The whole world is now so extensively dependent on technology that we can hardly think of any action without applying technology. The necessity of technology and our dependence on it have experienced remarkable significance during the covid-19 driven situation. It is undeniable that it is technology that has kept the global economy moving during yearlong pandemic situation. So, we must need technology and our present lifestyle is the result of technological advancement. However, problem arises when technology is placed ahead of humans because technology even AI (Artificial Intelligence) has no rationality and cannot apply judgment. In the developed world there is a tendency of placing technology ahead of human beings and resultantly, financial fraud, mishap and irregularityies in an unbelievable magnitude are taking place one after another. The recent USD 900 million financial mishap has occurred from a technological glitz in Citibank N.A-- one of the largest financial institutions in the world.
CITIBANK'S LOSS FROM TECHNOLOGICAL FLAW: In last August, Citibank mistakenly sent out USD 900 million to different investment companies which extended credit facility to Revlon Inc; a lipstick making company. Some Investment Funds extended syndicated credit facility to Revlon Inc. which had been struggling in servicing its debt in pandemic-hit economic condition. Citibank which itself was not the lender, has been acting as the agent bank, so it was responsible for managing that syndicated credit facility on behalf of lenders and borrowers as well. Loan disbursement, repayment, interest payment, fees payment etc., were processed by Citibank. One of the lenders sold out its stake to other lenders in the form of loan trading-- a popular activity among the Investment Funds, Banks and Financial Institutions in the developed world's financial market. Since buying and selling of loans are a regular phenomenon in the credit market of USA, it is common practice that lenders are entitled to receive interest up to the date they remain as lender. In the present situation, an Investment Firm, lender, was entitled to receive partial interest of USD 7.8 million while the remaining interest was supposed to be paid to the new lender which has brought this loan. However, splitting of interest between two lenders on same loan amount was not permitted under the system Citibank was using for their loan operation. Therefore, they had to go through a maneuvering exercise in order to process this transaction. Initially, Loan operation Team of Citibank had to show all outstanding loans paid off to the existing lenders and create new loan accounts in the name of new lenders. This exercise is carried out as an internal process so that transaction does not result in actual payoff of the loans and thus money does not go out. In order to ensure this practice i.e., preventing money form going outside, there were three specific boxes which must have been selected prior to executing the transaction. Loan Operation team of Citibank mistakenly processed all loan payoff transactions without selecting those three preventive boxes and resultantly, USD 900 million has been sent out to all the lenders who have presumed this fund as prepayment of loans and accordingly applied against the outstanding loans.
CITIBANK FAILED TO RECOVER FULL AMOUNT: Financial condition of the borrower, Revlon Inc, was continuously deteriorating causing serious concern to the lenders who were worried about writing off the outstanding loans. So, the lenders receiving this windfall repayment became so enthusiastic that they instantly applied against their loan. When Citibank's senior management came to know that their technological glitz has caused enormous financial losses, the recovery has already reached beyond their control. Nevertheless, Citibank applied their influence of being the largest financial institution in the USA on those lenders and was able to recover USD 400 million, conceding the remaining USD 500 million as loss. There is a common practice in the North American monetary transactions that if money is mistakenly or fraudulently wired against which there is no genuine payee, the receiving banks do not disburse that money, instead hold the money and communicate with the remitting bank to determine the next course of action. However, when money is received even mistakenly against any outstanding transaction, the receiving bank has valid reason to apply that money against the respective transaction that has actually happened in Citibank's erroneous payment. Investment banks which are lenders and have outstanding loans, have received payment that they have presumed as actual prepayment of loans. It is also true that the situation could be completely different if normal market condition would prevail. If the borrower, Revlon Inc, was financially sound, all lenders would have contacted with Citibank and returned that money. Since the situation is worsening, some lenders took the advantage of Citibank's mistake. Citibank., however, went to the Court for recovering the money but the judges rejected their case on the ground that lender cannot understand that repayment was not actual. Citibank has, however, appealed to the higher court for reversing the decision.
REASON BEHIND SUCH INCIDENT: Previously, there was a practice in the loan operation department of banks in the developed world that agent bank will first issue payment invoice or notice which will be followed by wire payment. Each bank used to maintain three separate departments within the Loan Operation teams, so one team was responsible for issuing payment notice / invoice, while funding team was responsible for remitting money as per notice / invoice and other department was responsible for reconciliation of transactions processed. Receiving bank would first receive notice of payment and then receive wired payment which receiving bank would apply when matched with the amount mentioned in the notice of payment. When this practice was continuing without any major problem, some technological companies came up with easy solution putting everything into one computer. They convinced bank's senior management that maintaining three separate departments for processing the same transactions is redundant and wastage of money and human resources. So, they developed super quality technology bringing all actions under one computer programme from where one mouse click can simultaneously activate all functions from issuing notice of payment to wiring money and even reconciliation. There are some check and balances with dual officers' validation but these are also executed under the same computer application. Using easy but comprehensive technology in loan operation has enormously increased the transaction volume keeping responsible bank officials busy with processing transactions without thoroughly reviewing and verifying each activity. Loan officers' job has now become data entry officers, so paying a billion dollars by mistake is not very unlikely.
ERROR NOT UNCOMMON IN FINANCIAL WORLD: Citibank's incident is not an exception. This type of technological error often occurs causing financial losses, however, sometimes, the magnitude of loss is minimal while at times too high. In some cases, the loss may be recovered but in many cases, recovery remains out of reach. Three years ago, Deutsche Bank mistakenly sent out EUR 28 billion equivalent to USD 33 billion which is more than the bank's entire market capital to its one of the outside accounts. However, they were able to recover the money.
Digital Bangladesh is now a reality and technological transformations are taking place in every sphere of the society. All offices and establishments are gradually moving from traditional approach to digital method and banking sector is also not lagging behind. Banks are rapidly adding new technology and even replacing or upgrading the existing computer application with the latest and most sophisticated technology.
This is of course a very good sign; however, extra caution will be required to properly assess the risk factors, mitigate those and establish adequate control at every stage of application. Emphasis must be given on competent human resources who will be placed ahead of technology so that they apply their due diligence instead of blindly clicking the computer mouse. Even, segregation of duty, responsibility and functionality with clear demarcation among different teams and department must have to be stringently maintained so that there is no or near zero chance of financial loss from technological glitz. We believe our banking sector should carefully consider these mitigating factors while moving ahead with their digitalising programme so that Citibank type financial loss does not occur at all in our country.
Nironjan Roy is a banker based in Toronto, Canada.