Citibank loses $ 500 million due to poor software interface | Finance

August 11, 2020 marks what is probably one of the biggest financial mistakes in history. A confusing software interface made the Citibank transfer more money than you should. Much more: losses from the operation reach US $ 500 million. The bank went to court to recover the money, but so far it has not been successful.

Dollars (image: Sharon McCutcheon / Unsplash)

Dollars (image: Sharon McCutcheon / Unsplash)

THE Revlon, a traditional cosmetics brand, faces a serious financial crisis that became more intense with the COVID-19 pandemic. To get out of it, the company refinanced its debt. In the process, it has made payments to some creditors and rolled over the rest of the debt with a new loan. Citibank is the bank that has conducted this operation.

On that August 11th, however, a bank employee based in India made a mistake. Citibank was to make interest payments to Revlon creditors on that date, which totaled $ 7.8 million. The problem is that the mistake made the institution transfer about $ 900 million to them.

A software called Flexcube is at the root of the problem. It is a bank management system developed by a company called iFlex, which, in turn, was acquired by Oracle in mid-2005.

In the transaction in question, there was no simple way to pay interest to creditors on the Flexcube. To carry out the transfers, the employee would have to carry out the procedure as if the bank were paying the amount of all the financing, not just the interest.

The best way to do this without the bank losing money – and, perhaps, the only one – would be to inform Citibank’s own account in the system to send the principal amount of financing (thus, the amount would not, in practice, leave the bank) , in a complementary manner, the creditors’ accounts for the amounts corresponding to interest.

This “gambiarra” would have worked if the employee had enabled and filled in the Flexcube “Front” and “Fund” fields with the Citibank account. The problem is that he just filled in the “Main” field with this information.

It gets worse. As this type of operation involves large sums of money, the transaction had to be signed by the employee who performed the operation with two others. None of them, not even an employee with a more advanced position, realized that just filling in the “Main” field would not be enough.

The problematic Flexcube interface (image: Ars Technica)

The problematic Flexcube interface (image: Ars Technica)

The next day, the employee who performed the operation performed a routine review and realized that, instead of $ 7.8 million, the previous day’s transaction transferred about $ 900 million to creditors.

Detailed training on how to use the Flexcube could have avoided the problem. In any case, the unclear interface, full of fields and without any specific division for operations like this, certainly contributed to the problem. Ironically, less intuitive software is common in the financial market.

Citibank tries to recover the money

Shortly after discovering the error, Citibank asked creditors to return the amounts unduly paid. Some returned the money, but others refused, leaving the bank at a loss of approximately $ 500 million.

New York law, where Citibank is headquartered, recognizes that, in the event of a mistake in bank transfers, the aggrieved party has the right to receive the money back. Based on this, Citibank filed a lawsuit against creditors who denied the return.

But there is a catch: in a 1991 money transfer case, a New York court ruled that when a creditor is unaware that a payment was made in error, it can treat it as a loan refund and so you don’t have to return it. Federal judge Jesse Furman used that precedent in this case.

Here is the result: Citibank remains without the money. Although the bank quickly notified creditors of the error, to the judge, they can assume that a sophisticated bank like Citibank would not transfer a large amount of money by mistake.

Unsurprisingly, the bank has already declared that it will appeal. As a result, Furman ordered creditors to keep the amounts in custody until a final decision is issued by the court.

With information: Ars Technica, The News York Times.

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