Citi was supposed to release $7.8 million worth of interest payments on Revlon’s behalf but ended up paying $900 million instead. Now the prospects of recovering about $500 million of that amount look grim.
Have you ever accidentally routed money to someone it wasn’t intended for? Or perhaps, added an extra zero to the amount? Now, imagine if the recipient refused to return the excess money, claiming ‘finders keepers’. That’s exactly what happened with Citibank, except on an exponential scale.
Citibank Loses $500 Million in Mistaken Transfer
The incident dates back to August 2020 when Citibank, which has taken on the role of an administrator for Revlon’s loans from 2016, erroneously paid the embattled cosmetic company’s entire debt. Citi was supposed to release $7.8 million worth of interest payments on Revlon’s behalf but in a transfer mistake of epic proportions ended up paying $900 million instead!
After the mistake was uncovered, Citi reached out to the lenders and managed to recover a portion of the money. However, 10 firms refused to return the money to Citibank, which collectively amounted to roughly $ 500 million. Following this, the Citi group decided to sue.
Ruling on the matter, Judge Furman based his judgment on the discharge-for-value rule in the New York law and stated that money received to settle a debt does not need to be returned given that the recipients neither made any misrepresentation to induce this payment nor did they have any notice of the error.
The judge said that lenders were justified in believing that payment was intentional. Given that Citibank was one of the most reputed and sophisticated financial institutions globally and the scale of the payments, it’d be irrational for them to believe otherwise.
Watch: Citibank loses fight to get back $500 million mistakenly transferred
Considering the unprecedented nature of the error, Citibank’s transfer mistake has fast become the talk of the financial world. Even more so, in the light of this unique court ruling. The most common concerns emerging from this financial mess are: What if it happens to you and me? What if our bank goes bust owing to such an inadvertent back-end error?
Let’s find try to address some of these questions:
Are erroneous transactions of this scale even possible?
The Citibank transfer mistake incident undoubtedly falls in the rarest of the rare category. Typically, there are stringent checks and balances in place – such as entering, confirming and cross-checking account numbers, amount and IFSC codes – to ensure that the details entered by the sender are correct. Even so, such accidental transactions can take place owing to an error on the part of the customer or the bank.
What recourse is available in case of such an error?
The course of action depends on whether the error was made by the customer or the bank. Banks have a standard operating procedure (SOP) in place to deal with such cases, which is set into motion as soon as the error comes to light. The recipient is informed about the erroneous transfer and a request for reversal is put in place. In case the recipient refuses to comply, the bank can move court or file a police case.
In case the transaction happens on account of the customer’s error, the onus of dealing with it falls squarely on them. They can request a reversal, and in case of non-compliance, seek legal recourse.
Why did Citibank’s case not hold water?
If banks have the option of seeking legal recourse in such cases, why did the judge rule against Citibank in the case? Well, because, in this particular case, lenders who received the money were actually owed that sum by Revlon, whose administrator Citibank was acting as.
They were neither the wrong recipients nor did they receive an amount that didn’t add up, leaving them no reason to suspect that the transaction was made by mistake. In this case, the error was more of a technical nature where instead of amount X (the interest), amount Y (the debt in its entirety) was transferred.
For now, Citibank has decided to appeal the ruling.
Bad loans and credit growth issues instill a sense of nervousness in global markets and the common man alike. And for good reason. The 2008 recession was the result of one subprime mortgage crisis snowballing into a global financial crisis. Closer home, bad loans have already sounded the death knell for the likes of Yes Bank and sent the others staring down a $20 trillion hole.
With the world economy already hanging by tenterhooks in wake of the COVID-19 pandemic, one of the most premier financial institutions losing half-a-billion dollars to an error is unnerving.