October 12, 2009 / 6:08 PM / 10 years ago

UPDATE 1-Citi fined $600,000 for lax trade monitoring

* One strategy helped foreign broker dealers evade taxes

* Second practice boosted yields on Italian stocks (Adds second strategy involving Swiss affiliate, detail on fine, stock activity)

WASHINGTON, Oct 12 (Reuters) - Citigroup Inc (C.N) has been fined $600,000 by the Financial Industry Regulatory Authority for failing to police derivatives transactions, including those that helped foreign clients avoid taxes on dividends.

FINRA, a private-sector regulator of U.S. broker dealers, said Citi had failed to supervise and control trading strategies designed partly to evade taxes.

One trading strategy involved Citi buying stock from foreign broker-dealer customers, selling it back to them and after a series of interim steps, including using swaps, the foreign clients would receive dividends free of withholding taxes, according to FINRA.

This practice occurred from 2002 to 2005, the regulator said.

Citigroup paid about $24 million to U.S. tax authorities in 2006 and earlier for using this strategy, FINRA said.

A second strategy, which FINRA said was aimed at enriching Citi itself, involved Italian stock trades and loaning stock to the company’s Swiss affiliate. Citi employed that practice from 2000 through 2004.

Citi is pleased to resolve the matter, a company spokeswoman said. In agreeing to the deal, the bank neither admitted nor denied the charges, according to FINRA.

FINRA said Citi discovered and reported the violations to the group itself, and that influenced the fine.

The development comes as governments around the world crack down on tax evasion as they look to close widening budget gaps caused by economic weakness.

Shares of Citi were up 3.5 percent at $4.79 in afternoon New York Stock Exchange trading. (Reporting by Kim Dixon, editing by Matthew Lewis and Lisa Von Ahn)

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