(Provisional Translation)

April 22, 2005
Financial Services Agency
Government of Japan

Administrative Actions on Cititrust and Banking Corporation

I . Description of the Administrative Actions

1. Order based on Article 27 of the Banking Law and Article 8 (3) of the Law for Trust Business in Financial Institutions

Cititrust and Banking Corporation (hereinafter referred to as the ''Bank'') must be suspended from engaging in all new trust business from May 2, 2005 (excluding the dissolution, transfer, etc. of existing deals and incidental operations).

However, if the Bank complies with the following orders, and is deemed to be fully prepared to dissolve, the said order shall be rescinded, and at the same time, an application for dissolution approval may be accepted.

2. Order based on Article 26 (1) of the Banking Law and Article 8 (2) of the Law for Trust Business in Financial Institutions

(1) Until the Bank dissolves and is completely liquidated, the Bank must establish and secure compliance, governance and internal control functions (and include adequate staffing and the construction of a proper organization and structure) as a trust bank with due emphasis on the following points:
(a) Decide the basic policies for maintaining the financial condition in a healthy state as a trust bank, as well as for maintaining a proper supervisory and control structure for transactions with existing customers, etc. and ensuring the necessary measures, etc., preparing the implementation plans and strictly enforcing them among executives and employees;
(b) Decide the basic policies for securing functions to provide a proper explanation to existing customers, etc. and to ensure they are widely informed, and functions to take preventive action and procedures properly so that problems, etc. do not arise in the control, settlement and clearing of trust assets after the Bank's dissolution/liquidation, and for the proper handling, control, delivery, etc. of documents and important articles (contracts, electronic recording media, etc.), prepare the implementation plans and strictly enforce them among executives and employees; and
(c) Clearly define the measures to be taken by the Bank and the Bank's major shareholder Citigroup, Inc. (hereinafter referred to as the ''Shareholder'') in the event that (a) and (b) above cannot be implemented or achieved in accordance with the Bank's policies and plans.
(2) The Bank must clearly specify the executives and employees to be held responsible for causing the problems, etc. relating to matters referred to in II . below, the inspection results notice and the reporting order.
(3) The Bank must submit its operation plans referred to in (1) above by May 27, 2005, and implement them immediately.
(4) After implementing the above, the Bank must summarize the implementation status of the operation plans on a monthly basis and report it to the Financial Services Agency (hereinafter referred to as the ''FSA'') no later than the fifteenth day of the following month until the dissolution and liquidation of the Bank is completed.

II. Reasons for Administrative Actions

1. Lack of Improvements in Trust Business following Business Improvement Order

The Bank had received a Business Improvement Order (issued on August 9, 2001) under the provisions of Article 26 (1) of the Banking Law (Law No. 59 of 1981) and other related trust laws, based on the violations of laws, etc. confirmed in the results of the previous on-site inspection (notified on July 9, 2001) conducted by the FSA.

In response, the Bank made a final report on the implementation status of its Business Improvement Plan to the FSA, and had its reporting order rescinded (June 27, 2003).

According to the results of the latest on-site inspection conducted by the FSA (notified on September 22, 2004) and the documents received subsequently, the FSA confirmed that the Bank's actual operational status had not improved in accordance with the plan drafted by the Bank in regards to the marketing, screening and operational control structure, etc. of its trust business as detailed below.

2. Violation of Laws

  • (1)Violation of Laws concerning Control, Settlement and Clearing of Trust Assets

    The results of the previous on-site inspection conducted by the FSA had confirmed the Bank's poorly established control, settlement and clearing functions of its trust business (including re-entrustment outside the Bank), and management failures in the funds control and tax accounting affairs of trust accounts.

    The results of the latest on-site inspection conducted by the FSA also confirmed that the Bank had failed to process claims for the refund of foreign withholding taxes, inform beneficiaries of refunds and other receivables, and properly perform necessary administrative and accounting processes in the control, settlement and clearing of trust assets, and left these problems unaddressed for a long period of time. This violates Article 20 of the Trust Law (which stipulates the duty that trustees should exercise sufficient caution when managing trust assets), as well as Article 28 of the said Law (which stipulates the duty of segregation of books, records, and assets on trust assets).

    Further, although the Bank's top management and the Head of Operations were aware of the aforementioned operational status of the Bank through reports made at management board meetings, etc., they failed to notify the FSA. This violates the duty of notification set forth in Article 53 of the Banking Law and Article 12 (2) (Article 31(4) after the revision) of the Enforcement Regulations of the Law for Trust Business in Financial Institutions.

