Citibank, the world's second-largest bank, may have violated tax and currency laws in at least five European countries, according to a study done for the bank in response to charges by a former employe that it was conducting business illegally overseas.

In releasing the eight-month-long study yesterday, Citibank said the investigation by its principal law and accounting firms revealed "no pattern of violation of foreign exchange regulation." But it added that "certain transactions which on their face complied with local regulations could be viewed by local authorities as being in conflict with the spirit of that regulation environment."

Citibank officials said that in at least one case brought to its attention by the report, the violations appeared so clear cut that the bank is "taking the initiative and bringing it to the attention of tax authorities in that country," said corporate Vice Chairman G.A. (Al) Costanzo. He would not identify the country.

The report was necessarily vague on what violations may have occurred in five of the seven countries checked by the auditors because foreign currency regulations are extremely complex and frequently open to differing interpretations.

In addition, the New York-based Citibank is embroiled in a court fight with David Edwards, the former bank official who made the initial allegations. Edwards, who was fired by the bank after pressing the allegations has sued Citibank, claiming wrongful dismissal and asking $14 million in damages.

While an employe at the bank, Edwards wrote a 106-page report to the directors citing what he considered to be numerous violations in overseas banking operations. He was particularly concerned that the bank may have been illegally evading payment of taxes in several countries by constructing transactions that served to shift profits to Citibank's Nassau branch in the Bahamas, when they had been earned at various European offices.

Contacted yesterday, Edwards said, This has been a difficult time for me, so I am particularly pleased with the fact tha the report appears to raise the same concerns I originally raised, and was fired for continuing to raise."

In general, the report concluded that "while no institutional pattern of transferring tax liability from one country to another in violation of local tax laws was present, we have discovered some specific instances where local counsel advise that tax challenges involving particular transactions would appear to have a high probability of success."

For example, the report questioned whether certain foreign exchange transactions between Citibank branches in different countries were made "at arm's lenght" or at prices artifically set by the bank's traders to reach a predetermined conclusion.

The report scrutinized Citibank's foreign exchange practices in the following European countries, and concluded:

Holland: While the bank found that most of the practices in its Amsterdam office appeared to meet Dutch tax laws, the report noted that "a small risk exists that Dutch tax authorities might attempt to reallocate to Amsterdam some portion of any profits made in Nassau due entirely to the efforts of Amsterdam."

Belgium: "On the basis of the information supplied, local counsel is of the opinion that the transactions described . . . do not constitute a violation by Citibank of any Belgian laws."

"Germany: "It may be concluded from the opinion of German counsel that transactions at rates outside of prevailing market range may violate applicable German regulations." The report added that "there is a severe risk that income realized in Nassau might be found attributable to Frankfurt during the period it was a branch." The Frankfurt office, at one point, was changed from a branch to a subsidiary.

England: "Without detailed knowledge of facts and surrounding circumstances as to the specific obligations of the transferee branch . . . local counsel cannot express any . . . precise opinion as to the basic pattern."

Italy: Auditors found that certain transactions by the Citibank Milan branch "may infringe upon both Italian exchange control and tax prescriptions." The report warned that if certain transactions could be shown to materially affect the Italian currency for any length of time. "Italian regulators might object to the procedure, and recommend or request that it be discontinued. Counsel note that disregard of such a request might lead to suspension or revocation of the branch's banking license."

France: It was the Paris branch where Edwards served as a money trader, and the auditor's report indicates that certain unusual transactions occurred before and during 1974, which current employes "could not explain."

Switzerland: Swiss attorneys told the bank that one transaction described to them "raise questions of a possible evasion of law and of compatibility with the legislative purpose of the exchange controls."

If certain income was transferred to Nassau from Zurich, as indicated in some documents, the auditors said, "This would be a violation of the laws of the Confederation and of the Canton of Zurich."

The pattern of transactions involving the valuation of Zurcih's positions and the creation of profit reserves may potentially raise questions under Swiss tax laws, the report added.

Certain Paris branch transactions that Edwards outlined in his original internal charges were cited in the report. "We were informed that these transactions were entered into in order to have foreign exchange income realized in Nassau, rather than Paris," the auditors stated.

That contradicts recent statements by Citibank Vice President Thomas Theobald, who told The Washington Post in a recent interview that no bank transactions were designed to shift profits and avoid tax payments.

"Tom didn't have the benefit of this report at that time" Vice Chairman Costanzo said yesterday.

The audit also stated that French attorneys for the bank warned that "there is a risk that French authorities can sustain the argument that such transactions not only violated French income tax rules but also violated French exchange controls relating to transfers of foreign currency from France."