Rs.300 Crore Citibank Fraud


Shivraj Puri

Last week Citibank India filed a police complaint stating that Mr. Shivraj Puri, an employee of Gurgoan branch had siphoned of money from 20 high net-worth investors (HNI) amounting to Rs 300 crore (USD 67 million). Media updates of police investigation show that police are having some success in cracking the case. I thought let me provide the case details and the implications of the case to Citibank and other related parties.


Case Facts 

Here is a summary of case published to date. Mr. Shivraj Puri is a Senior Relationship Manager in Citibank Gurgoan branch. He used a forged notification of Securities & Exchange Board of India (SEBI) stating that few select clients would earn higher returns (18% to 20%) if they invested in his suggested schemes.  He invested the money obtained from HNI in the stock market in his personal capacity over a period of few months. Presently, information of the period of fraudulent activity is not available.

Up to now the main client affected by the fraud is Hero Honda group and the amount diverted is to the tune of Rs 200 crore (USD 44.67 million). Mr. Sanjay Gupta, Assistant Vice President in the accounts office of Hero Corporate Services was arrested yesterday. Mr. Sanjay Gupta is purported to have formed two finance companies BG Finance and G2S Consultancy and diverted Hero group promoter funds in these two companies. These funds were then fraudulently invested by Mr. Shivraj Puri of Citibank. Mr. Sanjay Gupta has allegedly taken Rs 20 crore (USD 4.46 million) as commission from Mr. Shivraj Puri for diverting these funds.  It is suspected that Mr. Sanjay Gupta was aware of the forged SEBI letter but recommended the investment to a number of people.

Other details reveal that funds were transferred to Mr. Puri’s wife, other relatives account and some benami (fictitious accounts). Mr. Shivraj Puri used Religare and Bonanza brokerage firms for investing the money in stock market. Religare stated the Mr. Puri has been a client since December 2009.

SEBI investigators have commenced investigating Mr. Puri. RBI has demanded a fraud report and impact from Citi and may take an independent review of Citi operations.

 An Analysis of Issues

Impact on Profits: As per the audited financial statements as on March 2010 the net profit of Citibank India was Rs. 860 crore (USD 192 million). If Citibank has to absorb the loss of the fraud and payback to the clients, its profitability for the year will be impacted negatively. Presently, since the main loss is of Hero Honda group, and its employee is involved in the fraud, the whole burden may not be on Citi. The second aspect being stated is that the shares held in various demat accounts by Mr. Puri will be identified and the accounts frozen (19 accounts have been frozen till date). This will enable partial recovery of the estimated fraud loss.

Segregation of Duty: The Relationship Manager of Citibank as per the details available on Citi website is a “one point contact with the Bank”. The Relationship Manager is “backed by a team of experts in the fields of investments, insurance, treasury and foreign exchange services”. There appears to be lack of controls and supervision on the activities of the Relationship Manager. From the looks of it, the Relationship Manager is selling the investment concept, obtaining funds, investing them and monitoring the accounts. This shows that there is no segregation of duty for the different functions. SEBI and RBI could both question the investment management department functioning.

Know Your Customer (KYC): Both SEBI and RBI have issued guidelines for Know Your Customer. KYC procedures mandate that asset management companies should review cases of clients “where the source of the funds is not clear or not in keeping with clients apparent standing /business activity”. If in this case, funds from Citi customer accounts were being diverted to accounts in Citi (for example, Mr. Puri’s relatives or other fictitious accounts) then there should have been checks in place to question the business validity of the transactions. On the other hand, the brokerage firms, Religare and Bonanza should have questioned the source of funds of Mr. Puri as he is a salaried employee. Although, they are stating that KYC procedures were followed.

Suspicious Transaction Monitoring: According to RBI and SEBI guidelines, a bank is required to have systems in place to monitor suspicious transactions and there is special emphasis on high net-worth investors (HNI). For HNI the nature of activity of the customer should be monitored by the bank and suspicious transactions reported to RBI if money laundering is suspected. In this case, questions can be raised on the nature of systems and procedures in place to monitor suspicious transactions. SEBI and RBI could raise questions on the accuracy and validity of suspicious transactions monitoring reports submitted by the bank.

Functioning of Risk Management Departments:  RBI guidelines specify that banks should have proper fraud monitoring, compliance and risk management functions. The responsibility for establishing and maintaining the fraud risk function rests with the CEO. In this case, the fraud was perpetuated over a few months (specific dates not available) and the fraud department was alerted by the customer complaints. This raises questions on fraud detection and monitoring procedures implemented at the bank. The bank could face some tough questions from RBI regarding the fraud and compliance department functioning.

Citi definitely is in a soup and as the investigation unfolds, we will know the full story. I am expecting a few more skeletons to topple out. Will definitely keep you updated on the happenings. Share your opinion about the case here.