- Citi was fined $136 million on Wednesday for failing to fix regulatory problems quickly enough.
- This is despite spending billions of dollars on a 12,000-employee "Transformation" program.
- The initiative's leader has been accused of pressuring an employee to lie to regulators.
It's been nearly four years since Citigroup was ordered to pay $400 million in regulatory fines for its poor risk controls and data management.
In hopes of regaining compliance, CEO Jane Fraser bulked up a firm-wide initiative to overhaul the bank's technology. The head count for the so-called "Transformation" program has soared to 12,000 from some 3,000 since 2021, according to earnings reports. Citi spent at least $7.4 billion on the endeavor from 2021 through 2023.
And yet, the bank has fallen short again. Citi was fined $135.6 million combined by the Federal Reserve Board and the Office of the Comptroller of the Currency on Wednesday. The agencies stated the bank had not made enough progress in fixing its data quality and risk controls. Citi must now provide quarterly resource reviews to ensure the bank is allocating enough resources.
Citi's technology shortcomings are old news, according to Wells Fargo analyst Mike Mayo. In 2020, the bank accidentally transferred $900 million to Revlon lenders due to human error and outdated technology. But even Citi's biggest bull said the new fines are a "headscratcher" given the bank's efforts thus far.
"What's surprising is the degree that Citi is still in regulatory purgatory," Mayo told Business Insider. "Citi has thrown over 10,000 people and $3 billion and more at this problem. They just have to get it done."
Fraser, who will face shareholders Friday as the bank reports its second-quarter earnings, acknowledged the insufficient progress. She said the bank has allocated even more resources to data quality management and other areas where Transformation has fallen behind.
"We're committed to spending what is necessary to address our consent orders, as our agreement with the OCC demonstrates," she said in a statement. "We've always said that progress wouldn't be linear, and we have no doubt that we will be successful in getting our firm where it needs to be in terms of our Transformation."
Transforming Citi will take more than manpower
The root of Citi's woes is its patchwork technology system resulting from the bank acquiring dozens of companies and failing to integrate them fully.
"The thing about Citi — and most big banks, for that matter — is most use very old technology that can be overlayed with the then newest software, and this can be repeated over decades. The end result is the core systems are the technological equivalent of duct tape and spit," said Janney Montgomery Scott analyst Timothy Coffey. "Citi might have put all those people on getting out of the consent order, but if the underlying technology has unseen gaps, then fixing it could take much longer than four years."
A former private bank managing director compared repairing Citi's systems to uprooting the United States' infrastructure and moving it 10 miles north — houses, roads, and all — while growing the economy and getting permission from every governor for every change.
"That is pretty much what Citi is being asked to do globally," he said. "The only solution to fixing the technology deficiencies would be to rip everything out and start over, but that would effectively require the bank to shut its doors for two years and replace its entire staff with technology experts."
The exec overseeing Transformation is accused of pressuring an employee to hide data from regulators
These fines come two months after an ex-Transformation executive alleged the bank fired her after refusing to misreport data to a regulator. Kathleen Martin, former interim data transformation chair, is suing the bank and Anand Selvakesari, the bank's chief operations officer who oversees Transformation. According to the suit, Selvakesari, better known as Selva, pressured Martin to hide information that would make Citi "look bad" from the OCC. After repeated refusals, she was fired in September 2023.
The "lawsuit is without merit, and we will vigorously defend against it," said a Citi spokesperson. The bank has filed to dismiss the suit.
When Selva was named COO and took over Transformation in March 2023, Fraser praised his "long track record of delivering results."
Since Selva took the reins, Citi's relationship with regulators has not improved. In late 2023, the Federal Reserve sent three notices urging Citi to act faster to remedy how it measures risk, according to Reuters. Citi also failed the OCC's exams regarding data integrity, Reuters reported.
"Citi is falling short at managing their regulatory relationships," Mayo said, "and Jane Fraser has to do a better job while at the same time delivering better for shareholders."
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