December 16, 2011
Financial Services Agency
Administrative Actions against Citibank Japan Ltd.
Based on the results of the inspection of Citibank Japan Ltd. (hereinafter referred to as the “CJL”) and the report it submitted, the Financial Services Agency (FSA) today took the following administrative actions against CJL in order to ensure sound and appropriate business operations.
In addition to these administrative actions, to consistently monitor CJL's management and operations, the chief inspector of the latest inspection on CJL would basically be assigned to the chief inspector of CJL, and the on-site inspection on CJL would be prepared as needed.
I. Description of Administrative Actions
Orders based on Article 26(1) of the Banking Act
1. Suspend the proactive solicitation (including advertising and sales campaigns) related to risky assets in the retail banking division, such as foreign currency denominated deposits, investment trusts and structured deposits, between January 10, 2012, and February 9, 2012 (however, this shall not preclude sales operations [including the explanation of products] in cases where there are voluntary manifestations of intention by customers and where such manifestations of intention can be objectively recognized).
2. Take the following measures in order to ensure sound and appropriate business operations.
(1) Clarify the responsibility of the management.
(2) Review the governance system.
(3) Drastically restructure the internal control systems, the customer protection management system, the compliance system and the information technology risk management system (including a review of how outsourcing contractors should be managed), as well as the internal audit function (including the information technology system audit).
(4) Review the profit plan, including the business model, to ensure sustainability and establish customer centric operations (including a review of the remuneration system, rebuilding of an appropriate business operation system at branches and an establishment of an appropriate complaint processing system).
(5) Review the personnel management system with a focus on training and retaining personnel essential to CJL.
(6) Formulate a business improvement plan to implement the measures specified in (1) to (5) above and to deal with the matters pointed out in the notification of the inspection results and the order for the submission of a report, and promptly implement the plan (including a verification of the implementation of business improvement plans formulated in response to a series of past administrative actions and a review of the system to report suspicious transactions, regarding which, an inadequacy was pointed out on the occasion of the previous administrative action on June 26, 2009).
3. Submit the business improvement plan concerning 2. (6) above (including a development of a governance system that ensures steady implementation of the business improvement plan and a clarification of the division of responsibilities for ensuring the effectiveness of the plan) by January 31, 2012.
4. Sum up the progress and implementation of the business improvement plan and the status of improvements through March 30, 2012, and report on the findings by the 15th day of the following month (1st report), and subsequently submit similar reports every three months by the 15th day of the respective following months, until the business improvement plan is completed
II．Reasons for the Administrative Actions
It is found that there are fundamental problems with CJL's customer protection management, governance and information technology risk management systems as described below from the perspective of sound and appropriate business operation.
1. Problems related to the customer protection management system
Many cases of violation of laws and regulations have been found, including inappropriate solicitation of customers and inappropriate sales of investment products.
Such inappropriate practices occurred against the backdrop of an inappropriate remuneration system adopted by CJL.
The following are examples of the many cases of violation of laws and regulations:
(a) Cases where sales personnel, when evaluating the level of customers' investment skills, mentioned specific investment trust products that they would like to sell and induced the customers to give replies that match the risk level of the products, or otherwise made the risk profiling procedure ineffective, thereby violating the suitability rule.
(b) Cases where sales personnel solicited customers to make investment through foreign currency transactions and structured deposits without providing adequate explanations of products and risks for a long time.
(c) Cases where sales personnel solicited customers to buy risky assets by providing a definitive judgment as to matters involving uncertainty; for example, by assuring customers that they were certain to receive dividends and by providing explanations to the effect that there is little possibility of incurring losses if the products are held for a long period of time.
(d) In cases where sales personnel did not provide prospectuses when selling investment trusts.
2. Problems related to governance
(1) Overlooking and neglecting of problems related to customer protection management
CJL's management team has overlooked and neglected the problems related to customer protection management that are described in 1. above, indicating that the governance system is inadequate.
As an example of the inadequacy of the governance system, CJL partially changed, without adequate discussion and deliberation by CJL's board of directors, the business improvement plan formulated by CJL to execute business operation appropriately based on the past administrative action on September 17, 2004, after the administrative action was removed.
(2) A problem related to internal audits
The internal audit of the retail banking division conducted by CJL did not point out any of the violations of laws and regulations found in the latest inspection or any problem related to the governance system that led to the violations of laws and regulations, indicating that the effectiveness of internal audit is not ensured.
(3) An inappropriate practice related to the Tokyo Interbank Offered Rate (TIBOR)
An employee of CJL, who has continuously received approaches regarding the Euroyen TIBOR submission from an employee of Citigroup Global Markets Japan Inc., did not properly report to CJL's management team, indicating that there are problems related to the internal control system.
In addition, in the report submitted by CJL pursuant to Article 24(1) of the Banking Act in this case to the FSA, important factual discrepancies were found in the latest inspection.
3. Problems related to the information technology risk management system
At CJL, system failures that affect customers have frequently occurred and inadequate management of outsourcing contractors have been recognized, indicating that the information technology risk management system is not adequately functioning.
Financial Services Agency
Tel +81-(0)3-3506-6000 (main)
Banks Division I, Supervisory Bureau (ext. 3751, 3398)
Inspection Coordination Division, Inspection Bureau (ext. 2504)
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