Citi Never Sleeps


From a market capitalization perspective, Citigroup ($243 billion in mid-June 2004) is the biggest financial services group in the world. With $1264 billion in assets, the US-based bank is not just a big bank but provides well-diversified financial services ranging from investment banking to insurance in more than 100 countries. According to The Banker, Citigroup earned pre-tax profits of $26.3 billion in 2003, up 15 per cent from previous year.

Despite its spectacular growth and performance, Citigroup has been in the news for its wrongdoings. Given the scale of financial scandals and market manipulations Citigroup have been recently involved, nothing appears more appropriate than its popular advertisement slogan, “Citi never sleeps.” Here is a quick look at some recent financial scandals encircling Citigroup in different parts of the world:

The German and UK regulatory authorities are separately conducting formal investigation into the Citigroup’s alleged role in the manipulation of euro-denominated government bond futures market. On August 2, 2004, Citigroup traders sold euro-denominated government bonds worth Euro 12.4 billion in less than two minutes, only to buy back bonds worth Euro 3.7 billion at lower prices few minutes later. In the process, Citigroup traders made a handsome profit of Euro 13 million but triggered sharp movements and uncertainty in the bond futures market. A classic example of casino capitalism! In January 2005, BaFin, Germany’s financial market watchdog, found evidence of Citigroup’s involvement in manipulating government bond futures and asked prosecutors to launch a criminal investigation into the case. On February 1, 2005, Financial Times (FT) claimed that it had obtained an internal memo titled, “Challenging the dominance of Eurex futures,” apparently written by a member of Citigroup’s European government bond trading desk in London in which a plan was outlined to take undue advantage of liquidity differentials between the German government bond futures and cash bonds traded on the Euro MTS electronic platform. Interestingly, the memo was written on July 20, 2004, just two weeks before Citigroup carried out trading. The FT quoted the memo as saying, “When there is a liquidity imbalance… we drive up the Bund future (and) then hit out all the cash (bids) on MTS…we should be able to exploit this situation in a very profitable way.” If MTS finds that Citigroup had manipulated the market rules, it could impose a complete ban on the bank from trading. This potentially damaging memo has further embarrassed the top management of Citigroup who have already confessed their blunder. Citigroup’s chief executive, Charles Prince, publicly described the trade as “completely knuckle-headed” and promised to change the “culture” at the bank.

In mid-2004, the Japanese regulatory authorities found a number of irregularities at Citigroup’s private banking unit, the most lucrative business serving exclusively to high-net-worth customers in the country. In particular, the authorities found that the bank failed to prevent money laundering and offered loans to clients engaged in nefarious activities ranging from tax evasion to stock market manipulation. In addition, the authorities also claimed that the bank misled local customers about investment risk and overcharged for several financial services. The extent of Citigroup’s involvement in such scandalous activities was so pervasive that the Japanese authorities decided to close down its private banking unit. In addition, Citigroup was barred from participating in government bond auctions in Japan. Embarrassed by this scandal, Citigroup not only sacked its top executives in the private banking unit but also did not contest the findings of regulatory authorities.

The Italian authorities restructuring the bankrupt Parmalat debt are seeking $10 billion in damages from Citigroup in a lawsuit filed in the New Jersey for exploiting Parmalat’s financial position. The lawsuit is aimed at recovering cash paid to several banks before Parmalat went bankrupt in December 2003. In turn, Citigroup has legally challenged the restructuring plan of Parmalat.

A fine of $250000 was imposed on Citigroup’s subsidiary by NASDAQ distributing misleading information and sales literature on hedge funds between July 1, 2002 and June 30, 2003.

Very recently, Citigroup paid damages totaling $2.6 billion for claims arising from WorldCom’s bankruptcy. The bank also made provisions of more than $5 billion against potential claims arising from Enron and other scandals.

The South Korean authorities have also launched a full investigation into Citigroup’s private banking operations and some foreign exchange transactions suspected to be related with money laundering and criminals.

The Reserve Bank of India, country’s central bank, has fined Citigroup for allowing scamster Abdul Karim Telgi and his associates to open accounts and park their dirty money raised through printing and selling fake stamps.

There are many more instances where similar regulatory penalties and monetary damages have been imposed against Citigroup. What is astonishing to note is that Citigroup swears by several corporate codes of conduct besides voraciously supporting corporate social responsibility and ethical business norms and practices in many parts of the world.

The scandal-ridden image of Citgroup reveals the state of poor internal controls at the bank. There is a growing acknowledgment within the top management of Citigroup that recent scandals have severely damaged its reputation and image. The annual report of Citigroup (2003) says, “Importantly in 2003, we continued our thorough re-examination of the way we do business, with an eye towards developing standards that are not merely ‘common industry practice’ or ‘letter of the law’ but the best practices in a given area. We need to be clear about this subject; because of our size and scope, because of our position of business leadership, we are held to a higher standard. We accept this responsibility.” It remains to be seen how Citigroup would emerge out of its growing scandal-ridden image.

The variety of scandals in the international banking sector (from BCCI to Citigroup) offers several important lessons to the policy makers and regulatory authorities, both in the North and the South. Firstly, banks and financial institutions do not have better governance norms and practices than the non-financial corporate sector. Secondly, no international bank (irrespective of its size or outreach) is above reproach. Thirdly, self-regulation without strict enforcement is a fiasco. Lastly, banking sector needs more (not less) regulatory and supervisory measures not only because of its vital contribution to the economic development but also to prevent the emergence of casino capitalism at the global scale. Hence, there is a need to think beyond the current neoliberal framework of financial sector deregulation and liberalization promoted by international institutions such as WTO (under Financial Services Agreement), World Bank and the IMF.

 
Kavaljit Singh is Director, Public Interest Research Centre, New Delhi. He is also associated with Asia-Europe Dialogue Project (www.ased.org).

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