CITIBANKS MORTGAGES ETHICAL ISSUES

QT-2 MBM 301

Sherry Hunt ran the Quality Control department for Citi's Mortgage Unit for eight years. She joined the bank in November 2004, as a vice president in the mortgage unit. Her team was responsible for protecting Citigroup from fraud and bad investments by checking prospective loans to see whether they met the banks standards, e.g. properly signed paperwork, verifiable borrower income, and realistic appraisals. At the time, investor demand was so strong for mortgages packaged into securities that Citigroup couldnt process them fast enough .One of the groups did spot-checks on loans already purchased. It was such a high-volume business that one groups assignment was simply to keep loans moving on the assembly .The pay of Citi Mortgage employees all depended on a high percentage of approved loans. By 2006, the bank was buying mortgages from outside lenders with doctored tax forms, phony appraisals, and missing signatures. Shelley Hunt reported such discrepancies regularly to her bosses who buried her findings before, during and after the financial crisis, and even into 2012.

Hunts team was processing $50 billion in loans a year and, because her unit could not possibly review them all, they checked a sample. When a mortgage was not up to federal standards -- an unsigned document, a false income statement or a hyped-up appraisal -- her team labeled the loan as defective. In late 2007, Hunts group estimated that about 60 percent of the mortgages Citigroup was buying and selling were missing some form of documentation. Hunt says she took her concerns to her boss, Richard Bowen III. Bowen alerted Citigroup executives in an email dated November 3rd 2007. Citigroups response was to move Bowen from managing 220 people to overseeing two. By January 2009, Bowen no longer worked for Citigroup. Meanwhile, Hunt was transferred to the quality-control group on April 1, 2008. She went from supervising 65 people to managing none. She found even worse dealings in her new role. In November 2009, Hunt came across a list of about 1,000 loans that the quality-control team had identified for possible fraud. The Fraud Prevention and Investigation Group left some of the mortgages in the queue for more than two years and not one notification went to the FHA before July 2011, when the U.S. Attorneys Office issued a subpoena. In November 2010, Ross Leckie, a who was three levels above her in the chain of command, on March 22, 2011. Hunt says it was clear what Polkinghorne was asking for her to ignore the defective loan book - and she wanted no part of it. Senior director of CitiMortgages retail bank mortgage unit, sent an e-mail ordering his staff to meet its goal of a maximum 5 percent defect rate on home loans where it was 7%. On March 29th 2011, she followed the first step in the Dodd-Frank regulation: formally complaining to the company. Hunt walked into CitiMortgages human resources department and told them everything: how the bank had been routinely buying and selling bad mortgages for years, how the fraud unit wasnt doing its job and how the quality-control people were being pressured to change their ratings. She also reported her concerns to the SEC and hired a lawyer.

On August 5th 2011, she sued the bank, filing a false-claims complaint in U.S. District Court. She knew her chances of winning were slim.On January 3rd 2012, the Justice Department decided to join her in the case. There was no testimony and no trial. Citigroup admitted wrongdoing and, on February 15th, paid the $158.3 million to settle As a reward for blowing the whistle on her employer, Hunt got a $31 million out of the settlement paid by Citigroup.

