Yesterday, I considered a billing error and how social media worked to have the company which sent the invoice pull back the incorrect invoice. Today, I want to consider an abject failure of financial controls which led to Citibank making a payment error which saw the financial institution incorrectly wire $900 million. Citibank recovered approximately $400 million of the incorrect payments but lost a court case for the remaining $500 million. It is 2020’s example of legacy accounting and payment systems, the over-complexity of business processes, failures in training, oversight and controls. In other words, it is a prime example that every compliance professional needs to study to help stop catastrophic failure of a multi-national compliance program.

Legal Issues

The basic facts of the matter and legal question answered by the Court are found in the Court decision, available here. At its most basic, the case was summarized by the Court as follows, “On August 11, 2020, Citibank N.A. (“Citibank”), acting in its capacity as Administrative Agent for a syndicated term loan taken out by Revlon, Inc. (“Revlon”), intended to wire approximately $7.8 million in interest payments to Revlon’s lenders. Instead, it made one of the biggest blunders in banking history: It mistakenly wired, in addition to Revlon’s $7.8 million, almost $900 million of its own money as well. The resulting payments equaled — to the penny — the amounts of principal and interest that Revlon owed on the loan to its lenders. The question in this case is whether Citibank is entitled to get the money back or whether the lenders are allowed to keep it.”

For any lawyer, this case is simply too delicious. It involves the ancient legal principal, finders keepers. I would initially note, with a nod to my Section 3 colleagues, the legal principal of  finders keepers is the antithesis of Pierson v. Post and the rule of capture. Moreover, this is not a ‘fat finders’ error, where some lowly clerk incorrectly typed in a payment amount. It was a full system, process and set of human errors.

From the legal perspective what this matter does embody is the rather arcane legal principial, found in Restatement of Torts (1937), the discharge for value defense which holds

A creditor of another or one having a lien on another’s property who has received from a third person any benefit in discharge of the debt or lien, is under no duty to make restitution therefor, although the discharge was given by mistake of the transferor as to his interests or duties, if the transferee made no misrepresentation and did not have notice of the transferor’s mistake.

When you can cite back to any Restatement from 1937, you know you are in very good stead. This is the finders keepers legal principal. Indeed, there were New York courts which have interpreted this carve out to the rule around mistakes in payments. In the 1989 decision Banque Worms, 928 F.2d at 539, Security Pacific mistakenly wired $1,974,267.97 to BankAmerica for the account of Banque Worms. When a debt is due and owing, then fully paid by the creditor or its agent to a party or even third-party, through no actions of that third-party, the finder gets to keep the money, even if it was sent in error.

The Facts

As noted, Citibank is the Administrative Agent for a syndicated term loan taken out by Revlon. The creditors held several different types of notes, with different due dates, repayment amounts and interest payments under multiple filings in the bankruptcy of Revlon. Revlon wanted to reorganize bring them into some uniformity in payments. Some of these creditors agreed to this and others refused and went so far as to issue notices of default. Note some of the creditors agreed to the new payment schedule while others did not. Citibank’s role at this point in the sage was to send out interest payments to those creditors who agreed to the new repayment schedule.

This is where the problem began. Citibank had no mechanism, system or software product which could take multiple creditors and pay only a certain number of them who agreed to the new payout schedule. Citibank’s Asset-Based Transitional Finance (“ABTF”) team, a subgroup of Citibank’s Loan Operations group, was charged with effecting the transaction. To make the payment, Citibank had to create a new account in its software which said to pay ALL creditors the FULL amount they were due. At that point the software Citibank used for wire transfers, Flexcube, comes into play. The Citibank team charged with making the payments happen created what was called a “Wash Account” into which all monies owed by Revlon was placed. The interest payments were to go out of this account but not the principal payments.

To affect the transfer the below screen had to be accurately completed. As the court opinion noted, “The Fund Sighting Manual explains that, in order to suppress payment of a principal amount, “ALL of the below field[s] must be set to the wash account: FRONT[;] FUND[; and] PRINCIPAL” — meaning that the employee had to check all three of those boxes and input the wash account number into the relevant fields.” However, for reasons never made clear, the three Citibank employees in charge of the transaction “all believed — incorrectly — that the principal could be properly suppressed solely by setting the “PRINCIPAL””.

As a control, Citibank had a process called “six-eye”. The Court stated, “The transaction was also subject to Citibank’s “six-eye” approval procedure, which requires three people to review and approve a transaction before it is executed. Under this procedure, (1) the “maker” — in this case, Ravi — first inputs the payment information into Flexcube; (2) the “checker” — here, Raj — then reviews and verifies the transaction; and finally (3) the “approver” — here, Vincent Fratta, a Citibank senior manager based in Delaware — serves as a final check on the maker and checker’s work. It was approved and the money was sent out.”

Join us tomorrow when we consider the policy reasons for the Court’s decision and what that means for the compliance professional.

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