A FOOL'S MISTAKE

- Amitoj Singh (Editor-in-Chief)

Imagine a scenario where a lender had lent huge sums of money to a company for running its business operations but after a few months the company finds itself standing on difficult grounds and is thinking of shutting down its opeartions and filing for bankruptcy. The lender is in complete distraught as he believes that all his money is lost and will recover only pennies if the company files for bankruptcy. He is skeptical and feels that the company will default on its interest payments as the date for payment has arrived. He checks his bank account to see whether the interest is credited but finds the entire loan amount credited to his account and is overjoyed. You may be thinking of this story as quite amusing and hilarious as no one in real life would commit this blunder. But believe me when I say that this is a real case scenario and this blunder was commited by one of the most renowned international banks.

Citibank is one of the most renowned and well known international banks and following its reputation of being the best in everything (including mistakes), it has committed one of the biggest blunders in banking history - a blunder of $900 million. Allow me to explain the series of events that led to this blunder.

Citi being one of the most renowned banks was acting as an agent of cosmetic company Revlon. Revlon had taken a loan of about $900 million from a group of lenders for running its operations and wasn’t due to pay the loan until 2023. Due to a decline in cosmetics purchases due to the Covid pandemic, Revlon was finding it difficult and was also thinking of filing for bankruptcy but a last minute rescue from its owner Mr. Perelman avoided this fate. Citi was supposed to make a payment of $8 million (interest) to the lenders of Revlon but instead transferred the entire outstanding debt of $900 million to the lenders and attributed this mistake as “human error”. The worried bank asked the lenders to pay back the amount ‘mistakenly’ transferred to their account and some lenders accepted the request and transferred about $400 million to Citi. But 10 lenders who had to pay an estimated amount of $500 million refused to pay.

The bank then sought to take legal action against the remaining lenders. Citi argued in court that the lenders knew that the amount was transferred by mistake as the principal payment was not due in 2023 and Revlon couldn’t affored the payment and claimed that Citi was entitled to the funds. The lenders on the other hand argued that they believed that the payments were intentional as the company was almost going into bankruptcy and the lenders thought the company was repaying its debt before liquidating. The judge after hearing both the sides announced the verdict on 17th February in the favour of the lenders and said “they believed and were justified in believing, that the payments were intentional” and said that Citi’s mistake “was one of the biggest blunders in banking history”

This blunder raises many questions about the bank’s internal controls and internal management which also strained their relations with some of their major clients. What this case teaches us is that due diligence should always be carried out by the employees before conducting financial transactions. Only if Citi had been diligent in its operations, it would have avoided such public shame and financial loss