“Severe penalties against Citigroup Inc. in Japan are likely to further damage the reputation of the world’s biggest bank as it tries to recover from a series of scandals,” writes Andrew Morse in today’s Wall Street Journal.

“In one of the strongest sanctions levied against a bank operating in Japan, the Financial Services Agency on Friday ordered subsidiary Citibank NA to close its private-banking operations in the country, a penalty that will shutter four offices serving about 5,000 high-net-worth individuals. It is the harshest banking penalty in Japan since a Credit Suisse Group unit had its license pulled in 1999.”

“In nine pages of strongly worded charges, regulators said Citibank employees failed to prevent transactions that may have been linked to money laundering, extended loans used to manipulate publicly traded stocks, routinely misled customers about the risk involved in financial products and tied loans to the purchase of specific investments. The FSA also said Citibank officials tried to obstruct its investigation, and it criticized the efficacy of the unit’s internal controls.”

“The severity of the punishment and the nature of the complaints are likely to further damage Citigroup’s already tarnished reputation. Questions over its controversial work for Enron Corp. and WorldCom Inc. have brought regulatory inquiries, shareholder lawsuits and costly settlements. Citigroup also was engulfed in a scandal over the honesty of some of its stock research.”

“Charles O. Prince, Citigroup’s chief executive, has been working to convince investors, customers and regulators that Citigroup has reformed its corporate culture. Yet in the 11 months since Mr. Prince took over day-to-day management from Chairman Sanford I. Weill, Citigroup has been bedeviled by a series of embarrassments. Questions have been raised about its involvement with collapsed Italian dairy giant Parmalat SpA. In May, it disclosed that the U.S. Securities and Exchange Commission had opened an investigation into its accounting treatment of investments, business activities and loan losses in Argentina.”

“In some cases, Citigroup quickly has acknowledged mistakes. Last week it told employees in an internal memo that it ‘regretted’ having undertaken a controversial trading strategy that roiled European-government-bond markets in August.”

“Douglas Peterson, who has been Citigroup’s CEO of Japan since May, issued an internal memo outlining steps the company has taken to address the FSA’s concerns and admonishing employees to follow all compliance and regulatory obligations. ‘Let me state clearly that this bank does not condone, and it will not tolerate, behavior that violates the trust of our clients or the regulations under which we operate,’ Mr. Peterson wrote.”

“How quickly Mr. Peterson will be able to restore confidence in Citigroup’s Japan operations remains to be seen. The FSA investigation portrayed a culture that tolerated lax practices and suspicious transactions linked to possible criminal activity by clients as long as aggressive business targets were met.”

“FSA officials said Citibank salespeople took advantage of Japanese customers, suggesting unrealistic returns on investments, encouraging them to purchase complicated derivative products they didn’t understand and overcharging them.”