Citigroup reports second, smaller fraud at its Mexico unit


Citigroup said Monday it discovered another case of fraud in its accounts receivable program involving a supplier to the Mexican oil giant Pemex, raising questions about the banks ability to manage its sprawling global footprint. (Emmanuel Dunand/AFP/Getty Images)

Citigroup said Monday that it has discovered another case of fraud in its accounts-receivable program involving a supplier to Mexican oil giant Pemex, raising questions about the bank’s ability to manage its sprawling global footprint.

The revelation comes two months after Citigroup alleged that it had uncovered at least $400 million in fraudulent loans to Oceanografia, which supplies oil services to Pemex. The latest case involves less than $30 million in loans made to another Pemex supplier, whose name Citigroup would not disclose.

“We’re continuing our rigorous investigation into how the fraud was committed and how our controls were breached,” Citigroup chief executive Michael Corbat said during an earnings call with analysts.

Corbat said the bank reviewed its accounts-receivable program involving 1,100 companies worldwide and found only two instances of fraud. He said the company is pursuing the recovery of misappropriated funds. Corbat did not discuss details of the case but said the company fired one employee for involvement in the fraud.

“Anyone else we find to have been criminally involved will be fired, as well as referred to the attorney general,” he said. “We expect to take action against others whose negligence or lack of compliance with our code of conduct allowed this fraud to be committed.”

Troubles at Citigroup came to light after bankers at its Mexican outpost Banamex reviewed invoices that Oceanografia issued to state-run Pemex.

Banamex had floated money to Oceanografia that was supposed to be repaid by Pemex as part of an accounts-receivable program. Oceanografia is alleged to have falsified documentation to bilk the bank out of millions of dollars.

A key service provider to Pemex for more than a decade, Oceanografia collected billions of dollars in contracts for maintenance and engineering services on offshore oil platforms. Officials at Citigroup say they are still trying to determine how long the supplier had been submitting dubious invoices.

The Mexican government has seized control of Oceanografia and launched a criminal probe. Meanwhile, the Federal Bureau of Investigation has begun an inquiry into whether Citigroup had proper controls in place to avoid fraud, according to a person familiar with the probe.

Prior to the incidents of fraud, Citigroup had hailed Banamex as a model for its global strategy. Banamex, the second-largest bank in Mexico with 1,700 branches, has consistently produced strong returns for its parent company.

Problems arose in the third quarter of 2013, when $300 million in loans Banamex made to several Mexican homebuilders led Citigroup to increase its reserves in anticipation of losses. Those homebuilders had trouble repaying the loans after the Mexican government cut subsidies to finance their developments.

The soured loans pale in comparison to the fraud investigations Banamex faces. In a regulatory filing in March, Citigroup said it received grand-jury subpoenas from the U.S. Attorney’s Office for the District of Massachusetts and the Federal Deposit Insurance Corp. concerning Banamex’s compliance with the Bank Secrecy Act and anti-money-laundering laws.

“We’re reviewing all of our controls and processes in Mexico, and we’ll strengthen any area we think falls short of our global standards and best practices,” Corbat said Monday. “While we’d all like a quick resolution of this issue, we’re doing a lot of work and it’s just going to take some time to get it done.”

The Oceanografia episode in Mexico resulted in a $235 million after-tax loss in the fourth quarter that lowered Citigroup’s 2013 earnings by 7 cents per share, from the $13.9 billion, or $4.42 a share, the company reported in January.

The bank rebounded in the first quarter by reporting a profit of $4.1 billion, up 2.5 percent from the same period a year ago. A reduction in expenses and provisions for soured loans helped boost profit, despite a drop in revenue from bond trading and mortgage refinancing.

Danielle Douglas-Gabriel covers the banking industry for The Washington Post.
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