Santander ends up in Citi moment with $ 175 million error

As Santander seeks to recoup the roughly $ 175million it mistakenly paid to UK customers on Christmas Day, it can turn to Citi, at a basic level, for what to expect, what to avoid and what. wonder.

Citi’s $ 900 million manual transfer in August 2020 to creditors of cosmetics company Revlon is possibly the most high-profile recent case of a bank making a stray nine-figure payment from its own reserves.

For Santander, the $ 175 million represents duplicate payments. About 75,000 people and businesses have received one-time or scheduled payments from 2,000 businesses – in many cases their employers or suppliers – that have accounts with the bank. Then they received a second identical payment from Santander.

“The duplicate payments were the result of a scheduling problem, which we quickly identified and rectified,” a Santander spokeswoman told The Times of London. “As a result, none of our clients have been left out and we are taking steps to recover duplicate transactions in accordance with industry processes.”

The first obstacle Santander faces is that of cooperation. Santander is the corporate client bank – not necessarily the personal bank of the beneficiaries. So a good chunk of the $ 175 million went to people with accounts at Barclays, HSBC, NatWest and other institutions, according to the Times – and may have been spent.

This is an argument that Brigade Capital Management – the biggest creditor in the Revlon case – used against Citi. When Citi decided to get its $ 900 million back within hours of the transaction, Brigade said it couldn’t return the money because it had gone to other funds. After Citi sued, a U.S. District Court judge decided to temporarily freeze the money. That same judge, six months later, ruled that Citi was not entitled to recoveries from the defendants.

In Santander’s case, a bank told The Times it would be reluctant to recover from an account holder if it resulted in that person being overdrafted.

Another problem, however, can be the reach. Santander’s $ 175 million could be a fraction of the $ 900 million Citi was seeking to recover. But in Citi’s case, the money went to 315 creditors – far fewer than the 75,000 account holders affected by the Santander error.

Santander, as of December 29, was in talks with Pay UK, which operates the country’s main payment systems, regarding the best way to cancel payments. Some of the money had been returned, The Times reported.

Likewise, not all of Revlon’s creditors have heeded Citi’s demand for repayment. Asset managers returned about $ 385 million of the $ 900 million paid by Citi in August 2020.

Opportunity of regulators

Santander’s UK regulator, the Bank of England, made no comment to The Times. But it’s conceivable that the $ 175 million error will warrant a review of Santander’s risk and control mechanisms – or at least the systems Santander uses to schedule payments.

In Citi’s case, a bank employee who manually adjusted the numbers selected incorrect options in Citi’s software, allowing the loan to be paid off in full with years of interest ahead of schedule, the bank said. Two colleagues who were supposed to act as safeguards failed to detect the error. The bank has said in a court filing that it intends to send an interest payment of $ 7.8 million rather than the full $ 900 million.

The loan transaction software used in the transaction debuted in 1997. Citi moved in 2019 to replace the system, but this transition was not complete by the time of the August 2020 transaction.

Regulators were aware of the weaknesses of the Citi system. The Federal Reserve ordered the bank in 2013 to correct shortcomings in its anti-money laundering compliance program and issued another order in 2015 regarding Citi’s compliance and control infrastructure. Between those orders, Citi failed the Fed’s stress test in 2014 for failing to address previously identified risk management issues.

The 2020 error likely reminded regulators that long-standing risk management issues have yet to be fully addressed. The Office of the Comptroller of the Currency (OCC) fined Citi $ 400 million in October 2020 over persistent issues with risk management, data governance and internal controls, and ordered the bank to seek regulatory approval before making “significant new acquisitions”. The OCC also reserved the right to require Citi to make changes to senior management and its board of directors if progress was too slow.

The imbroglio may have accelerated the departure of then-CEO Michael Corbat from Citi. The bank said Corbat still planned to retire in 2021, but the CEO announced less than a month after the $ 900 million transaction that he would retire in February 2021 and be replaced by Jane Fraser. “It will be a multi-year effort,” he said of the bank’s risk management reform, “and I think it is better for the business that my successor has been leading this important work since start.”

If Santander Systems recently signaled red flags to regulators, this $ 175 million blunder could be a catalyst for a mandatory change. Likewise, regulators can take into account the frequency and response of Santander to previous errors. Santander apologized after a May 2021 computer outage prevented some of its customers from making payments on a Saturday. An August 2020 blackout prevented thousands of the bank’s customers from accessing their accounts online.

No “chess game”

In favor of Santander is the one-off nature of the error. Some of Revlon’s creditors may have been less gracious with Citi because the cosmetics company and the bank had engaged, during the life of the loan, in what a trial witness called “a significant portion of the loan.” failures ”.

Creditors said Revlon owner Ron Perelman had already bailed out the business. At one point, Perelman’s private equity firm put up some of its own capital to secure a bond restructuring that helped Revlon avoid bankruptcy.

Judge Jesse Furman, in his February 2021 ruling, said it was reasonable for creditors to believe that Revlon and Citi, with Perelman’s help, had “found a creative way to pay off” the debt when all of the debt was paid off. of the $ 900 million has arrived.

It may be interesting to note, over the next few weeks, the level of cooperation Santander is getting from HSBC and Barclays to get the money back. If Santander takes the case to court, the bank will undoubtedly consider its odds against any precedent in the UK legal system.

Citi’s judicial loss can be traced to a 1991 decision in which New York’s highest court ruled that when a third party mistakenly sends money from a debtor to a creditor, the creditor can withhold payment. if he does not realize that he was sent in error and did not make any false statements – a principle called value discharge.

Beyond banks

The impact of Santander’s $ 175 million error is not limited to the banks themselves. A payroll manager who spoke to the BBC last month said Santander had given no information on how customers should explain the duplicate payment to staff or how it should be reimbursed.

“It ruined my vacation period because I thought I paid hundreds of thousands of dollars in error. I thought I did something wrong,” the payroll manager said. “I thought it was just me and I was going to be in trouble at work.”

Likewise, beneficiaries must be careful not to overspend their windfall. A Louisiana 911 dispatcher, for example, was charged with fraud and theft in April 2021 after using part of an accidental $ 1.2 million transfer from Charles Schwab to buy a house and an SUV.

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