Lessons from Citi’s Revlon Error

SMITH BRAIN TRUST – A recent $500 million “clerical error” at Citigroup exposes an inherent weakness in big banks that provides lessons to be learned, says Maryland Smith’s Clifford Rossi.

Citi, last August, intended to make a $7.8 million interest payment on behalf of Revlon to its lenders but mistakenly wired just under $900 million, structured as a payoff, to the creditors. Citi quickly alerted the creditors to the error, but some of them refused to return the funds, resulting in a half-billion-dollar loss – a refusal that a federal judge recently upheld.

Obsolete software, according to Citi, contributed to the error. Despite Citi having three individuals verify details of every wire transfer, a contractor executing the Revlon transaction checked the wrong box on a digital payment form.

Rossi, professor of the practice and executive-in-residence for the University of Maryland’s Robert H. Smith School of Business, says the aforementioned “inherent weakness” has to do with big financial institutions like Citi expanding over the years by acquisitions.

In a recent interview with Global Association of Risk Professionals’ Tod Ginnis, Rossi says: “When banks engage in M&A, oftentimes the back-end systems and data integration aren’t explored adequately… Systems and processes haven’t always kept up with the times. They are doing many manual calculations that should be automated.”

Here’s more from Rossi, a former risk executive for Citi, excerpted from “The $900-Million Error: ‘Fat Finger’ Mistake or a Warning for Banks?”:

Among his comments, Rossi says automation and integration of systems and databases lowers operational and other risks. “Citi had an operational breakdown that led to regulatory and legal risks. Old systems create exposure,” he cautions.

One of the obvious lessons from Citi’s critical error is that banks should regularly check and re-check the viability of their incumbent risk management systems. For a risk manager beginning a new job, Rossi says, this investigative responsibility is particularly important. Investments in technology and automation can help prevent operational risk breakdowns. Rossi describes this as “the basic blocking and tackling of risk management,” but laments the risk profession’s shift toward an actuarial-type science. “Many banks forget about the art side, the expertise and judgement that need to overlay the models,” he says.

While acknowledging the importance of technical skills and the need to demonstrate core risk management know-how, Rossi implores his students to develop soft skills – particularly the ability to identify when something isn’t quite right.

Read more at “The $900-Million Error: ‘Fat Finger’ Mistake or a Warning for Banks?”