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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"Private Banking is what Citibank is here for. Citibank could lose the trust of wealthy clients, who had relied on the bank. This is a setback for the bank to keep its operations in Japan in the mid-to-long term." 1

- Mitsushige Akino, Chief Fund Manager, Ichiyoshi Investment Management in 2004.2

"We've been kicked out of the Private Banking business in Japan because the regulator has said we're not fit to run that kind of business in Japan. It's embarrassing. That's a big deal; that's a really big deal." 3

- Charles O Prince, CEO, Citigroup in 2004.

The Withdrawal

On September 17, 2004, the Financial Services Agency (FSA),4 the banking and financial services regulatory body of Japan, announced that it had revoked the licenses of the four Citigroup offices in Japan.

Citigroup was asked to withdraw from the Private Banking business5 in Japan after several instances of illegal conduct of business by Citibank Japan came to light. The four branches, one in Tokyo's Marunouchi business district and three satellite branches in Fukuoka, Nagoya and Osaka, employing around 400 people, represented Citigroup's Private Banking business in Japan. The winding up of business commenced from September 29, 2004 onwards by suspending all new transactions with customers. Incorporated in 2001, FSA had been keeping a close eye on the working of foreign and domestic banks in Japan (Refer Exhibit I for more information on FSA). It uncovered a number of acts injurious to public interest, serious violations of law and regulations and extremely inappropriate transactions in the Private Banking unit.

The regulator further said that the unit had amassed large profits illegally by allowing money laundering transactions. Customers were misled in various private bond deals and were sold securities and derivatives at unfair prices without being informed about the risks. FSA further said that Citigroup's management in Japan was solely driven by profit motive and had created a law-evading sales system, breaking Japan's banking laws and regulations.

The irregularities at the Private Banking unit were preceded by continued failure to improve internal controls despite regulatory warnings over the past three years and a reprimand by the FSA in May 2004.

After the unit was asked to wind up its operations, Charles O Prince (Prince), CEO, Citigroup, acknowledged the irregularities saying, "I sincerely apologize to customers and the public for the company's failure to comply with legal and regulatory requirements in Japan.....senior staff in the private bank had put short-term profits ahead of the bank's long-term reputation and broken the law. It was a unique breakdown in Japan due to the individuals involved."6

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1] "Japan Closes Citigroup Branches," www.news.bbc.co.uk, September 17, 2004.

2] Ichiyoshi Investment Management is an affiliate of Ichiyoshi Securities Company Limited of Japan founded in 1944. The investment wing specializes in small and medium-sized growth stocks.

3] "Chief Tackles Citigroup's Culture," Timothy L O'Brien & Landon Thomans Jr, www.iht.com, November 09, 2004.

4] FSA is responsible for ensuring the stability of the financial system in Japan, protection of depositors, insurance policy-holders and securities investors. It aims at ensuring smooth finance function through such measures as planning and policy making concerning the financial system, inspection and supervision of private-sector financial institutions and surveillance of securities transactions.

5] Private banking includes providing services like investment counseling and portfolio asset management services for high networth (HNW) individuals.

6] "Citigroup Publicly Apologizes to Japan," www.investorsassociation.org, October 26, 2004.

 

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