NEW YORK ( TheStreet) -- Hong Kong's Securities and Futures Commission has fined Citigroup ( C) HK$6 million ($770,000) for failing to promptly report a Ponzi scheme operated by one of its former employees. Citigroup Global Markets Asia has agreed to pay compensation to customers affected by the fraudulent scheme to the extent of any principal lost by customers, in addition to the fine. The SFC said that the former licensed representative, referred to as Mr X, ran a fraudulent scheme involving 13 of Citi Asia's wealth management clients whose money was meant to be invested in US Treasuries and other products. Mr. X's scheme operated from 2004 until February 2009 when Citi Asia suspended Mr. X while investigating the suspected misconduct. Shortly thereafter, Citi Asia dismissed Mr. X for gross misconduct. However, Citi Asia failed to report the scheme to the authorities in a timely manner, although a preliminary report following an internal investigation already revealed important information in relation to the scheme, the regulator said. By the time the unit reported the matter to the SFC following an external investigation, the former employee had left Hong Kong and has not been traced since. "Citi Asia not only failed to detect a Ponzi scheme operating under its nose, despite having the opportunity to do so, but then failed to report the scheme to the SFC in a timely way, thus making the investigation of this case more difficult given Mr X's decision to leave Hong Kong after he had been dismissed by Citi Asia, " the SFC's Executive Director of Enforcement, Mr Mark Steward said. "Intermediaries know they have a duty to report misconduct to the SFC immediately upon discovery, not when they have plumbed the bottom of it. Delay in reporting simply helps the wrongdoer. This public reprimand should make it clear that the SFC condemns such delay in the strongest terms," he added. The regulator also suspended the license of the responsible officer Lisa Chan Sin Man for eight months for failing to adequately supervise Mr. X and ignoring "red flags" brought to her attention about the scheme.
Citi Asia has agreed that it will pay for an external auditor, to be appointed by the SFC, to audit the accounts of affected customers and assess the amount of compensation required to make them whole. The unit will also pay for an external expert to conduct a review of the internal and external detection, escalation and notification practices and policies in Citi Asia's private banking division in relation to compliance with all applicable regulatory and legal requirements in its securities business, the regulator said. Citigroup has had a series of problems with its Asian operations, even as it increases its focus on the region. The bank is
mulling management changes to its Japan unit after an investigation found alleged problems with the bank's disclosures when selling financial products, including a failure by Citigroup to provide mutual-fund investors with prospectuses in a timely fashion. The bank also took a hit in Indonesia after debt collectors allegedly working for the U.S. bank were tied to a "mysterious death" of a customer. That was followed by ban from selling wealth management services in Indonesia following the arrest of an employee accused of stealing $2 million from clients. Earlier this year, the police in India registered a case against Citigroup in connection with a $67.2 million alleged fraud at a branch in a New Delhi suburb. --Written by Shanthi Bharatwaj in New York >To contact the writer of this article, click here: Shanthi Bharatwaj. >To follow the writer on Twitter, go to http://twitter.com/shavenk. >To submit a news tip, send an email to: firstname.lastname@example.org.