Last year, Citibank fired one of its employes who had questioned the bank's international currency operations. The dismissal and subsequent public charges by the employe - denied by the bank- have triggered public debate on how international money markets operate. Citibank refused permission for interviews with its European staffers.

For more than two years, Assistant Vice President David Edwards had been warning his superiors in Citibank's European money trading operation here that something was wrong.

There were things going on that were illegal, he kept saying. Certain employes were taking kickbacks, and some bank practices were in violation of tax and currency control laws in several European countries, he alleged in written and verbal communications with other bank officers.

For a while, he was shuffled from one office to another to voice his concerns, often having to repeat the same tale over and over again , and present the same evidence he had gathered time and time again.

Finally, the bank got tired of hearing the story, and Edwards got tired of telling it to people he says were not listening.

On Dec. 14, 1977, Citibank asked for Edwards' resignation. He said no. Two months later, he was fired. It was only a few months after that that Edwards responded, doing something that shocked the normally staid and secretive banking industry, and caused reverberations that have yet to subside.

Edwards went public. In doing so, he opened the door for one of the first public glimpses into the normally illusive world of international banking.

In a lawsuit filed July 24, 1978, Edwards charged the bank with "wrongful dismissal," claiming he had been fired merely for following the bank's own policy of reporting any suspected wrongdoing to bank superiors. He asked for $14 million.

And he may not have been just whistling in the wind. Edwards had documents. When he left his job at the bank he took a significant number of papers in an attempt to support his allegations of illegality and his attempts to bring them to the attention of bank higher-ups.

In his now-famous 106-page "Blue Book" (so-named for its blue cover), Edwards used Citibank's own internal memoranda to detail the bank's foreign exchange practices, which he said in many cases were designed to get around local laws in almost every European country in which Citibank operated. He claimed the bank was deliberately and illegally shifting profits out of European branch offices, at which such profits would be taxable, to tax havens like Nassau, the Bahamas, where the profits were not taxed. He also charged in his court filings that bank officals continually covered up his allegations.

What has occured since that suit was filed has been what Business Week magazine called "Citibank's worst public relations problem in years."

Seven federal investigative agencies and two congressional committees are probing many of Edwards' allegations, made both in court and in an article he has written for a business magazine.

Bank regulators in several countries have begun investigating the bank's practices in their jurisdictions, with at least one, Switzerland, acknowledging a back-tax bill is likely.

But the most profound impact has been felt within the banking industry itself, an industry that is not used to having its dirty linen aired in public. And perhaps more importantly, an industry that has to rely on a great deal of public trust.

There is a fear among bankers that the Citibank "problem," as they prefer to call it, could cause an overreaction by the public, who the bankers are convinced understand little about the volatile and increasingly extensive world money markets.

The Euromarkets, as they are called, represent a hugh pool of currency out of the regulatory reach of any single country. An estimated $860 billion worth of currency is floating around the world outside the country of its issue, i.e., dollars outside the U.S., francs outside of France. In the past 20 years, the size of the Euromarket has increased 1,720 times, reflecting both the growing demands of world trade-which, in turn, needs easy access to huge amounts of all major currencies-as well as the banks' perceived need to avoid costly and bothersome local restrictions in many countries that they say thwart the fee flow of money around the world.

Because the attraction of the Euromarket is its freedom from regulation, bankers become understandably nervous when there are attempts to apply some kind of controls that would end such freedom. And, they feel, if people begin to distrust bankers, they will begin to seek such controls.

There are indications that such concern may be justified. Only last week, Rep. Jim Leach (R-Iowa), ranking minority member of the International Trade Subcommittee of the House Banking Committee, cited the Edwards case when he introduced legislation aimed at putting new controls on the Euromarkets.

Leach called on the Federal Reserve to place reserve restrictions on the dollar and for the U.S. to pressure foreign governments to do the same on their currencies in an effort to stabilize the Euromarkets and slow their growth.

"The existence of a large Eurocurrency market acts as a driving stimulant to currency speculation," Leach said. "Unfortunately, potential conflicts of interest develop between banks and their customers when banks trade on their own account, and between banks and the goals of a stable dollar and international monetary system when profiteering in currency exchange transactions is so alluring."

"Speculation is the major new business of international banks, with a number reporting 12 percent to 19 percent of their last-quarter profits coming from currency transactions," he said. "Unfortunately, the very profitability of this activity gives international banks a vested interest in increasing currency instability since currency profits are most apt to be made in a fluctuating market."

Leach also warned that the large Eurocurrency market "increases the temptation to seek profits in currency transactions and to move monies to appropriate tax shelters. The possitiblities for tax evasion are significant."

