Citibank, which is currently appealing from a District Court ruling against it in a $900 million payment error case, has got backing from Robert L. Clarke, a former United States Comptroller of the Currency.
Mr Clarke has submitted an Amicus Curiae (that is, a Friend to the Court) letter at the Second Circuit Court of Appeals. He advises that the judgment against Citi should be reversed.
The case concerns wire transfers made on August 11, 2020 in relation to Revlon’s 2016 Loan.
Let’s recall that, in 2016, Revlon acquired Elizabeth Arden, Inc. The deal was partially facilitated by a seven-year, $1.8-billion loan. Brigade currently holds a portion of the loan. The Credit Agreement governs the term loans held by Brigade. Citibank serves as the administrative agent and collateral agent for the loan.
On August 11, 2020, several months of accrued interest came due under a credit agreement. The interest payment was to be processed by Citibank in its capacity as administrative agent. No other amount was due at the time, and Revlon transferred no additional funds to Citibank.
The interest payment was processed by Citibank on August 11, 2020. Due to issues with the loan-processing system, the payment to each lender was on average more than 100 times the interest that was actually due. Brigade was one of the lenders that received an overpayment.
This operational mistake caused Citibank to transfer approximately $900 million of its own money to parties that were not entitled to it. When Citibank discovered the mistake, it promptly asked the recipients to return its money. Some recipients did return the money, but some did not.
Citi tried to recover the funds it allegedly sent by mistake but the District Court ruled against the bank, stating that the payments Citibank made on August 11, 2020, were final. Put otherwise, the firms that got the money Citibank sent will not have to return it.
Now, Citi has the backing of Robert L. Clarke.
In the letter to the Court, Mr Clarke notes that the likelihood of errant wire transfers should not be underestimated.
He says that, for banks, both in the United States and overseas, it is a challenge to establish and maintain completely foolproof internal controls. This is not entirely surprising, given the complexity and volume of these institutions’ operations. Even the most highly developed control systems are not (and cannot be expected to be) perfect, Mr Clarke explains.
He then enlists a set of examples of errant transfers from recent years.
In March 2018, for instance, Deutsche Bank transferred $35 billion to an exchange in error, the apparent result of an employee accidentally selecting euros instead of yuan as the transfer currency. The mistake occurred though the bank had installed a supposedly “fail-safe” system after a 2014 errant transfer of $24.62 billion that was reportedly a result of “human error.”
Similarly, in 2017, Germany’s state-owned development bank KfW mistakenly transferred more than $5.4 billion to four separate entities because of a glitch that repeated single payments multiple times, and a bank in China mistakenly transferred 1.2 billion yuan to a new customer because an employee mistook his 10-digit account number for a transfer amount.
Mr Clarke notes that none of these errors is meaningfully different in an operational sense from the one committed by the Citibank contractors involved in this case. The biggest difference is that, in each of these other examples, the bank quickly recovered all of its mistakenly transferred money.
As long as human involvement is required, mistakes will occur. And it is highly unlikely this will be the last such mistake, Mr Clarke says, adding that because the circumstances under which the mistaken transfer occurred are not unique, as the District Court ruled, affirming that ruling would introduce a serious risk of additional unfair results for years to come.
Robert L. Clarke is an attorney with decades of experience in the field of bank regulation and supervision. Mr Clarke served as United States Comptroller of the Currency from December 1985 through February 1992, leading the Office of the Comptroller of the Currency (OCC).
Mr Clarke also served as a Director of the Federal Deposit Insurance Corporation (1985-1992) and the Resolution Trust Corporation (1989-1992), and as Chair of the Federal Financial Institutions Examination Council (1989-1991).
He also served as a consultant to the World Bank and as senior adviser to the President of the National Bank of Poland. From 2004 until December 31, 2015, Mr. Clarke served as a member of the board of directors of the Dubai Financial Services Authority, overseeing operations of financial services providers licensed and operating in the Dubai International Financial Centre. Mr. Clarke has also served on the Boards of public companies, including service as a director of Eagle Materials Inc., Mutual of Omaha Insurance Company, and Stewart Information Services Corporation.
He is a graduate of Rice University and Harvard Law School.