Citi scam puts wealth managers under lens

Firms audit HNI accounts, as concern among clients grows.

The Rs 400-crore scam at Citibank India is causing jitters in the wealth management space. Bank executives said that a two-pronged probe into high net-worth individual (HNI) accounts has been initiated. One, an audit of HNIs’ accounts has begun. Two, the background of schemes where clients have invested are being probed.

Yesterday, the Gurgaon police launched an investigation into Citibank employee Shivaraj Puri, a relationship manager, for duping HNIs by selling them fraudulent schemes and diverting the money into accounts belonging to his wife and other relatives. HNIs are those with investible assets worth more than $1 million (roughly Rs 4.5 crore).

“There is a health check-up going on in our firm. We have initiated an audit of all the dealings that our relationship managers have with their clients,” admitted the compliance head of a wealth management firm, under the condition of anonymity.

The probe also includes due diligence of schemes where investments have been made. “Investments in schemes, especially by Citi, are being looked into to verify if they have been authenticated by the bank,” said the compliance head.

The role of relationship managers in wealth management is under special scrutiny. This is because many of them have the authority to issue third-party cheques on behalf of their clients. According to wealth management sources, HNIs give relationship managers power of attorney to operate their accounts. The Gurgaon scam could have been because of this.

The modus operandi was quite simple. Puri asked clients to invest in schemes that were offering more than 20 per cent annual returns.

He showed forged documents to prove these schemes were approved by Citibank’s investment product committee and regulator. After obtaining the client’s approval, he could have done two things. Either, he had got a blank cheque from the client and filled up the receiver’s name. Or, he had issued third-party cheques from the account of his clients’ Citibank account in his wife’s and relatives’ names.

The money was then transferred from these accounts to be invested through a brokerage firm. Citibank sources said though the money is likely to be recovered because of the trail, the main concern is damage to the bank’s reputation. 

Banking sources said while a relationship manager is allowed to issue a third-party cheque, in most cases, they need to be countersigned. But the second signatory often signs the cheque without much verification. “Once the first person has signed, the other person signs it without much due-diligence. A lot of this business is based on trust,” said a wealth manager. 

Many wealth management companies have also started communicating to their clients that their money is in safe hands. The head of private wealth firm said, “Damage control is what a company or organisation engages in as top priority. The first thing is convincing clients that their money is safe and in responsible hands. Also, banks will need to see if there was a failure of controls (checks and balances) within the set-up.” Bank clients, including non-resident Indians, have already begun making inquiries at branches to check if their money is safe. While initial reports suggest that the number of clients that could have been duped is 20, there could be more.