Dive Brief:

• Human error led Citi to mistakenly transmit $900 million this month to creditors on a 2016 Revlon loan, the bank said in a court filing Monday, according to Bloomberg.
• The loan allows Revlon to repurchase some or all of what it owes from certain lenders. A Citi employee who was manually adjusting the amount of the loan the lenders still own selected the incorrect system options in Citi’s software, allowing the loan to be paid in full with interest years ahead of schedule, the bank said. Colleagues who were supposed to act as a safeguard failed to catch the error, Citi said.
• Citi’s loan operation software debuted in 1997. The bank decided to replace the system last year, but the transition is not complete.

Dive Insight:

Citi sued about a dozen companies last week in an attempt to recover the errant $900 million transfer, and secured court orders freezing more than half of that amount.

A group of Revlon’s lenders also filed a letter in court Monday, saying they’ve offered to return the money to Citi “in exchange for a standard indemnity Citibank would pay back the funds were it later determined that Citibank was not entitled” to them.

Citi has refused that condition, the lenders said, adding the bank still has not explained to them what happened.

“On multiple occasions, Citibank has advised the undersigned counsel that it believed it would be able to demonstrate, through a prompt factual presentation, that the disputed payments were in fact innocuous mistakes,” the lenders wrote Monday, according to Bloomberg. “Yet, as recently as this afternoon, Citibank advised that it was not yet prepared to shed light on or otherwise explain the putative mistake.”

The company that is owed the largest share, Brigade Capital Management, has argued in a filing that “the public interest is served by allowing a recipient that was rightfully owed the funds (as the lenders were here) to retain the transferred funds, whether made in error or not,” American Banker reported.

Citi said it has put “significant, additional controls in place.” That may refer to an ongoing upgrade to the bank’s loan operation software. Regulators have encouraged Citi, in recent years, to invest in improvements to that segment of its business, people familiar with the matter told Bloomberg.

The bank’s incumbent software, Flexcube — developed in the 1990s — spawned from an IT spinoff of Citi, I-Flex Solutions, which was led by the bank’s then-head of overseas software. I-Flex agreed to replace Citi’s legacy banking system and, in 2005, Oracle bought Citi’s 41% stake in the company, Bloomberg reported.

“The [$900 million transfer] error is a reminder that the transition they’re going through is absolutely necessary,” Paul Spiteri, CEO of The Lending Practice, told Bloomberg. “Loan IQ is built to avoid problems like this.”

Indeed, Loan IQ’s maker, Finastra, said the technology can help banks cut loan processing time by up to 30%. “We take pride in the role that we play as a global leader in financial services and recognize that an operational error of this nature is unacceptable,” Citi said in a statement.

Awareness of underlying vulnerabilities doesn’t erase the error, however.

“The best way of handling this mistake is to have the internal procedures in place to make sure it doesn’t happen in the first place,” Erik Gerding, a banking law professor at the University of Colorado, told American Banker.​

The seed of discontent among Revlon's lenders lies in the cosmetics firm's desire in April to issue more debt, despite not having enough support from existing creditors to do so. Borrowing against such assets as the brand names under Revlon's umbrella would decrease the value of the 2016 loan in question. Nonetheless, Revlon borrowed additional money through a revolving credit facility, which temporarily increased the number of creditors that could vote on the move, according to the lawsuit filed by Brigade, Symphony Asset Management and HPS Investment Partners.

“The new revolver commitments served no legitimate business purpose; rather, they were created solely to manipulate and gerrymander voting,” the lawsuit said, according to the Financial Times.

The refinancing plan upset creditors to the degree that Brigade and others asked Citi to resign as administrative agent in April. One of Citi’s leading debt bankers agreed, and, according to the creditors’ suit, Citi CEO Michael Corbat verbally confirmed that the bank’s resignation was in progress.

Had Citi resigned as administrative agent in April, the Financial Times points out, another bank would have been responsible for the August interest payment that has caused such an uproar.