Citigroup was fined $600,000 today by the
Financial Industry Regulatory Authority Inc. for allowing some of its international clients to avoid paying taxes on dividends connected with derivatives transactions.
Citigroup failed to supervise and control trading, and to prevent improper internal trades as well as those with some of the bank's trading partners, Finra said.
The bank settled with Finra, without admitting or denying the charges. “We're pleased to have the matter resolved," said Citi spokesman Jon Diat.
The transactions in question occurred between 2000 and 2005. One of the strategies involved a
Citigroup unit in New York that bought stock from foreign brokerage customers. After some time had elapsed, during which the taxable dividends on the stock were paid out, the stock was sold back to the customers, Finra said.
When dividends on U.S. company shares are paid to foreign investors, they may be subject to U.S. withholding taxes. Under the
Citigroup arrangement, certain foreign customers were deemed to receive a "
dividend equivalent" in a swap, not considered to be subject to withholding taxes.
Finra said that in determining the amount of the fine, it took into account that
Citigroup discovered the alleged violations and reported them to the regulators, and that the bank and a law firm it hired to make a review aided Finra in its investigation.
“Increasingly complex trading strategies must be governed by supervision that is equally sophisticated and detailed," Susan Merrill, Finra's executive vice president and chief of enforcement, said in a statement confirming the reports. "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.”
While the case is primarily a tax case, Finra brought its action based on rules requiring companies to supervise the activities of their brokers, said Finra spokesman Brendan Intindola.
“Our piece of it is just the trading, [and] the lack of supervision over the trading in execution of these particular strategies that gave rise to these tax issues,” he said. “These were strategies that broadly were designed to create certain tax advantages for the firm and their clients,” he said.
“What Finra's imposing the fine for is specifically [that
Citigroup] didn't have adequate resources so these transactions could be tracked,” said Thomas Gorman, a partner with Porter Wright Morris & Arthur LLP and a former senior counsel in the Securities and Exchange Commission's Division of Enforcement. “Requiring adequate procedures to track a transaction is a fairly typical kind of action for Finra,” said Mr. Gorman, who is also co-chairman of the American Bar Association's White-Collar Crime Securities Section.
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InvestmentNews reporter Sara Hansard and The Associated Press contributed to this report
