How Citi’s error-riddled loan reports led to a $136mn fine

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Citigroup inaccurately reported to regulators the details of tens of billions of dollars of loans, errors that could complicate its ability to fund dividends and buybacks.

The flawed loan files were a primary reason regulators slapped the Wall Street bank with a $136mn fine this month, said five people with direct knowledge of the matter. The previously unreported mistakes had also led to discord in the close relationship between Citi and McKinsey, the consulting firm the bank retained to help remedy shortcomings identified in a 2020 Federal Reserve consent order, three people said.

The Fed’s bank examiners uncovered the flaws in Citi’s annual stress test submission and gave it 30 days to submit a plan to fix the loan errors and other data issues. If regulators do not approve the plan, the group will face new limits on its ability to distribute profits to shareholders.

The latest fine underscores the chronic technology and regulatory issues that have plagued Citi for years and shows how chief executive Jane Fraser is struggling to resolve problems she said were among her priorities when she got the bank’s top job in 2021.

Former Citi executives say Fraser has failed to change a culture where many employees search for short-term, least-cost fixes to deep-rooted problems, or try to avoid addressing them altogether. “At Citi, there are a lot of committees and working groups that get set up so people can sit around and talk about the issues,” one former executive said.

On its latest earnings call, Fraser acknowledged Citi was behind in fixing its data problems but said it was adding resources and experts to address the issue.

Citi on Wednesday said: “We remain committed to addressing this and are confident that we’ll get this work to where it’s expected to be.”

Inside Citi former employees said it was well known that its commercial loan files regularly contained errors, such as incorrect maturity dates, collateral information or even the size of loans, issues that had direct bearing on examiners’ ability to evaluate the bank’s soundness.

But last year as Citi approached a new deadline to show regulators it had fixed its data issues, employees say they were told to either ignore the remaining gaps in its data controls or hide them from regulators.

Kathleen Martin, a former Citi executive who last year served as interim head of its data remediation efforts and is suing the bank for wrongful termination, alleges in the suit that she was fired for not following instructions by her boss, Citi’s chief operating officer Anand Selva, to mislead regulators about the group’s progress in complying with regulators’ demands.

Citi, which is fighting the suit, said Martin was fired legitimately for performance issues.

Current and former Citi employees blame the bank’s heavy use of outside consultants — McKinsey in particular — for the failure to resolve data and controls issues.

Citi originally hired McKinsey, the prominent consultancy where Fraser was a partner before joining the bank, when it was hit with the 2020 consent order.

But regulators rejected several of the action plans McKinsey wrote for Citi, and there was widespread internal dissatisfaction with the consultancy’s work addressing the consent order, a former executive at the bank said. Three people familiar with the matter said McKinsey’s team worked on fixing the issues that led to inaccurately submitted loan files.

Citi stopped working with McKinsey on the project last year shortly before the Fed discovered the errors in its loan files, said people close to both companies.

McKinsey said: “We continue to serve Citi today and are proud to work across a range of topics, just as we have done for many years.”

Others said Citi was set up to fail, noting its problems had built up over the course of many years and acquisitions, and describing regulators’ timeframe for addressing them as unrealistic.

At least 10 executives have left in the past year who held critical roles in technology, controls and compliance, and would have been responsible for work that regulators are pressing Citi to complete. The most senior departure was Mike Whitaker, who was the head of technology and operations.

In April, following setbacks and recent lay-offs, Whitaker held a town hall to rally his troops in Citi’s Tampa, Florida, office, where many of the bank’s tech and operations workers are based. He walked on to the stage to the music from the film Gladiator.

A month later Whitaker was gone. Meanwhile, the bank still faces the difficult task of fixing its errors. According to one former executive, it is “going to be a dance between regulators and Citi for years to come”.