Lessons from Citi Bank fraud

Fraud is defined as “Deceit, trickery or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage.”Whereas misselling is defined as “Ethically questionable practice of a salesperson misrepresenting or misleading an investor about the characteristics of a product or service. In an effort to make a sale to a potential customer, a financial products salesperson could leave out certain information or describe a financial product as something the investor urgently needs, even though sound financial judgment would come to the opposite conclusion.”Indian Financial Services sector are replete with instances of fraud and misselling which occur time and again.

 CITI Bank case

The modus operandi  of recent frauds on wealth management at CITI Bank, gurgaon has  unraveled how combinations of greed  and promise of higher returns has facilitated the relationship manager to manipulate the system and expose the   NRIs and Corporates to  the risk of  losing their money .The customers were promised high returns by misrepresenting  a nonexistent SEBI circular.The investors were driven by greed of higher return and therefore easily influenced by the relationship manager to act according to his direction.The funds were diverted  to the security market and  used for  derivative  transactions without hedging the downside risk. Once the market moved against the leveraged positions, the margin calls were triggered which resulted in the inevitable.


Firstly, the back ground and professional  qualifications of the sales person or the relationship managers should be verified before trusting them   to manage or take decisions on the customers money. Secondly customers should not get carried away by big names  or large size of wealth management entities. Thirdly customers should be clear on their own  financial goals and should not be driven by   greed . Fourthly the sales person and the relationship managers should undertake a due diligence on the risk bearing capacity of the customers.Fifhly the customers should not be promised high returns and the risk appetite of the customer should be factored in deploying their funds  in various asset classes.Sixthlythe internal controls and systems of the wealth management entities should be clearly defined .The last but not the least; the customers should not lend their signature to any document without understanding the implications of the document.

What should the customers do?

Firstly, the customers should depend on trusted financial planners and advisers who are professionally  qualified and governed by a sound code of professional conduct. For example,the CERTIFIED FINANCIAL PLANNERS of the FPSB India are governed by the  code of ethics like integrity, objectivity, Competence, Fairness, Confidentiality, Professionalism, Dilligence and Compliance    and  fifty eight  rules of code of conduct under these code of ethics.

Secondly the customers should share  the financial goals and the time frame by which the funds are required  to meet these goals.

Thirdly the customers should decide and share the risk bearing capacity . The risk apetite will depend on the life stage needs.At the beginning of the career , one may take high risk. If some one is approaching retirement or already retired, the risk appetite will be low since he/she can not afford to lose money. Further the customers should keep in mind that the higher the return they expect they have to take higher risk. In case of equities, the return may be higher but the capital invested may be eroded if the market crashes. Similarly in case of derivatives , the leveraged position gives scope for high profit if the market moves with the expectation of the customer and vice versa. In case of fixed income securities, the benefit comes out of coupon income and capital appreciation/depreciation. When the interest rate goes up, the value of securities comes down and when the interest rate goes down, the value of securities goes up. The simple formula for equity exposure is 100 minus the age. Asset allocation amongst various asset classes e.g equities, Fixed income securities, Mutual Funds, Real estate , Gold etc will ensure diversification amongst various asset classes and mitigate the concentration risk.

Fourthly the customer should enquire what can go wrong in investing and what can be done about it. Volatility is a way of life in the market and periodical and long term investing through SIPs are recommended strategy to overcome volatility. It is also advisable to go for  periodical rebalancing of the portfolio to bring the asset allocation to its recommended proportion.

Fifthly the customer should enquire about the portfolio periodically  and what has happened to his/her money.In case the portfolio has not delivered as per the expectation, the customer should ask what has gone wrong and if any corrective actions are required.It also may happen that the needs undergo change during the various life stage and it also requires a review of the portfolio.

Lastly the customer should enquire about the fees to be paid directly to the planner/adviser and  the commission to be  earned indirectly. It has to be remembered that it is always advisable  to pay to get reliable and trusted advice rather than expecting to get it free.

Last modified on Monday, 03 June 2013 01:58

Prakash Praharaj

Shri Prakash Praharaj has a passion for excellence. He has been awarded two gold medals for securing top positions both in Graduation and Post Graduation in Commerce. He is an MBA with specialization in Finance and marketing. He has been awarded Diploma in Treasury, Investment and Risk Management besides CAIIB from the Indian Institute of Bankers. He is a Certified Financial Planner from the Financial Planning standards Board, India (FPSB), affiliated to FPSB, Denver, USA and Certified Personal Financial Adviser from NISM. He is also a SEBI registered Investment Adviser vide Reg. no. INA 000000045 dated 2nd August 2013.His book "Your Every day guide to Personal Finance and Insurance" has been published by CNBC TV 18 in August 2015.


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