Citigroup is set to be fined over derivatives transactions that were partly designed to help foreign clients avoid taxes on dividends in a move that could herald a wider crackdown against Wall Street banks that used similar strategies.

The $600,000 fine by the Financial Industry Regulatory Authority, which oversees broker-dealers, comes after the US authorities hardened their stance on offshore tax operations with a series of actions over the past few months.

As part of their campaign, regulators have targeted the complex derivatives deals used by banks that they allege help offshore bank clients avoid billions of dollars in US taxes.

When dividends on stock in US companies are paid to foreign investors, these dividends may be subject to withholding taxes, depending on the applicable treaty between the US and the foreign investor's home country.

Finra's fine against Citigroup Global Markets, expected to be announced today, partly involves the bank's failure to control trading related to strategies including so-called “total return swaps”.

Such swaps helped Citi's foreign clients receive the full value of dividends from US securities without paying the withholding tax. The bank also had another swap strategy involving Italian stocks that generated financial benefits for the firm itself.

Citi declined to comment but people close to the bank said the bank had discovered the control failures and reported them to regulators. As it is customary, Citi is expected neither to admit nor deny Finra's allegations.

Citi voluntarily paid $24m to the Internal Revenue Service, the US tax authority, in 2006 in relation to the withholding of dividend taxes on a limited set of swap transactions from 2003 to 2005.

The IRS yesterday said it was examining “numerous transactions” but declined to comment on specific taxpayers or their cases. The examinations focus on whether financial institutions failed to withhold tax on payments made to foreign clients who may be liable for US taxes with respect to dividend payments.

Derivatives transactions came into the spotlight last year when the Senate permanent subcommittee on investigations released a report saying that some financial institutions designed, marketed and used transactions to enable foreign taxpayers, including offshore hedge funds, dodge millions of dollars of taxes on US stock dividends.