Citigroup is being investigated by Japanese regulators for possible infractions related to its marketing of financial products and could face its third major punishment in Japan in 7 years, a source with knowledge of the matter said.

Japan's Financial Services Agency (FSA) is probing whether Citigroup failed to offer sufficient explanations to customers about investment trusts, which are similar to mutual funds in the U.S., and other financial products, the source said.

The regulator is also looking at whether controls against money laundering were sufficient, following punitive action in recent years for lax oversight in that area, the source said.

The FSA plans to order Citigroup to report on its legal compliance and will then decide whether it deserves to be punished. Possible sanctions include having some operations suspended for a certain period of time, the source said.

The source spoke on condition of anonymity because the probe into Citigroup specifically has not been made public.

No one at the FSA, which carries out routine inspections on all banks, could be immediately reached for comment.

It is a matter of public record that the FSA is conducting an inspection and we don't comment on conversations with our regulators, a spokeswoman for Citigroup in Japan said without elaborating.

News of the probe was first reported by Dow Jones.

Sanctions would come as a fresh blow to Citigroup, which had its name tarnished in Japan in 2004 when regulators forced it to close its private banking business due to lax controls in the prevention of money laundering.

It was punished again in 2009 for the same violation and forced to suspend retail bank marketing activities for a month.

(Reporting by Noriyuki Hirata, Taiga Uranaka and Junko Fujita; Editing by Nathan Layne)