Indonesia on Friday barred Citibank from seeking new credit cards for two years over a case of alleged embezzlement and the death of a client following questioning by debt collectors.

Indonesia's central bank also barred Citigroup from adding new customers for its premium wealth service for a year and said if any crimes were found, it would revoke the U.S. bank's operating license in Southeast Asia's biggest economy.

Bank Indonesia has found violations on international banking regulations as well as weakness in risk management, said S. Budi Rochadi, a deputy governor of Bank Indonesia at a news conference.

The central bank is taking the measures as an effort to protect customers and the credibility of the banking industry, he said, adding it had told Citibank to suspend executives involved in both cases.

Citigroup said it was working closely with Indonesia's central bank to address its concerns and had bolstered its debt collection process in the country.

The penalties do seem to be harsh but there could also be an element of criminal liability. Banks do need to be concerned with the agents that they engage and the message that they use in carrying out their services, said Wilson Ang, a dispute resolution lawyer at Norton Rose in Singapore.

There could be potential criminal liability if there was knowledge that the debt collectors in this instance were intending to do things which would be criminal in nature.

INDUSTRY BAN

Last week Indonesia's central bank also asked 23 banks to stop seeking wealthy new customers for a month.

The wider move, which came into effect from May 2, could prove a short-term setback to a buoyant private banking industry seeking to tap wealthy Indonesians.

There are 60,000 millionaires in Indonesia and the total wealth in the country stood at $1.8 trillion in 2010, according to Credit Suisse Global Wealth report released last year.

Citi, one of the leading onshore wealth managers in Indonesia together with UBS and Credit Suisse , has said it has uncovered suspicious transactions in its Indonesian operations but has not given the size of loss.

Indonesian police have said the case involves around $2 million and have taken into custody Melinda Dee, a 47-year-old former wealth manager at Citi.

An Indonesian woman has filed a civil suit against the local unit of Citigroup, seeking $347 million in damages, after her husband died on March 29 following questioning by debt collectors over bills run up on a Citi credit card.

Citi has said previously it is cooperating fully with police to determine if external agency staff had adhered to its code of conduct on debt collection and that it did not believe physical harm was done to the client when he came to the bank's office.

Citi has around 15 percent of Indonesia's credit card market, according to the country's credit card association.

The sanction will certainly hurt their revenue and profit. The credit card department is their bread and butter here. Indonesian people love to shop, and Citibank has a big presence in Indonesia, said Edwin Sinaga, a senior banking analyst and head of local brokerage Finan Corpindo Nusa in Jakarta.

SETBACK FOR CITI

Bank Indonesia said the U.S. lender will not be allowed to use external debt collectors for three years. Citi said last week it is hiring 1,400 debt collection staff in Indonesia, who were previously outsourced.

The central bank had already suspended Citibank Indonesia from recruiting new customers to its Citigold premium service, where clients typically have over $50,000 in savings, as police investigate the suspected embezzlement at its wealth management unit.

The suspension is the latest run-in with regulators in Asia for Citi, which trying to grow business in booming emerging markets. Citi recently compensated customers for alleged fraud in India and paid a fine in Japan over stock ownership filings.

Citi also has a strong presence in debt and loan markets in Indonesia, but has not been a big player in underwriting initial public offerings or advising on acquisitions, in a country seeing strong investment interest and a buoyant capital market.

I don't think this will make them sell their business and pull out from Indonesia. It may favor banks like HSBC or Standard Chartered, but it doesn't mean clients will flow to the local banks, said Nick Cashmore, Country Head of CLSA, Indonesia.

(Additional reporting by Janeman Latul in JAKARTA and Rachel Armstrong and Harry Suhartono in SINGAPORE; Editing by Lincoln Feast)