Thread: Citigroup Takes $400 Million Hit, Alleging Fraud in Mexico

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Citigroup Takes $400 Million Hit, Alleging Fraud in Mexico

Bank Says Mexico Subsidiary Paid to Finance Falsified Contracts

Citigroup said as much as $400 million was stolen from its Mexico unit in what the bank's CEO called a "despicable crime." The bank cut its fourth-quarter results by about $235 million as a result.

By Saabira Chaudhuri

Citigroup Inc. said as much as $400 million was stolen from its Mexico unit in what the bank’s CEO called a “despicable crime.”

The New York bank announced Friday that it was cutting its fourth-quarter and full-year results by about $235 million after finding allegedly fraudulent billings at its Mexico unit, Banco Nacional de Mexico, or Banamex.

Citigroup said the after-tax adjustment came after the bank investigated its dealings with a Mexican oil-services company, Oceanografía S.A. de C.V, and found an apparent gap of $400 million in an account that owed money to Citigroup’s Mexico unit.

The disclosure is a hit to Citigroup’s global banking efforts, a key part of its strategy. By some estimates, Banamex, Mexico’s second-largest bank, has contributed 10% of Citigroup’s income in some years. It also comes after Citigroup has been hit by three U.S. regulatory actions in the last two years over its internal controls.

Mexico Attorney General Jesus Murillo Karam said Friday that the government had seized control of Oceanografía in order to preserve records and maintain operations as officials investigated the alleged fraud. He said that a preliminary investigation found “inconsistencies in documentation,” but that no arrests had been made.

A representative of the company didn’t respond to requests for comment.

Citigroup said its Banamex unit extended credit to Oceanografía to finance amounts that were allegedly owed to the oil-services company by Petróleos Mexicanos, or Pemex, the Mexican state-owned oil company. Oceanografía has been a supplier to Pemex.

Citigroup said that it learned on Feb. 11 that Oceanografía had been suspended from being awarded new Mexican government contracts.

The bank then began a review of its credit exposure. According to the Citigroup release and an internal memo reviewed by The Wall Street Journal, Pemex said a significant portion of the amounts allegedly owed to Citigroup’s Banamex unit were based on fraudulent invoices from Oceanografía.

Pemex said in a statement Friday that the alleged “irregular activities by Oceanografía” were “an isolated case that will be dealt with by the appropriate authorities.” It said the order to ban Oceanografía from receiving government contracts for 21 months wasn’t related to the alleged fraud involving Banamex.

Citigroup said that as of the end of last year, its Banamex unit had extended about $585 million of short-term credit to Oceanografía. The bank said it estimated that only about $185 million of that amount represented valid accounts receivable owed to Banamex by Pemex.

Citigroup charged the remaining $400 million to operating expenses in the fourth quarter of 2013.

The bank said Banamex had about $33 million in loans outstanding to Oceanografía or letters of credit it had issued on behalf of the company. Citigroup said it was analyzing whether any of that, or the $185 million in remaining accounts receivable, was impaired.

In the internal memo, Citigroup Chief Executive Michael Corbat said that the invoices from Oceanografía “were falsified to represent that Pemex had approved them.” He said a Banamex employee had processed the falsified invoices. “At this point, it is not clear how many people were involved in the fraud,” Mr. Corbat told employees in the memo.

Citigroup said in a statement that it was reviewing the matter. The employee at the bank who approved the allegedly fraudulent invoices is suspected of being complicit in the fraud, according to a person familiar with the matter.

Citigroup said in the news release that it was exploring its legal options and coordinating with law-enforcement agencies in Mexico. It also said it was examining other accounts receivable programs at Banamex and across the rest of Citigroup.

The bank recently disappointed investors by announcing 2013 results that showed Mr. Corbat, CEO since 2012, wasn’t as successful as many had hoped at cutting costs and generating profit growth. Citigroup said Friday that the alleged fraud in Mexico would lower its 2013 net income to $13.7 billion from $13.9 billion. Citigroup’s annual report, which will be filed Monday, will reflect the adjustments and changes to its fourth-quarter numbers, it said.

The alleged fraud renewed the focus on whether Citigroup and other large global banks can monitor their sprawling international businesses.

In a note to clients, SunTrust analyst Eric Wasserstrom noted that while the financial impact of the alleged fraud was limited, the matter “highlights the importance of a robust compliance and control infrastructure, and will likely bring renewed focus to Citigroup’s investments and possible deficiencies in this area.”

“Fraud is always going to be a part of banking; the key is to keep it small and rare,” said CLSA analyst Mike Mayo. “If we look at Citigroup in the last decade, fraud and other risk mishaps were anything but small and rare.”

Citigroup declined to comment on the analysts’ remarks.

The U.S. Federal Reserve last year slapped Citigroup with a consent order demanding improvements in the bank’s anti-money-laundering procedures and related internal audits. That action came less than a year after orders from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. over similar issues.

A Citigroup spokeswoman said at the time that the bank “has made substantial progress in strengthening” its compliance with rules to prevent money laundering.

–Shayndi Raice in New York and Amy Guthrie and Laurence Iliff in Mexico City contributed to this article.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

http://stream.wsj.com/story/markets/SS-2-5/SS-2-468046/

U.S. Justice Dept., Citigroup settle probe into Banamex USA

In the internal memo, Citigroup Chief Executive Michael Corbat said that the invoices from Oceanografía “were falsified to represent that Pemex had approved them.” He said a Banamex employee had processed the falsified invoices. “At this point, it is not clear how many people were involved in the fraud,” Mr. Corbat told employees in the memo.

Citigroup said in a statement that it was reviewing the matter. The employee at the bank who approved the allegedly fraudulent invoices is suspected of being complicit in the fraud, according to a person familiar with the matter.

Citigroup said in the news release that it was exploring its legal options and coordinating with law-enforcement agencies in Mexico. It also said it was examining other accounts receivable programs at Banamex and across the rest of Citigroup.

The corruption doesn't end South of the Border.