Citibank and Other Financial Scams

Kripananda Chidambaram, 21 Aug 2010

What's happening?

Citibank was in the news recently in Gurgaon for a scam running into several hundred crores. Very briefly, a relationship manager of the Bank sought customer funds in return for the 'promise' of a 2%-3% monthly return. Needless to say, such a scheme was bogus and unsustainable. It is yet unclear where there was involvement of any other officers (especially senior ones) from the Bank.

A less reported, but very similar, scam took place in Noida. The local office of a foreign exchange trading company End Mark Forex Group ran almost the same script as Citibank. Returns of as high as 1% a day were promised from 'investments' and monies ranging from Rs.30,000 to Rs.3 lakh collected from individuals. Overnight, the employees vanished.

Most of those swindled in both cases were relatively high net-worth individuals and corporate entities. Among other things, this has demonstrated that even educated and 'smart' people can fall prey to the temptation of greed.

What does it mean for me?

We cannot overemphasize the need to keep both greed and fear in check while thinking about savings and investments. Any 'promise' of a return, above what you get in a Bank fixed deposit, is inherently unsustainable, and almost definitely fraudulent. It doesn't matter what credentials, clientele or big brand names the agent throws around. Such a 'promise' flies in the face of elementary mathematics and finance theory – so you should smell a rat immediately. As we have repeated ad nauseum, the only way to 'get rich' is to invest systematically in equities over 10 years or more, in either the index or a frontline mutual fund.

A second point we have raised in the past is the danger of trusting Banks blindly with your money. Banks are good at just providing Banking services. When it comes to managing your money and investments, they are far from satisfactory – this applies to both public sector and private sector Banks. The point here is not about Banks running away with your money; it's about them actually legally being able to siphon off your money as commissions.

Indeed, most Banks incentivize their relationship managers not by what returns you make, but by what revenues the manager generates for the Bank. Thus, most managers only recommend high-commission products for you, or they end up frequently churning your portfolio. From the simple stock 'tip', to the unit linked insurance product, to the 'rebalancing' of your portfolio - these are all ways of simply moving money from your account to the Bank's coffers. This is perfectly legal - it is called brokerage or commission. Done frequently enough, you could lose 20% a year or more as brokerage alone!

In general, you are better of managing your own money instead of delegating it to your Bank. Their 'research desk' is anyway nothing to write home about - it simply involves picking a new high-commission product every month and recommending that for you. If you do not have time for research yourself, just put money regularly in index funds.

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