Citibank's $500 Million Mis-Transfer Can’t Be Undone Per Courts

Sean Kernan

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I shudder when I think about ‘the moment’.

It’s that instant you realize pushing send was a very bad move. The balloon gets away. You watch your ill-advised email disappear into the mist, destined to return with new friends and bitter consequences.

The worst I’ve seen was at my former office. An employee sent our internal budget to a key customer. It detailed how much money we were making off this customer, and clearly showed we were overcharging them. Making things 10x worse, the body of the email included a comment that we were “milking this customer like an overfed cow”.

Acci-sending and reply-all is a rich topic and Citibank just wrote an unrivaled chapter.

The transfer disaster continues to unfold

Citibank accidentally sent $975 million to a group of lenders on behalf of their client, Revlon. They intended to send $8 million as an interest payment.

Typically, you are required to return mis-transferred money. Be warned, it’s a criminal offense to run off and spend it. One couple erroneously received $120K from a bank and, rather than confirm it, went on a shopping spree. Now they are facing felony theft charges.

With Citibank, $475 million was returned by the other recipients in quick order. The return of the remaining $500 million is complicated by other factors.

The holdout lenders are in legal disputes with Citibank’s client, Revlon. So when Citigroup requested a return of the funds, ten of those lenders refused, saying the money was owed anyways. Technically, it was. But the context is important.

The pandemic wreaked havoc on retail vendors like Revlon, which is now in financial trouble. For lenders, keeping the money was an obvious strategic move. When a company goes bankrupt, it liquidates. When it liquidates, a payment pecking order is established, saying who gets paid first. Lenders are usually near the top of that list but their odds of getting full payment still tend to plunge.

The big problem? The entirety of the money wasn’t supposed to go through Citibank. This pre-payment now places the liquidation risk directly in their lap — which is the last thing a bank wants unless they’re getting revenue for that risk. It’s one of the biggest banking blunders in history.

Analysts expected Citibank to get the money back. Which is why it was a shock when, on February 16th, a judge ruled against the banking conglomerate.

Judge Jesse Furman of the district of Manhattan wrote in his ruling, “To believe that Citibank, one of the most sophisticated financial institutions in the world, had made a mistake that had never happened before, to the tune of nearly $1 billion, would have been borderline irrational.”

Citibank is expected to appeal. One thing helping their chances is a colorful chat between employees. It was revealed in court documents:

DFREY5: I feel really bad for the person that fat-fingered a $900mm erroneous payment. Not a great career move . . . .

JRABINOWIT12: certainly looks like they’ll be looking for new people for their Ops group

DFREY5: How was work today honey? It was ok, except I accidentally sent $900mm out to people who weren’t supposed to have it

DFREY5: Downside of work from home. maybe the dog hit the keyboard

How could this happen?

There’s a “six eyes” requirement with transfers of this size, meaning three different managers must approve it before it completes. The situation snowballed because someone checked the wrong payment box, which hid it from managerial approval. This baton drop was due to an internal change: Citibank’s updating of a long-dated software system. Employees are still learning the new setup.

Regardless, the transfer was an inexcusable error in any context. A single missed checkmark should never be the crumbling wall between a billion-dollar transfer.

The $500 million wasn’t due for years. Banks put those millions to work, generating millions more for the company before spending it. In finance, we commonly referred to this as the time value of money: having money now is more valuable than having money later. It’s a central principle to lending.

Additionally, the mistake has drawn the attention of regulators, who are now auditing and demanding stricter controls around Citibank’s processes.

The incident might morph into a Black Swan event, one which generates greater regulation of the entire banking industry. It’s unfortunate for employees because banking regulation is already suffocating. I’ve always said that behind every dumb law and rule, is an even dumber mistake.

Ultimately, the entire debacle is massively bad PR for the company. It’s never a good look when you accidentally add a few extra zeroes to your transfer. One can imagine that there was a reckoning inside the doors of Citibank’s corporate office. I wouldn’t wish it upon anyone.

Proof your work, people. Bad typos have a long shelf life.

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