Japanese regulators have never had the reputation of being particularly tough, but after the surprisingly harsh penalty imposed against Citigroup in Japan last month, that may change.
Getting in trouble with Japanese financial regulators in the past often resulted in nothing more than a request to shape up. So it came as a shock to many in Japan's financial industry when regulators brought out the big guns and penalized Citigroup by shutting its private banking business in Japan for what they described as severe violations of banking laws.
Analysts say such harsh penalties could become more common as financial system watchdogs adopt a more aggressive stance amid sweeping changes that will allow banks to enter new businesses, like selling stocks and offering investment advice.
"This is a signal for other financial institutions to tighten up their businesses in terms of compliance," said Yoshinobu Yamada, bank analyst at Merrill Lynch, in Tokyo.
"As banks or financial institutions get more power, they need to have a very clear and tough compliance system," Yamada said.
And contrary to perceptions in the past, it is not just foreign banks that may face regulators' wrath.
Citigroup is only the second bank to have a license to operate branches revoked. In 1999, the Financial Services Agency, Japan's chief bank regulator, revoked the banking license of a Credit Suisse Group unit, Credit Suisse Financial Products, after it found that the company was engineering financial products specifically to help companies hide losses and that employees had obstructed regulators by destroying or hiding files.
One of the toughest penalties issued against Japanese financial firms came in 1999 when the agency took action against the Dai-Ichi Kangyo Bank, then the nation's third-largest lender, and three top brokerage firms, including Nomura Securities, for paying off corporate racketeers. More than two dozen executives were convicted of viola-ting securities laws and regulators shut crucial parts of the companies for up to five months.
Dai-Ichi, for instance, was prohibited from making new loans to businesses for five months and forbidden to open new branches or business lines for a year.
The penalties were estimated at the time to have resulted in hun-dreds of millions of dollars in lost revenues for the companies.
One executive at a US brokerage house in Japan said that until four or five years ago, regulators tended to look at banks in groups. If a US bank was caught in a violation, other US banks could expect to get a closer look.
But recently, he said, the regulatory agency have added personnel and become much more sophisticated. He said that there was little sense that the action against Citibank was causing alarm among foreign firms, which have been strengthening compliance in the last couple of years as signs of tougher regulation arose.
Citibank's actions were seen as overly aggressive and a clear breach of financial rules, he said.
Regulators cited a long list of problems at Citigroup's Japanese private banking unit, including failure to prevent possible money laun-dering and making loans to clients engaged in various forms of wrong-doing, including tax evasion and stock manipulation. Regulators also said bankers misled customers about investment risk and overcharged for some products.
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