UPDATE 5-Japan raps Citi for lax money laundering controls

* Japan bans Citi from retail banking promotions for month

* Cites problems with governance, internal controls

* Regulatory action follows similar violation in 2004

* Citi apologises, promises plan to improve compliance (Recasts, adds comments from Citigroup press conference)

By Taro Fuse and David Dolan

TOKYO, June 26 (Reuters) - Citigroup (C.N) has been ordered by Japanese regulators to stop marketing financial products at its retail bank for a month, a slap that is unlikely to squeeze revenue but will further tarnish the U.S. bank's reputation in a key market.

The Financial Services Agency said Citi had not developed adequate systems to detect suspicious transactions such as money laundering, the same violation that prompted the regulator to shut down Citigroup's private banking business in 2004.

The latest punishment comes amid the collapse of the U.S. bank's push to be a major player in Japan. Citigroup spent about $16 billion in recent years to buy broker Nikko Cordial, which it agreed to sell last month at less than half that price.

"If Citibank cannot get its house in order, its operations in Japan may come under threat," said Neil Katkov, head of Asia research for financial services consultancy Celent.

"We've seen banks in the U.S. shut down for alleged loose money laundering compliance, and this is a sign that Japanese regulators are getting tougher."

Citigroup, which has 35 branches and generates about $2 billion in annual revenue from its retail and corporate banking division, Citibank Japan, apologised for the breach, saying it stemmed from the way it reported suspicious transactions.

Its head of retail banking in Japan, Darren Buckley, made a public bow of apology, the traditional sign of remorse employed by Japanese executives, repeating the gesture made by Citi's then-CEO Charles Prince five years ago.

"Our controls need strengthening," Buckley said at a news conference, adding the bank had failed to properly institute changes following the 2004 punishment.

He said it was difficult to anticipate how much impact the suspension would have on revenue. The regulatory move does not impact Citigroup's corporate banking business, he said.

ASSET SALES

The suspension comes as Citigroup tries to sell assets in Japan, an integral part of its efforts to raise cash after suffering more than $85 billion in losses on toxic assets and receiving a U.S. government bailout.

The bank has agreed to sell its Japanese brokerage and investment banking assets to Sumitomo Mitsui Financial Group (8316.T), Japan's third-largest bank, for about $5.9 billion.

It is also looking to sell its Japanese asset management arm, Nikko Asset Management, and telemarketer Bellsystem24 Inc, sources have told Reuters. The deals are expected to raise more than $1 billion each. [ID:nBNG457249]

The FSA said the lack of compliance showed Citigroup executives "... lack an understanding of the rules applied in Japan, such as laws and regulations, and an awareness of improvement".

Citibank Japan, which handles retail and corporate banking operations, had 299 billion yen in net assets and 1,548 employees as of end-March, according to its website.

It promised to submit a plan to the Japanese regulator by the end of July to remedy the problems.

While Citibank Japan cannot promote its retail products for the next month, customers can still initiate transactions with the bank, the FSA and Citigroup said in statements. (Additional reporting by Mayumi Negishi, Nathan Layne and Noriyuki Hirata; Editing by Michael Watson & Ian Geoghegan)