DATABASE: CITIGROUP PRIVATE BANK JAPAN - PERIOD III


Period III
Prior to FSA Second Measures

Interview material relating specifically to the Citigroup Event, but with substantive allegations redacted to within the scope of the FSA Second Inspection findings

17 November 03
Foreign Private Banker
As mentioned by phone last week, apparently 50 FSA staff just turned up unannounced at Citibank and an unknown portion was devoted to private banking. Certain private banking staff were targeted for questioning and effectively prevented from performing day-to-day duties as a result. It would seem that "informed consent" as regards product marketing is an issue. Have seen product documentation in the past that had Citibank Trust Bank as the trustee for a structured off-shore product, so there is certainly an unfortunate confusion between on-shore and off-shore. This would be another issue no doubt. There has clearly been a trend among even the larger Swiss players to a US-style of product-oriented private banking globally. As it is so profitable and competitive, it is irresistible and senior management falls into it. The path to hell is paved with good intentions etc.


17 November 03
Government Bureaucrat
Could make no comment about any possible inspection of any specific institution. The Citibank inspection and its private banking unit fall into that category. Understand the interest in "informed consent" and will try to come up to speed on the various combinations on-shore/off-shore and product/relationship etc. Will investigate the 2001 parallel prior case and reply as soon as possible. However, must keep absolutely neutral between the various styles of private banking and could not simplistically give an OK to Swiss-style and a non-OK to US-style. Obviously it all depends on what they actually do within the style as it were.


17 November 03
Financial Planner
Have not been following the Citibank/FSA story particularly as am so very much more actual client financial/estate planning oriented and outside the private banking market tittle tattle of product etc. Would not be surprised that some such "accident" has occurred. Everything was heading that way, "ariso na hanashi da".


18 November 03
Foreign Fixer
Have been in contact with HNWIs running businesses in Japan with an international dimension for years as am in the business of fixing "Big Buck" cross-border deals. That then soon leads into being asked for private financial advice and into a certain notoriety as such an advisor on the private banking grapevine and had even been offered a finder contract by Citibank Tokyo. The terms were so extra-ordinarily generous that was alerted that something was not quite kosher and so said no. That was an unexpected outcome and in the process got into contact with New York, where Tokyo was seen as a fountain of money, but something of a black box fountain. Was asked for an opinion and said that trouble was brewing. Heard later that the response was apparently to have made changes in the reporting lines so that Japan in Tokyo did not report directly to Global in New York, but via Asia in Singapore, if the memory serves correctly. Thus, while responsibility was safely confused, the money equally safely continued to flow as it were. That was in 1999. Became aware through FSA contacts that around 2000 the FSA was becoming interested in Citibank: a number of Japanese oblique hints were dropped about certain schemes that were being offered, although there had been an understanding that these had been terminated in the first closure. The hints were not taken and Citibank moved up the scale of the FSA problem list. Have met the senior management man in Tokyo several times and he is one of those larger-than-life overly Americanised Japanese figures with a large wardrobe of expensive imported suits and all changed so that he never met the same client in the same combination. Suits, braces and ties were all carefully logged and rotated by his secretary woman. Also received a not entirely favourable impression as regards his private banking/general management expertise etc. In these circumstances, began to advise clients to steer well clear of Citibank as it seemed so doubtful. Client reporting documentation was poor with accounts showing phantom cross-entries etc with strange and difficult to understand coding. One client had a query about attending a Tiger Woods golf event in the very prominent Citibank private box etc. Said clearly no as it would be an obvious breach of confidentiality. General advice was always discreetly to run down the relationship to some trivial amount and in some innocuous product and leave well alone. Simply closing an account in Japan is more complication than it is worth and raises suspicions needlessly. It is not surprising that the FSA has waded in and it is quite probable that the whole operation will be closed down. The FSA inspectors are looking at the big "Family Office" accounts both on-shore and off-shore. That kind of bad news gets around quickly anywhere and especially in Japan and there will be client flight so it is effectively the death knell of the operation, whatever the FSA formal decision might eventually be. There is really little interest in the mass of retail on-shore accounts that are such small beer and add up to little more than an old-fashioned churn and burn brokerage.


