Outlining the Overpayment Story
Last week saw the Southern District of New York release their judgement on one of the largest payment errors in recent memory. Finance giant Citibank intended to pay $7.8 million in interest payments to a syndicate group of lenders. Accidentally, Citibank overpaid the group by almost 900 million dollars, an amount that nearly matched the full value on the loan.
This enormous blunder is now being challenged by a group of hedge funds who received over $500 million of the mistakenly wired funds. The court found precedent that without misrepresentation or notice of the error, the hedge funds were right to assume the money was to discharge their valid debt.
“To believe that Citibank, one of the most sophisticated financial institutions in the world, had made a mistake that had never happened before, to the tune of nearly $1 billion, would have been borderline irrational.”
Jesse Furman, US District Judge
It is said that the funds may be unrecoverable even upon appeal, due to the time period (24 hours) it took for Citi to realise the error and alert the lenders.
Citibank’s Internal Processes
Citibank highlighted the flaws within their processing and servicing application Flexcube. The error also made it past Citibank’s “six-eye” approval procedure where three employees are required to sign off and approve the transaction.
The overpayment error was noticed the following day and initially the blame was put on their processing software for not working properly. Recall notices were sent out the following day and Citibank continued to send several notices over the subsequent days. However, the court found that the hedge funds were within their right to assume the funds were discharging their debt and were assured that they would not be subject to revocation.
Unfortunately, Citibank’s case for unjust enrichment is significantly weakened by the validity of the debt and the late acknowledgement of the error. New York State firmly holds jurisdiction over this case and their “discharge for value” doctrine provides a strong case for the defendants.
Man Complemented by Machine
Citibank is a highly respected and accomplished institution and even their internal processes failed to stop this overpayment mistake. Now they are at risk of carrying a large amount of distressed debt on their balance sheet, heavily impacting working capital and current business plans. The company plans to continue appealing and fighting for the lost funds, despite how unlikely recovery may be.
“We believe we are entitled to the funds and will continue to pursue a complete recovery of them,”
said Danielle Romero-Apsilos, a Citi spokeswoman.
ERP systems and internal controls are no longer enough to protect against payment errors and fraudulent attacks. At Xelix, we use best-in-class AI to identify a wide range of risks and errors; protecting and empowering firms with an accurate, reliable and smart overpayment prevention solution.
Every business is at risk but not every business is aware of the risk
If you’d like to understand more about the risk your business faces and how the Xelix software can supercharge your controls and protect your bottom line, please get in touch.
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