"A lot of money is created in the international markets outside the control of any central bank," Federal Reserve Board Chairman G. William Miller said to the National Press Club last year, calling the Eurodollar situation "one of the greatest worries" he has.

"And this Edwards case can do nothing but make people more suspicious about what we are trying to do," adds a Chemical Bank official in Europe.

A large part of the problem in the Citibank case is due to the bank's own handling of the matter since the suit was filed. There has been a virtual stonewall on information from the bank, except for the release of an exhaustive, yet inconclusive, eight-month study of the problems by the bank's law and accounting firms.

Citibank also has been criticized in news accounts for changing its publicly stated reasons for firing Edwards on two different occasions.

In a Dec. 14, 1977, letter from Citibank Executive Vice President Thomas Theobald, Edwards was told he was being fired because "your continued allegations were detrimental to the best interests of the bank."

But in the Aug. 24, 1978, Citibank News-an internal employe publication-the bank stated that Edwards was fired "not because he raised questions about bank practices, but because of circumstances surrounding his refusal to accept reassignment."

Then, in the March 1979 issue of Executive, the Cornell University Graduate School of Business magazine, Citicorp Chairman Walter Wriston said Edwards was fired because he was "totally incompetent." Wriston further claimed that the sacked banker's "famous accusations didn't arrive until after he was dismissed."

"In our country, we call that being badly briefed," one British banker said, commenting on Wriston's statements.

But the implications of the Edwards case, and the bank's reaction to it, are far more serious than just one banker being "badly briefed."

"You're damn right we're upset," said an international banker at Morgan Guaranty in New York. "People see a bank stonewall like that, and they think we all have something to hide. Then, they see that we are regulating ourselves for the most part-which is the way it has to be for this market to work-and they begin to wonder if we are hiding a lot more.

"Well, we aren't hiding a lot more, but I have no idea how we are going to convince people of that when they see this king of stuff" (pointing to a news account of the Edwards case.)

"I'm shocked by the behavior of this fellow Edwards," says Dr. Hans Mast, a widely respected banker for Credit Suisse in Zurich. But Mast comes from a country where banking secrecy has been a way of life for decades. And Mast would not discuss the merits of Edwards' allegations, except to say that it is both legal and legitimate for a bank to seek to reduce its tax bit-to "avoid taxes"-around the world.

Other bankers point out, however, that there is a fine line between "tax avoidance," which is the legal avoidance of taxes, and "tax evasion," which is illegal. Many countries, for example, have explicit laws forbidding the establishment of transactions that are designed solely to cut down taxes. The bank defends many of the transactions in question by claiming they were designed not to avoid taxes but to keep money flowing around the world and available to its worldwide network. That taxes also were reduced is merely a side effec, the bank says.

"What Edwards says Citibank was doing is abusive, and (if what he says is true) it is morally wrong," says an international banker for Chase Manhattan. "We are hoping that most of the foreign governements looking into this case don't come to the conclusion that we all can't be trusted, because that could have a disastrous effect on the entire worldwide market. There are already too many domestic controls in each country that don't recognize the needs of the international market."

Even Citibank's own Theobald-the man who fired Edwards-acknowledges that international banking is virtually unregulated.

"As a matter of economic policy, it is absolutely correct to say that attempts to stop, in one location, a global market are futile," he said in an interview. Asked if people and companies are flouting the law, he said, "Yes. But you don't have to flout the law. All a country can do is pass laws relating to that country, and if the person, company or anything else does business in more than one place, then automatically (they) are under two jurisdictions or more (and out of the control of any one of them)."

But Citibank appears from its internal documents to be aware of the fact that it probably crossed that fine line from legal avoidance to illegal evasion of both tax and currency laws in several of the countries in which it operates. In a 21-page internal memo in 1976, Citibank's then assistant vice president, Paolo Cugnasa, warned that the bank's system of "parking" various foreign exchange holdings in tax havens like Nassau should "be kept as inconspicuous as possible."

There is concern that the problems faced by Citibank were due to overzealous employes driven by the bank's profit incentive system, which is tied to performance.

"Young guys get greedy," said a former Citibank official, "especially overseas where so much money moves around so fast. It's hard to keep track or even notice something is wrong until it reaches epidemic proportions."

"The problem isn't Citibank," says one Frankfurt-based American banker. "Everyone works essentially the same way. Oh, Citibank may be a bit more aggressive than anyone else, and maybe that rubs off on their people. But on the whole, they're an honest and hard-working lot. The real problem is the perception the public has of bankers, and what we are trying to do. When they read a book like the 'Crash of '79' or they read in the papers about this Edwards case, it looks like the industry has something to hide. Actually we don't, but we are so sure that no one will understand us that we don't talk to anyone. So, naturally, no one will trust us." CAPTION: Illustration, no caption, By Robin Jareaux-The Washington Post