18 November 03
Government Bureaucrat
Per the administrative action in the parallel case notified 19 Dec 01, there was non-securities business conducted without prior notification/approval in 1. Credit derivative transactions, 2. Intermediation of sale/purchase of interest in limited partnerships and limited liability companies, 3. Operations for pursuing business specific entities, 4. Operations for pursuing business of affiliated companies other than specific entities, 5. Intermediation of making a sleeping partnership agreement among parties, 6. Intermediation of cash lending/borrowing and 7. Intermediation of commodity derivative transactions. There is no double standard as regards the so-called Swiss-style and US-style in private banking.


21 November 03
Foreign Private Banker
Spoke to the Citibank contact, but there was no further information available. In the circumstances, it had been felt inappropriate to follow up too insistently.


17 December 03
Foreign Private Banker
Met the Citibank contact and the conversation turned to the FSA Citibank Inspection: not overtly concerned was the message and attitude. Apparently, after about one month of generally rootling around, some 40 FSA inspectors left suddenly and there is now the rump of 10 or so continuing to rootle haphazardly. There was, however, somewhat of an unfortunate impression of putting a brave face on a bad story.


06 January 04
Financial Journalist
The Asahi Chokan articles p1 "Concealed Assets JPY1bn" + p26 "A Stop Given to OB's Guidance" of 29 Dec 03 are indeed very important. Typically the correspondent went for the obvious OB line with the special highlighted section of a face-to-face interview. However, the real impact is in the NTA planted comment about ignoring the legalities of the tax efficiency and going to the underlying economic reality of the transaction and declaring it to be a sham, keizaiteki gorisei ga nai. Then the NTA further employed the supporting argument based on the grounds of public equity in taxation re kazei no kohei, tax fairness. It should be seen as a leading case in the development of a tighter control of "private banking" schemes using complex corporate structures for tax avoidance and the OECD highlighted vexed issue of "global trading" for making impossible any practicable tax audit trail at all. The bizarre Citibank Tokyo "Cult of the Personality" private banking advertising campaign in the domestic and foreign press is a misconceived US-style attempt to quiet client concerns about the recent FSA inspection. Obviously the clients will have been badly rattled re tax confidentiality and the market view is that the Citibank operation has received a death blow, whatever the form of execution eventually decided by the FSA may be in due course. Like all such US-style PR approaches in Japan it is profoundly counter productive given the, to the Occidental mindset admittedly counter intuitive, established Oriental Japanese bureaucrat mindset.


10 February 04
Financial Journalist
The story is that a leading MoF OB has just been hired as an amakudari advisor at Citigroup Tokyo - no doubt in an attempt to soften the impact of the FSA inspection of the private banking operation. He was a senior man at MoF and is reasonably well connected. It could have some favourable impact for Citigroup, but not that much in the new NTA policy scheme of things re NTA OB tax consultants being so chewed up recently. Of course, it does show that Citigroup is running scared: time will tell as always.


28 February 04
Industrial Journalist
Had talked to senior editorial staff about the news lead on the developing Citigroup Private Bank Japan Event and the FSA inspection. The story is apparently widely known to financial journalists. In the current diplomatic environment re BSE, Iraq etc, it was thought unwise to take a lead against such a high profile US bank. When the FSA decision is released there will be the licence to comment and quite detailed and very informed comment may be expected at that point therefore.


25 March 04
Foreign Private Banker
It seems that there are investigations into the somewhat complicated on-shore and off-shore accounts of four leading Citigroup Private Bank client "Family Offices": A, B, C & D shall we circumspectly say, although there are concrete rumours in the market. Obviously this is highly confidential and highly sensitive as tax confidentiality becomes breached. The Event is most probably going to go beyond an inappropriate behaviour slap over the wrist and temporary closure as there could even be a suspicion of systematic behaviour in bad faith by Citigroup staff.


