Citibank 2015 Annual Report Download - page 80

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wrongdoing. The complexity of the federal and state regulatory and
enforcement regimes in the U.S., coupled with the global scope of Citi’s
operations, also means that a single event or issue may give rise to a large
number of overlapping investigations and regulatory proceedings, either by
multiple federal and state agencies in the U.S. or by multiple regulators and
other governmental entities in different jurisdictions.
Moreover, U.S. and non-U.S. regulators have been increasingly focused
on “conduct risk,” a term that is used to describe the risks associated with
behavior by employees and agents, including third-party vendors utilized by
Citi, that could harm consumers, investors or the markets, such as failures
to safeguard consumers’ and investors’ personal information, failures to
identify and manage conflicts of interest and improperly creating, selling
and marketing products and services. In addition to increasing Citi’s
compliance risks, this focus on conduct risk could lead to more regulatory or
other enforcement proceedings and litigation, including for practices which
historically were acceptable but are now receiving greater scrutiny. Further,
while Citi takes numerous steps to prevent and detect conduct by employees
and agents that could potentially harm customers, investors or the markets,
such behavior may not always be deterred or prevented. Banking regulators
have also focused on the overall culture of financial services firms, including
Citi. In addition to regulatory restrictions or structural changes that could
result from perceived deficiencies in Citi’s culture, such focus could also lead
to additional regulatory proceedings.
Further, the severity of the remedies sought in legal and regulatory
proceedings to which Citi is subject has increased substantially in recent
years. U.S. and certain international governmental entities have increasingly
brought criminal actions against, or have sought criminal convictions from,
financial institutions, and criminal prosecutors in the U.S. have increasingly
sought and obtained criminal guilty pleas or deferred prosecution
agreements against corporate entities and other criminal sanctions from
those institutions. As previously disclosed, in May 2015 an affiliate of Citi
entered into a settlement with the DOJ whereby the affiliate pleaded guilty
to an antitrust violation and paid a substantial fine to resolve the DOJ’s
investigations into Citi’s foreign exchange business practices. These types
of actions by U.S. and international governmental entities may, in the
future, have significant collateral consequences for a financial institution,
including loss of customers and business, and the inability to offer certain
products or services and/or operate certain businesses. Citi may be required
to accept or be subject to similar types of criminal remedies, consent orders,
substantial fines and penalties or other requirements in the future, including
for matters or practices not yet known to Citi, any of which could materially
and negatively affect Citi’s businesses, business practices, financial condition
or results of operations, require material changes in Citi’s operations or cause
Citi reputational harm.
Further, many large claims asserted against Citi are highly complex,
slow to develop and may involve novel or untested legal theories. The
outcome of such proceedings is difficult to predict or estimate until late
in the proceedings. Although Citi establishes accruals for its legal and
regulatory matters according to accounting requirements, Citi’s estimates
of, and changes to, these accruals, involve significant judgment and may be
subject to significant uncertainty and the amount of loss ultimately incurred
in relation to those matters may be substantially higher than the amounts
accrued. In addition, certain settlements are subject to court approval and
may not be approved.
For additional information relating to Citi’s legal and regulatory
proceedings and matters, including Citi’s policies on establishing legal
accruals, see Note 28 to the Consolidated Financial Statements.