  • (2)Unregistered Sales of Mutual Funds

    Since the previous on-site inspection conducted by the FSA, the Bank has repeatedly and continuously engaged in the solicitation for and brokering of mutual funds targeted at financial institutions, etc., including issuing a prospectus for a怀mutual fund managed by an overseas asset management company of Citigroup without registering its mutual fund sales operations, and secured a number of contracts. These violate Article 65 (2)-1 of the Securities and Exchange Law.

    Moreover, it is confirmed that although the Bank's former President, the former Managing Director & Manager of the Sales Planning Department, and the sales staff of the Department had been specifically warned by the internal control division, etc. in writing about the unregistered sales of mutual funds, etc., the checking and monitoring functions did not work and unregistered sales was promoted by management decision.

  • (3)Evasion of Inspection and False Reply to Cover Operational Status of Unregistered Sales, etc.

    During the course of inspecting the mutual funds sales activities, the FSA met the following evasive conducts intended to cover the true nature of unregistered sales, etc. These conducts are considered as evasion of inspection under Article 63 (3) of the Banking Law.

    1) The former Managing Director & Manager of the Sales Planning Department was requested by the FSA inspector to submit documents detailing the Sales Planning Department's sales activities targeted at financial institutions, but failed to indicate some of the sales activities in the documents, with an intent to mislead the inspector. The Manager also failed to prepare the documents for some financial institutions he was in charge of, again with an intent to mislead the inspector.
    2) The former President made false answers contradicting the facts about the performance control of the manager of the investment advisory department of the Japanese investment trust & advisory subsidiary of Citigroup (hereinafter referred to as the ''Group Subsidiary'') who jointly engaged in the Bank's sales of mutual funds without registration, and about the actual status of customer information being shared between the Bank and the Group Subsidiary, etc.

3. Improper Transactions, etc.

The latest on-site inspection conducted by the FSA, as in the previous on-site inspection, confirmed that the Bank acted as trustee and arranger in improper transactions involving the securitization of real estate designed to manipulate the accounting records of clients.

It also confirmed that the Bank had underwritten the real estate management trust and blanket trust formed by the Private Bank Group of Citibank, N.A. Japan Branch (hereinafter referred to as the ''Marunouchi Branch'') for similar purposes, brokered the sale and purchase of beneficiary rights to trusts based on unfair valuations, and collaborated and took part in soliciting for and selling overseas real estate investment trusts with the Marunouchi Branch, which violate Article 12 of the Banking Law (prohibition of engagement in non-banking operations).

4. Inappropriate Customer Information Control

It is confirmed that the Bank regularly exchanges and shares undisclosed customer information with the Group Subsidiary and Marunouchi Branch, without the customer's consent, and handles customer information improperly due to lack of awareness of customer protection.

5. Governance and Internal Control Problems

It is confirmed that in the background of the violations of laws, etc. stated above were a number of problems, the Global Investment Management Business Division Head Office (New York) of the Shareholder, against the laws and regulations of Japan, as well as the legal entity structures, appointed the former President to the position of chief administrative officer in charge of supervising, across divisions, the asset management division of the Bank and the investment advisory division of the Group Subsidiary, and the excessive delegation of authority which allowed the chief administrative officer to promote sales activities targeted at institutional investors in the Group as a whole.

Such sales policy decisions and governance methods are causing compliance problems and giving rise to obstacles to ensuring healthy and proper operations at the Bank.

The latest on-site inspection also confirmed problems relating to the Bank's inability to prevent the violations of laws, improper transactions, etc., and even fundamental problems in governance functionality, in that the management monitoring and checking functions of the Bank's Board of Directors and Auditors are not working properly.

It is also confirmed that the Bank's audit department is not performing audits effectively, based on the fact that even though it had been told about the violation of laws, etc. in the operations division upon the previous on-site inspection conducted by the FSA, it just prepared a statute book relating to operations and checked the procedures, etc. and did not directly examine the actual operational status of the business.

6. Dissolution of Trust Bank

In response to the Shareholder's announcement (dated October 25, 2004) of the closure of the Bank in twelve months time, the Bank decided as an institution on November 12, 2004, to start examining the steps towards closure in concrete terms.

In order to smoothly terminate all trust bank operations, it is necessary to maintain fair and proper operations until the Bank is dissolved and completely liquidated, to prove worthy of the Shareholder's support and the trust of existing customers, etc. (including beneficiaries, business partners, etc.). However, it is confirmed that its operations cannot be terminated for a certainly if left to the Bank's own efforts, considering the Bank's operational status and responses to inspection in the past.

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