Citibank Can’t Make Up for Revlon Mistake: Judge Blocks Return of $500m

March 12, 2021

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3 min read

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What's going on here?

In one of the biggest blunders in banking history, Citibank cannot recover the $500m they wired by mistake while acting as a loan agent for Revlon.

What does this mean?

On 11 August 2020, Citibank mistakenly wired $900m to a number of Revlon’s lenders, when an employee neglected to override the default settings in the software. Only $8m in interest payments was meant to be sent and it took a day to discover the mistake. Citibank sent out notices to recover the cash. Some of the lenders returned the money but Citi was forced to file a lawsuit when ten investment advisory firms refused to do so. Amongst those ten were Brigade Capital, Symphony Asset Management and HPS Investment Partners.

The bank’s prestige worked against it in the court case, as Judge Furman considered it to be “borderline irrational” for the lenders to have realised the payment had been made in error. Citibank strongly disagrees with the decision and intends to appeal, with spokesperson Danielle Romero-Apsilos explaining that it intends to “continue to pursue a complete recovery” of the funds.

What's the big picture effect?

Citibank had a “six eyes” safeguarding measure in place whereby three people have to approve a transaction before completion. Despite this, a contractor checked the wrong box on the digital payment form, which repaid the loan in full. Under normal circumstances, the law would have sided with Citibank, however, New York exercises the “discharge-for-value defence”. This states that, if a beneficiary is entitled to the money and were unaware of the mistake, they can keep it. Therefore, if the lenders believed the payment was intentional, refusing to pay it back could not be considered fraudulent.

It is plausible that the creditors considered the transaction to be intentional, with some of the internal messages discussing the unexpected receipt of the loan balance were used as evidence. A portfolio manager for Allstate commented, “Not sure if this is an error, seems very unlikely”. Understandably, the lenders are reluctant to give the money back, as Revlon’s shares are trading at 40% lower than last year, while Citibank has a balance sheet of $2.2tn.

Citibank has also been criticised in recent years by UK regulators for its shortcomings in its governance and controls. They were fined £44m by the Bank of England over poor financial information following a reporting oversight that “fell below expected standards”. They had submitted incomplete and inaccurate regulatory information between 2014 and 2018, in what the Bank’s Prudential Regulatory Authority called a “serious and widespread” incident. Citibank is going to have to clean up its act if they are to avoid a reputational crisis.

Considering the recent and unexpected change in how we work due to the pandemic, we can’t help wondering whether Citibank has fallen victim to the dangers of working from home. Or are their systems merely outdated and unreliable? We know that they have since undergone major systematic changes, but whether they will regain their standing in the banking industry remains to be seen. With Citibank blaming human error, perhaps the use of AI would have saved them the embarrassment. It will be interesting to see what checks and balances are implemented in the banking industry as a result of this unprecedented fiasco.

Report written by Lauren Kent

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