29 March 04
Financial Journalist
Given what has been going on at Citibank in Otemachi Phase I 1986 - 1995 and in Marunouchi Phase II 1997 - 2004 and at the NTA in Kasumigaseki over the last ten to twenty years, the conjoint outcome between the immoveable and the irresistible as currently widely rumoured is understandable and far from surprising. The Japanese tax year is a 15 month overlapping year re the underlying single entry cash basis accounting method and runs from April to June of the following year. Hence, it would be expected that the NTA would want to determine the tax and tax penalties payable by end-June 2004 at the latest for the bureaucratic tidiness of determining the debtor balances and so closing the books as accrual accounting is not possible. That would most probably then determine the timing of the FSA penalties, public prosecutor decisions etc announcements. Sometime between the end of Golden Week and the end of June is the most reasonable guess, say end-May/early June as a target. The media will report extensively at that point.


16 April 04
Foreign Private Banker
The Citibank contact man continues to strike a very nonchalant attitude towards the FSA investigation results that must be expected soon. It is very strange: is he a good actor or is the FSA going to go soft on a foreign, notably US, major?


11 June 04
Foreign Private Banker
The Citibank contact was not very cheerful recently. In fact he seemed to be very out of sorts. It appears the FSA private banking inspection results announcement is about to be made and will be highly negative with some nasty sanctions imposed as expected for so long now. The Head of Private Banking has been given his marching orders, but is still around the office clearing up until the end of the month no doubt organising the transport of his famous wardrobes of suit, braces and tie matching combinations, and the announcement will be made public no doubt in a spin message of responsibility being taken etc etc at the time of the sanctions. It is the old story of foreign management not handling Japanese compliance issues, Japanese rogue employees and Japanese anti- social elements probably through a mix of complacency and ignorance. The Credit Suisse, Doden, Kajiyama etc story is just another such recent small link in a long chain of foreign accidents. The Citigroup Private Bank link is, however, an especially large potato link in the same chain to mix metaphors. A fall-out will be the impact on the Bank's customers: the inspection findings generating an adverse image for private banking and consequently generating general customer unease that will have to be countered. It is all very tedious and a quite unwanted bother.


15 June 04
Financial Planner
Did indeed say, "Would not be surprised that some such 'accident' has occurred. Everything was heading that way, 'ariso na hanashi da'" in Nov 2003 as Citigroup Private Bank had been involved in a lot of monkey business for a very long time, as everyone knows. It is the old bureaucrat game of watching carefully, preparing the case and pouncing in a cat and mouse game. The mandarinate tradition, ichibatsu hyakkai, punishing one warns one hundred lives gloriously. The NTA is desperate to hold tax revenues up. The Nikko Cayman Island tax evasion case just reported is the most recent move, obviously with massive overseas Japanese assets, the NTA is keen to keep the ability to tax Japanese assets, even when overseas, and this is all part of the Japan in East Asia story and trying to maintain a Switzerland position there as regards a retained stability and living standards gap.


13 September 04
Financial Journalist
The media reporting has been very weak on the Citigroup Private Bank Event and the story therefore appears to have no "traction". However, there is actually too much traction as it were. The FSA has a full schedule of the many serious infractions and is perfectly capable of moving as picked up by the media awkward squad, Yukan Fuji and Yomiuri, Yukan Fuji typically leading with its very good financial coverage on Friday 03 Sep 04 p1. The problem is that Koizumi is perceived as being rather too friendly with Bush and there are a lot of things going on apparently that should not be exposed to the light of day. An FSA punitive measures campaign against a major US bank could cause an avalanche of negative reporting on the US and information control may be lost. The FSA is in a perfect dither about what to do. Both Yukan Fuji and Yomiuri are right wing and critical of undue US influence on Japan particularly financial affairs influence, so it is entirely possible that their out-of-line reporting was an effort to win traction and thus was so very clearly ignored by the Establishment press: although the Event has been an open secret for months now. Anyhow, the financial community in asset management, private banking, tax etc is now casting aspersions on the FSA as not having the guts, balls or whatever other anatomical expressions preferred. Personally chose and used the term balls, kintama, when speaking to two FSA representatives the other day. They looked very sheepish and made the usual bureaucratic non-committal replies. Obviously, this delay does not sit well with the general claims of open and transparent; free, fair and global; no double standards etc etc. It rather more smells of sairyo gyosei, discretionary regulation, and the bad old days. The issues involved are very important and the matter should really be resolved asap.





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