Citigroup Inc. (C) is likely to pay $600,000 in fines to settle a claim by the Financial Industry Regulatory Authority (FINRA) over derivatives transactions that helped foreign clients avoid taxes on dividends.
The regulator accused the bank of incompetently supervising transactions that helped international customers avoid U.S. taxes on stock dividends.
Citigroup Global Markets failed to supervise the system of trades and swap contracts and inadequately monitored certain communications. In accordance with the system, an overseas client sold U.S. shares to Citigroup before dividends were paid. However, Citi later received an amount similar to the dividend through a derivative contract.
Citigroup initially did not have written procedures to inspect the system. Though, later on the bank adopted a policy but employees failed to follow it consistently.
Major governments around the world are taking stringent actions to impede tax evasions in order to fix the widening budget gaps fueled by economic weakness. In 2008, a U.S Senate inquiry found that a number of Wall Street firms invented imaginary derivatives and stock loan deals to help clients including international hedge funds avoid huge amount of taxes. Citigroup also voluntarily disclosed such deals and paid $24 million in taxes for 2003 through 2005.
In early 2009, Swiss banking giant UBS AG (UBS) agreed to pay $780 million to settle criminal claims that it helped U.S. citizens evade taxes.
Citigroup will release its third quarter 2009 earnings on Oct 15, 2009 with a conference call scheduled later in the day to discuss its results. Ahead of its results, we maintain our Neutral recommendation on the stock.
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