate situation.



After identifying ethical issues in this case, how would you deal with these issues? What ethical programs will you recommend for Citibank, Japan?



Using your knowledge in business ethics (articles and books) give a comprehensive REPORT to the Board.