ETHICS IN BANKING
In light of the today scenario, it is evident that ethics in banking is of supreme importance for the economy and the society. Ethics in banking must be firmly anchored on four pillars. First, banks must comply with all laws, rules, and regulations that are usually framed in any country to ensure soundness of operations and to enhance confidence of the society. These laws, rules and regulations may relate to, among others, capital adequacy, maximum shareholding by members of a family, qualifications and tenure of members of the Board of Directors and Managing Directors, representation of depositors on the Boards, credit rating requirements, maximum limits on single party exposure, liquidity and credit/deposit ratios etc. Banks are additionally subject to provisions of company law, tax laws, and securities laws. Any attempt to circumvent any legal provisions must be considered unethical. The universe of law and the universe of ethics are not necessarily coterminous, but violation of law is rarely, if ever, ethical. Second, banks must ensure fair and equitable treatment of all stakeholders. The interests of various stakeholders such as shareholders, depositors, borrowers, and employees do not necessarily coincide. For example, banks may be inclined towards offering low returns to depositors and charging high interest rates from the borrowers in order to maximize profits and dividend for the shareholders. Such conflict of interest must be ethically balanced keeping in view the greatest good of the greatest number. Third, the banks must ensure full, truthful, and transparent disclosure of their financial health. As noted before, many of the assets, which turned out to be toxic, were treated as off-balance sheet items. The concerned stakeholders were thus deprived of the right to get a transparent picture of the true financial health and the risks that were being assumed. Fourth, banks must behave as socially responsible corporate citizens. Milton Friedman, a Nobellaureate economist and an ardent proponent of free market economy wrote in 1970 that there is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profit so long as it stays within the rules of the game. One may interpret this statement to mean that business is simply about maximizing profit without violating laws and regulations. This is obviously an untenable position. It may be observed here that banks did not apparently violate any prevailing laws and regulations, yet their activities

inflicted severe negative externalities upon the society, as noted earlier. In this context, it may be mentioned that many of our corporate entities, including banks, gloat with satisfaction about fulfillment of social responsibility by offering a few scholarships, donating to some clinics, or offering some support for some charitable activities. While such initiatives are welcome, these touch only the fringe. Social responsibility must be viewed from a wider perspective, taking into account the impact of banks' activities on growth, employment and emphatically in our case, poverty alleviation as well. With the above hindsight, a few do's and don'ts for banks to meet ethical standards. DO'S: * Ensure a fair return to the depositors and safety of deposits. * Minimize spread between cost of funds and lending rates. * Engage in transparent accounting practices. * Comply with all laws, rules and regulations promulgated by relevant regulatory authorities. * Develop effective risk management systems. * Treat clients with courtesy. * Offer services promptly. * Make proper use of information and communications technology to enhance efficiency in providing services. * Protect minority shareholders' interest. * Set up management systems which clearly specify the functions of the Board, key management personnel such as the Managing Director, Chief Financial Officer, Company Secretary, Heads of Divisions and Departments etc. * Treat employees fairly and compassionately. * Arrange for requisite employee training. * Ensure non-discrimination in personnel practices and support employees' and their family members' access to basic health, education and housing needs. * Finance activities, which contribute to environmental protection, employment creation, poverty alleviation, and women's empowerment. * Devise innovative products without assumption of undue risk. * Arrange flexible mortgage payments for poor people's housing. * Try to expand operations to unbanked or under banked sectors, regions, and population groups. * Emphasize recovery, but with a human face. * Develop an internal code of ethics and set up an institutional arrangement to monitor compliance and suggest remedial actions, where needed. DON'TS:

* Don't prove Mark Twain's statement banks will lend you money if you can prove you don't need it. * Don't reschedule loans at the last moment to enable powerful, but delinquent borrowers to participate in elections. * Don't permit sexual discrimination with respect to depositors, borrowers, and employees. * Don't be lavish in branch decorations and benefits for Board Members and senior management personnel. * Don't engage in unhealthy competition to steal qualified employees or wean away depositors from other banks. * Don't engage in collusive interest rate fixing. * Don't finance activities, which aggravate pollution, employ child labour, and injure human health. * Don't finance unsustainable bubble in real estate or stock prices. * Don't bow down to illegitimate pressures exerted by political personalities, bureaucrats, or musclemen. * Don't appoint pliable auditors to prepare opaque, non-transparent financial reports. * Don't be an accomplice to money-laundering activities or illicit trade.

