Citigroup’s $900-mn Loan Error is Still Perplexing, Suggests Systemic Deficiencies

You can understand why Citigroup Inc. is blaming human error for its $900 million mistaken payment to Revlon Inc.’s lenders. It’s a straightforward explanation for an embarrassing cock-up. Presumably the company wants to give the impression that the individuals responsible can be dealt with quickly in the hope that the fuss will die down.

Well, not so fast. When a simple human lapse like this can cause such a problem, it suggests there may be systemic deficiencies too. Where were the checks? The U.S. banking giant was also criticized not long ago by U.K. regulators for shortcomings in its governance and controls.

As it seeks through the courts to recover the erroneous Revlon payment, Citi — a bank with a $2.2 trillion balance sheet — says the person who processed the transfer “did not manually select the correct system options" after some lenders had been paid part of the loan. Instead of paying just the interest, it says the individual failed to prevent the entire principal on the loan from being repaid, landing the lenders with 100 times what they were due to receive. 

According to Citi’s latest court filing on the subject, “manual checks" also failed to catch the original blunder. A third-party vendor was also involved, according to a person familiar with the transaction. Unfortunately for the Wall Street firm, this raises more questions about how robust its system was. As my colleague Chris Hughes wrote last week, when these controls don’t work, that’s an institutional failing. The bank has acknowledged separately that it’s upgrading its loan-operations platform.

Citi’s investors may be asking themselves what did those additional checks consist of. Were any alerts triggered and if so how and why were they ignored? And how did Citi’s own funds end up being transferred to Revlon’s lenders? The bank was only the “administrative agent" for the loan, according to its own description, and the cosmetics company had on Aug. 11 remitted the interest amount to Citigroup for transfer, not the principal.

Will the new loans platform ensure this doesn’t happen again, or has the upgrade itself somehow compounded the problem? It is not uncommon for glitches to occur when technology changes.

Citi declined to comment beyond its legal filings and statements, as did a lawyer for the lenders. Regardless of the legal ins and outs of the case — one hedge fund lender sees grounds to keep the money to set against its exposure to Revlon, while another group of creditors is claiming that the cosmetics company was in default on the loan anyway — regulators will surely be looking closely at the details of what went wrong too.

In the who’s who of payment errors, Citi isn’t the worst. Deutsche Bank AG inadvertently wired 21 billion euros ($25 billion) as collateral for an over-the-counter derivatives trade in 2014 and made a 28 billion-euro payment error in 2018. The German bank also blamed the first blunder

on an individual and the failure of a system that requires two sets of eyes to look over transactions.

Citi’s mistake isn’t its only recent oversight issue. In December, a U.K. regulator fined the bank $57 million for inaccurately reporting the capital and liquidity that it held locally, identifying dysfunctional systems, governance and controls. The Bank of England’s Prudential Regulation Authority said the lender’s top executives and governance committees lacked a complete understanding of what was required and which of their managers were in charge.

Of course, these are two separate incidents. Citi may get the remaining funds back on the Revlon payment (some lenders have already repaid). It has acknowledged that “an operational error of this nature is unacceptable." But regulators and shareholders should keep pressing for a clearer explanation of what went wrong.

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(Except for the headline, this story has not been edited by Scrabbl staff and is published from a syndicated feed.)