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NEW YORK: Citigroup Inc repeatedly violated U.S. Federal Reserve rules limiting inter-company transactions, leading to errors in its internal liquidity reporting, according to a December Citigroup filing seen by Reuters.
Reuters first reported the violations. Under so-called Regulation W, banks must restrict transactions such as lending to affiliates they control. The rule is designed to protect depositors, whose funds are insured by the government for up to $250,000.
The Regulation W violations come as Citigroup grapples with different issues in risk management and internal controls. In 2020, regulators called its risk practices “unsafe and unsound,” and in 2023 they faulted the way Citigroup measures counterparty risk. This year, regulators criticized the bank’s resolution plan and recently fined it $136 million for insufficient compliance progress.
The firm’s “subsequent response to the breach resulted in inaccurate liquidity reporting,” said the document, which provides a snapshot of some of Citi’s work on regulatory issues at the end of 2023.
A spokesman for the bank said: “We are fully committed to compliance with the law and regulations and have a robust Regulation W framework in place to ensure issues are identified, escalated and remediated in a timely manner.”
Reuters could not determine whether the irregularities had been corrected.
Regulation W was enacted by the Federal Reserve more than 20 years ago to prevent depository institutions from incurring losses from related entities, known as subsidiaries, such as by selling bad assets onto the institution’s balance sheet or striking deals at preferential rates.
According to the filing, “the chronic violations exposed deficiencies in Citibank’s ability to identify, monitor, and prevent future Regulation W violations.” At the same time, “the proposed policy and procedure revisions do not appear to provide sufficiently clear guidance to employees to ensure compliance with the regulation.”
Another source with direct knowledge of similar violations but who has not reviewed the document also confirmed that Citigroup violated Regulation W. The source requested anonymity because they were not authorized to speak publicly.
The Fed declined to comment. The Office of the Comptroller of the Currency said it does not comment on specific banks.
Protecting banks
Government examiners will test whether banks are complying with Regulation W. Compliance experts say banks that violate the rule could face increased scrutiny and fines. Citigroup has been under regulatory scrutiny for deficiencies in its risk management and controls since late 2020, and any further action could exacerbate its woes.
The document categorizes Citigroup’s Regulation W violations as compliance risks, but more narrowly categorizes them as prudential and regulatory risks. The company uses this internal categorization to meet global banking standards, according to people familiar with the document.
The filing said the violations “continued over an extended period of time” and were related to clearing relationships between affiliated companies. Clearing is the process of reconciling or confirming transactions before they are settled through the exchange of currency or securities.
Reuters was unable to ascertain further details of the breach, including the identity of the affiliated companies or the nature of the transactions.
The consequences of violating Regulation W depend on the frequency and severity of the violations, said Julie Hill, dean of the University of Wyoming School of Law, who was speaking generally about Regulation W and not specifically about Citibank.
Regulators can start with minor warnings and private notices, then gradually increase the urgency and severity of the violations, she said, adding that serious violations could result in fines or public penalties, known as consent orders.
“The idea behind all these rules and restrictions is to make sure that the bank’s profits are not diverted” to the detriment of depositors or to deplete the government insurance fund, Hill said.
Reuters could not determine whether regulators were aware that Citigroup had violated Regulation W or that there were inaccuracies in its liquidity reports.
Compliance Risk
Earlier this month, the Federal Reserve and the Office of the Comptroller of the Currency fined Citigroup for “insufficient progress” in addressing data management issues and implementing controls to manage ongoing risks.
Chief Executive Jane Fraser said at the time that the bank had increased its focus and investment in compliance efforts over the past few months.
Since October 2020, the two regulators have issued regulatory penalties, called consent orders, and warned Citi about its risk management practices.
Since then, Fraser has said her priority is to transform the bank and enforce regulators’ orders. Investors have rewarded her efforts, with Citigroup shares up 28 percent this year, outperforming some rivals.
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