BANKS SEEING RISE IN INCIDENTS OF FRAUD: DELOITTE

Banks have witnessed a rise in the number of fraud incidents in the last one year, says the survey titled India Banking Fraud Survey 2012. Domestic banks have witnessed a rise in the number of frauds in the past one year and expect the trend to continue in the near future, a survey titled India Banking Fraud Survey 2012 by Deloitte India says. The survey, which covers most public, private sector, and foreign lenders along with co-operative banks, also says fraud risks may increase with weakening economic environment. No bank, whether private, public or MNC, is immune to frauds. As economic conditions continue to soften, it can lead to increased fraud risks. While as many as 93% of the respondents indicated that there has been an increase in frauds, at least 75% said the increase was at least 5% more than the last year. The survey also points out that retail banking will be the most vulnerable to frauds, followed by corporate banking.

While retail banking is the most vulnerable segment... priority sector lending followed by corporate banking are other two segments in which frauds are likely to happen, Deloitte

Touche Tohmatsu India, senior director, Neeta S Potnis said, adding that as the asset size of a bank increases, it sees higher incidence of frauds.

According to the survey, lack of oversight by the senior managers has been one of the major reasons for frauds. In addition, difficult business scenario and business pressure are the other contributing factors. Types of fraudulent incidents, which appear to rank high, are retail, corporate and priority sector in the public sector banks, and identity theft along with misuse of power of attorney in private sector banking.

As per the Reserve Bank of India (RBI), the number of fraud cases increased to 24,797 in 200910 from 21,247 in 2007-08. Recovery in the case of a fraud is less than 25%, according to over half the respondents, indicating that banks are not able to recover losses in case of frauds, the survey says. About the preparedness of the banks to prevent frauds, the survey says it is still a work in progress in many organizations. The following facts were disclosed from the study:-

Factors contributing to fraud:1. Collusion between employees and external parties-33% 2. Lack of fraud risk framework within the organization-23% 3. Business pressure to meet targets-50% 4. Lack of oversight by line managers or senior management on deviations from existing process/controls-73% 5. Change to business strategy without changes in business processes-27% 6. Lack of tools to identify potential red flags-37% 7. Difficult business scenario-47% Average loss per fraud incident 1. 10 Lacs-40% 2. 10-20 Lacs-23% 3. 20-50 Lacs-17% 4. >100 Lacs-7% Areas prone to fraud

1. Retail banking-77% 2. Corporate banking-57% 3. Private banking-10% 4. Treasury-3% 5. Private sector lending-33% 6. Administration/procurement-3% RETAIL BANKING 1. 2. PARTICUL ARS Incorrect sanctioning External vendor induced fraud Identity fraud Multiple funding Fraudulent documentat ion Overvaluati on of collateral Very low 55% 31% Low 9% 8% Medium 9% 31% High 0% 8% Very high 27% 23%

3. 4. 5. 6.

46% 13% 7% 29%

15% 7% 7% 7%

15% 20% 29% 14%

8% 13% 14% 21%

15% 47% 43% 29%

Fraud detection mechanism

1. Anonymous complaint by external party-43% 2. Internal audit compliance-53% 3. Whistle blower mechanism-37% 4. By accident-20% 5. Fraud detection-40% 6. Others-20%

Responsibility for fraud risk management

1. Others-13%

2. internal audit-3% 3. Chief vigilance officer-37% 4. chief risk officer-17% 5. chief fraud officer-13% Reasons for non-implementation of fraud analytic solution 1. 2. 3. 4. 5. Issued in data integration from existing internal system-50% Do not have sufficient data to implement-50% Available solutions are expensive-13& Solutions have not been effective-25% No system available to cater the needs-1

FRAUD RISK MANAGEMENT STRATEGIES

PREVENTION Fraud and misconduct risk assessment Anti-fraud programs and controls, including code of conduct, policies and procedures Communicating and training Due diligence in hiring and evaluations Boards and management oversight

DETECTION Hotline and whistleblower reporting mechanisms Fraud and compliance testing Data analysis Process and transaction testing

