As Santander looks to claw back roughly $175 million it mistakenly paid to British customers on Christmas Day, it can look to Citi, on a basic level, for what to expect, what to avoid and what to ask itself.
Citi’s manual transfer of $900 million in August 2020 to creditors of the cosmetics firm Revlon is likely the highest-profile recent case of a bank making an errant, nine-figure payout from its own reserves.
For Santander, the $175 million represents duplicate payments. About 75,000 people and companies received one-off or scheduled payments from 2,000 businesses — in many cases, their employers or suppliers — that have accounts with the bank. Then, they received a second identical payment from Santander.
“The duplicated payments were the result of a scheduling issue, which we quickly identified and rectified,” a Santander spokeswoman told The Times of London. “None of our clients were at any point left out of pocket as a result and we are taking steps to recover the duplicated transactions in line with industry processes.”
The first hurdle Santander faces is one of cooperation. Santander is the corporate client’s bank — not necessarily the personal bank of the recipients. So a good portion of the $175 million has been disbursed to people with accounts at Barclays, HSBC, NatWest and other institutions, according to The Times — and may have been spent.
That’s an argument Brigade Capital Management — the largest creditor in the Revlon case — used against Citi. When Citi moved to recover its $900 million within hours of the transaction, Brigade said it couldn't return the money because it went to other funds. After Citi sued, a U.S. district court judge issued a temporary freeze on the money. That same judge, six months later, ruled Citi was not entitled to clawbacks from the defendants.
In Santander’s case, one bank told The Times it would be reluctant to claw back from an account holder if it would cause that person to be in overdraft.
Another issue, though, may be scope. Santander’s $175 million may be a fraction of the $900 million Citi sought to reclaim. But in Citi’s case, the money went to 315 creditors — far fewer than the 75,000 account holders affected by the Santander error.
Santander, as of Dec. 29, was in talks with Pay UK, which runs the nation’s main payment systems, regarding how best to reverse the payments. Some of the money had been returned, The Times reported.
Likewise, not every Revlon creditor held out on Citi’s request for payback. Asset managers returned about $385 million of the $900 million Citi paid out in August 2020.
Santander’s regulator in the U.K., the Bank of England, did not comment to The Times. But it’s conceivable that the $175 million error will warrant a look at Santander’s risk and control mechanisms — or at least the systems Santander uses to schedule payments.
In Citi’s case, a bank employee who was manually adjusting figures selected incorrect options in Citi’s software, allowing the loan to be paid in full with interest years ahead of schedule, the bank said. Two colleagues who were supposed to act as safeguards failed to catch the error. The bank said in a court filing it had meant to send a $7.8 million payment of interest rather than the full $900 million.
The loan operation software used in the transaction debuted in 1997. Citi moved in 2019 to replace the system, but that transition was not complete at the time of the August 2020 transaction.
Regulators were aware of weaknesses in Citi’s system. The Federal Reserve ordered the bank in 2013 to correct deficiencies in its anti-money laundering compliance program, and issued another order in 2015 regarding Citi's compliance and control infrastructure. Between those orders, Citi failed the Fed's 2014 stress test for not fixing previously identified risk management issues.
The 2020 error likely served as a reminder to regulators that long-standing risk management woes had yet to be fully resolved. The Office of the Comptroller of the Currency (OCC) fined Citi $400 million in October 2020 over persistent issues in risk management, data governance and internal controls, and ordered the bank to seek the regulator's approval before making any "significant new acquisitions." The OCC also reserved the right to require Citi to make changes to senior management and its board if progress came too slowly.
The imbroglio may have hastened then-CEO Michael Corbat’s exit from Citi. The bank said it was always Corbat’s plan to retire in 2021, but the CEO announced less than a month after the $900 million transaction that he would retire in February 2021 and be replaced by Jane Fraser. "This will be a multiyear effort,” he said of the bank’s risk management reformation, “and I believe it is best for the firm for my successor to lead this important work from the beginning.”
If Santander’s systems have raised red flags to regulators in recent memory, this $175 million error could be a catalyst for mandated change. Similarly, regulators may take into account Santander’s frequency and response to previous errors. Santander apologized after a May 2021 IT failure left some of its customers unable to make payments on a Saturday. An August 2020 outage left thousands of the bank’s customers unable to access their online accounts.
No 'game of chess'
In Santander’s favor is the one-off nature of the error. Some of Revlon’s creditors may have been less gracious with Citi because the cosmetics company and the bank had engaged, over the term of the loan, in what one trial witness called “a significant game of chess.”
Creditors testified that Revlon owner Ron Perelman had bailed out the company before. At one point, Perelman’s private-equity firm put up some of its own capital to secure a bond restructuring that helped Revlon avoid bankruptcy.
Judge Jesse Furman, in his February 2021 ruling, said it was reasonable for the creditors to believe that Revlon and Citi, with Perelman’s help, had “figured out a creative way to pay down” the debt when the full $900 million arrived.
It may be worth noting, over the coming weeks, the level of cooperation Santander gets from the likes of HSBC and Barclays in retrieving the money. If Santander takes the issue to court, the bank will undoubtedly consider its odds against any precedent in the U.K. judicial system.
Citi’s court loss can be credited to a 1991 decision in which New York's highest court ruled that when a third party mistakenly sends money from a debtor to a creditor, the creditor can keep the payment if it didn’t realize it was sent in error and didn’t make any misrepresentations — a principle called discharge for value.
The impact of Santander’s $175 million error isn’t limited to banks themselves. A payroll manager who spoke to the BBC last month said Santander had not given any information about how clients should explain the duplicate payment to staff or about how it should be repaid.
"It ruined my holiday period because I thought I'd paid out hundreds of thousands in error. I thought I had done something wrong," the payroll manager said. "I thought it was just me and that I was going to get in trouble at work."
Likewise, the recipients should take care not to overspend their windfall. A Louisiana 911 dispatcher, for example, was charged with fraud and theft in April 2021 after she used some of an accidental transfer of $1.2 million from Charles Schwab to buy a house and an SUV.