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. Puris 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.
The scam was engineered by none other than an employee Shiv Raj Puri who was working as a Relationship Manager for the past 7-8 years. The fraud came to light when the bank's Assistant Vice President Binu Soman noticed suspicious transactions in certain accounts at the Gurgaon branch.

Employees involved have been suspected of selling investment products to clients claiming that these would generate unusually high returns. The employees claimed that the products were authorized by the banks investment product committee and used forged bank documents and letterheads to prove the same. The suspected employees then siphoned off the funds raised from the sale of these products into their personal bank accounts and defrauded clients to the tune of Rs. 400 crore. The suspected employees had access to High Net Worth Individual (HNI) clients of the bank and were in roles which involved servicing their requirements for investment products, according to a bank employee who spoke on condition of anonymity. It is leant that close to 40 clients have been impacted by the fraud though the number could be much higher as investigations are still underway.

The range of the fraud is currently being put at anywhere between Rs 100 to Rs 400 crore. The concerned Citibank employee had produced a forged SEBI letter which purported to give its approval to high fixed interest rate schemes to HNIs. While the total number of HNI clients involved is 30, there are large corporate clients in the shape of a family owned investment company and a CFO who had a relationship with the concerned Citibank staffer.

It is learnt that a large part of this money may be recovered as some returns were given and additional benefits were shared between the CFO, Puri and few others.

Gurgaon police has have frozen nearly 80 accounts in several banks. Out of the total, 18 accounts belong to four family members of Puri, while Rs 3.85 crore has been recovered from these accounts.

According to one of the sources, a senior official in the consumer banking division was talking to a client who mentioned that he had recently purchased a product from the bank that could generate unusually high returns in a short span of time. It was brought to the clients notice that the bank was not distributing any such product which is when an investigation into the matter was initiated. The investigation may have triggered audits across several branches of Citibank in India according to another bank official.

The local policy today registered an FIR naming Indian-born global CEO of the bank Vikram Pandit and 10 other officials in the Rs 300-crore Citibank fraud case. The fraud at the bank's Gurgaon branch, involving diversion of depositors money into the stock market, was uncovered last week. Besides Pandit, the FIR filed by a high networth individual (HNI) Sanjiv Agarwal with the Gurgaon police also names Citibank chairman William R Rhodes along with other senior officials based in India. The others who have been named in the FIR include Citibank's senior officials CFO John Gerspach and COO Doughlas Peterson (both based in New York). The others who figure in the FIR are Amit Zarpuri, Ashwini Chaddha, Amrita Farmahan, Rahul Soota, N Rajshekaran, Pramit Jhaveri and Shivraj Puri, the main accused in the fraud case.

Implications "Any erosion of investor's confidence could slow down growth or even reduce profits in this business, particularly if some of the existing clients choose to exit. Investments in improved surveillance and processes would also affect profitability," Fitch said. The rating firm also highlighted the need for tighter operational risk management for wealth management business in India, which has attracted many domestic and foreign play

HIGH-NETWORTH FRAUD HOW FRAUD WAS COMMITTED? Citibank's relationship managers are said to have committed the fraud with the help of an external party, most likely a brokerage house that distributes investment products Funds generated by selling the product to some investment companies and individuals were transferred to accounts of some brokers, who utilised the money for their transactions The employees claimed the products were authorised by Citibank's investment product committee and used forged bank documents and letterheads to prove the same WHO ARE INVOLVED? Employee named in FIR learnt to be working as a senior relationship manager in Citibank's Gurgaon branch. The staffer may have been supported by other relationship managers responsible for sales of investment products to high net worth clients of the bank WHO ARE AFFECTED? Close to 40 clients, including some corporate treasuries, could be affected because of the fraud. It is unclear whether Citibank will compensate its clients for the losses

Sanjeev Aggarwal, co-founder of private equity fund Helion Investment Advisors, who accused Citibank of duping him of Rs 32.43 crore of his savings on Tuesday, kept up the pressure on the bank to 'own up to its wrongdoing, and make up for the losses.' Meeting reporters at his home in Gurgaon, Aggarwal said the Rs 300-crore fraud is a systemic failure and believes multiple parties must have been involved in such a big fraud. "One person can't do this. There are more people involved," Aggarwal said. 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.

Puris 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.

Lessons to be learnt

Similar to the one in the US involving Bernard Madoff, a number of high net-worth individuals here stood to lose a part of their savings. This continues a trend in which well-heeled and seemingly knowledgeable people are being taken for a ride by investment managers, and should lead to serious introspection by the companies involved as well as regulators. The Citi and other frauds share some common features. First, there is the use of forged documents to fool customers. Given that there is a growing market for fake PAN cards, driving licences, income tax returns, and so on, a healthy dose of scepticism is required if one is to base an investment decision on a piece of paper. Investors also place undue reliance on their managers. Active fund managers on average add little value (a well-known study showed that a portfolio created by a monkey throwing darts at random performed as well as one created by a group of leading financial advisers). In an investment climate where outperforming the pack is extremely difficult, any scheme that promises extraordinary returns warrants close scrutiny. You cant wash your hands of your investment simply because you have a fund manager. Most investment frauds could have been avoided had the investors spent a few hours every month tracking their portfolio and their fund managers performance. One concedes that for most who have day jobs, it is difficult to spare even this much time. This underscores a somewhat jarring reality about investingit is best suited for those who have the leisure to do it, and risky for ones who are otherwise occupied in earning a living. The Citi fraud also highlights the danger in the fashionable view that a customer must only have one point of contact with a company. This can lead to extreme dependency on the ethical compass of one individual. In Citibanks case, it may be a cause for introspection as to why the relationship manager

single-handedly managed his customer relationships. Had others in the system been involved, warning signals of the fraud may have emerged earlier. Any definitive conclusion, however, will have to await the results of Citibanks internal review. On a more general level, this fraud highlights the fact that in the desire for growth, a large number of conventional risk mitigants are often obeyed only in letter and not in spirit. Regulators need to know that customer policies are in place, suspicious transactions are being reported, and the like. But the mad rush for growth can perpetuate a philosophy of doing no more than the minimal due diligence. In the Citibank case, questions asked about the source of the large funds that were flowing into the account of the accuseds relations would have immediately raised red flags. Against this background, boards of financial services firms must introspect about the nature of their business. As lender or asset manager, the essence of banking is in its fiduciary responsibility. Critical to a banks functioning are control-related actions such as concurrent audits, daily reconciliations, segregation of duties, and so on. These ensure that virtually every transaction of the organization is subject to multiple checks and balances. They are also the less attractive operating aspects of the financial services business, compared with closing deals or making new investments. As a result, they are often given short shrift. One hopes that after the Citibank incident, other organisations will reflect on the risks inherent in todays loosely regulated investment management business. 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.

An Analysis of Issues

Reserve Bank of India (RBI) today said it had initiated a probe into the Rs 300 crore fraud at Citibank's Gurgaon branch and would soon issue a statement in this regard. "Any bank where fraud (has taken place), we cannot (ignore)...And from banking side we have to do our own job..How it (Citibank fraud) has happened and what are the implications," RBI Executive Director G Gopalakrishna said. He was replying to a query on whether the RBI has undertaken any probe in multi-crore Citibank scam. Acknowledging that RBI has stepped in with regard to Citibank fraud, he said that either RBI Governor or Deputy Governor would make a statement shortly pertaining to the bank scam.

"Any transaction related to bank certainly we are concerned..Most probably RBI Governor or Deputy Governor will issue statement today or tomorrow in this regard," Gopalakrishna who was here to attend a financial inclusion programme said.