RESPONSE Internal investigative protocols Remediation action Enforcement , discipline and accountability protocols Disclosure protocols

MAJOR FRAUDS IN BANKS IN INDIA

ICICI BANK LEADER IN FRAUDS:A report which appeared lately ,has indicated that ICICI Bank is a run away leader in the Fraud share with nearly 50% of frauds being reported from the Bank. In the financial year 2010-2011, Banks in Mumbai reported 787 fraud cases involving Rs 1049 crores followed by Delhi with 335 cases amounting to Rs 269 cores. The exact nature of the frauds have not been revealed since RBI refuses to acknowledge the break up. It is however expected that the Phishing and retail banking frauds will be high at least in number of cases. What is also alarming is that the recovery rate of the fraud amount is negligible. For example, in the last 5 years, out of the total of Rs 1882 crores lost in Mumbai, only Rs 63 crores were recovered CITIBANK, GURGAON BRANCH:A big banking fraud was uncovered at the Gurgaon branch of Citibank that saw a bank employee fraudulently diverting an estimated Rs 400 crore from 20 accounts of high-networth clients

FRAUD MANAGEMENT IN ICICI BANK

ICICI Merchant Services is committed to helping its retailers and merchants minimize the risk of credit card payment fraud. How we help protect your business: Robust system design - Our systems are compliant with applicable industry security regulations and feature robust encryption for added data protection

Training - Take advantage of our Card Acceptance Training Program, which will help equip your staff with the skills and knowledge to competently handle card acceptance. Speak to your Relationship Manager or our Customer Care team for more details. Quick reference materials we provide stickers with the Customer Care and Authorisation Center contact numbers on your point-of-sale for quick reference if you need it.

How you can help protect your business Help protect yourself from fraud by observing these simple rules when managing your card payments: You should always:

Compare and match the signature on the card with the signature on the charge slip. If the signature panel on the reverse of the card is blank, insist the cardholder signs on the signature panel in your presence and then compare the signatures.

If the signature panel on the reverse of the card is blank, hold the card and contact the Authorisation Centre under a Code 10 call (see Operating Guide section regarding Suspicious Transactions) and you will be advised as to the appropriate action to take.

Keep copies of charge slips for 18 months from the transaction date so you can produce them in the case of a disputed transaction. Keep them in a cool place, away from sunlight and not in a plastic folder as thermal paper deteriorates over time.

Complete settlement every day as a delay can result in a payment dispute. Compare the photo on the card (if it is a photocard) to the person presenting it.

You should: Never swipe the card more than once - If necessary, VOID the transaction before SETTLEMENT. Otherwise, the cardholder may be debited twice and you are likely to come under scrutiny of MasterCard and Visa International. Never split a sale under any circumstances. e.g., if an authorisation is tried for Rs. 25,000 and the response is "Decline" or "Refer to Issuer", do not try to split the sale into smaller amounts. Instead, contact the authorisation centre for a voice authorisation.

Never amend the transaction amount after the charge slip has been signed by the cardholder.

Never levy an additional charge or surcharge on card payments as this is likely to cause a cardholder dispute and require a refund from your account.

Additional recommendations For high value merchandise - we recommend keeping invoice copies with a stamp confirming "Goods received in good condition across the counter. Goods once sold will not be exchanged" and ask the cardholder to sign your copy of the Invoice. For merchandise being delivered we recommend you obtain a Proof of Delivery and have the Terms & Conditions of the sale signed by the cardholder. These should be on the face of the invoice and not on the reverse of the invoice. If not printed, this can be in the form of a rubber stamp. If a chargeback (dispute with cardholder) is raised, please provide a proof of delivery copy signed by the cardholder and not a confirmation from the courier that the merchandise has been delivered. Refunds & void sales Refunds of card transactions should only be done through your Acquiring Bank by a credit to the card account. In case of a voiding a sale transaction, please contact the Customer Care centre before settling the terminal batch. To cancel or VOID