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Finra fines Citi $600,000 for weak trade supervision

13 October 2009  |  5125 views  |  0 citi bank

Citi has been fined $600,000 by US regulators for lax supervision of trading strategies that helped foreign clients avoid taxes on dividends. The firm also failed to adequately monitor Bloomberg messages used to communicate about the trades.

The Financial Industry Regulatory Authority (Finra) says that Citi failed to supervise and control trading activities because it lacked procedures designed to detect and prevent improper trades between the firm and certain counterparties.

When dividends on stock in US companies are paid to foreign investors, they can be subject to withholding taxes.

Between 2002 and 2005, Citi employed a strategy of buying stock from foreign broker-dealer customers and then selling it back to them after a series of steps that meant withholding taxes were avoided.

The bank paid about $24 million to the Internal Revenue Service in 2006, and earlier, in connection with the strategy.

Between 2000 and 2004, the bank also employed a strategy designed to enhance - for the financial benefit of the firm itself - the after-tax yield on Italian stocks.

In addition, Citi's New York desk and counterparties used Bloomberg-terminal messages to communicate about the US equity trades with foreign clients for around a year before they were incorporated into the firm's e-mail review system.

Susan Merrill, chief of enforcement, Finra, says: "Increasingly complex trading strategies must be governed by supervision that is equally sophisticated and detailed. In this case, Citigroup's inadequate supervision resulted in improper trading related to the execution of strategies involving transactions with a principal purpose of limiting tax liability."

Citi neither admitted nor denied the charges, but consented to the watchdog's findings. Finra says the bank discovered and reported the violations itself and this was taken into account when deciding the punishment.

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