Mexico eyes tougher rules by fourth-quarter to catch bad loans

MEXICO CITY Tue May 13, 2014 7:45pm EDT

MEXICO CITY (Reuters) - New rules to shed more light on loans like the fraudulent ones that hit Citigroup's Mexican unit are being drawn up by Mexico's bank watchdog and should go into effect by the fourth quarter, the agency said on Tuesday.

Citigroup Inc (C.N) in February said it had found $400 million in bad loans at its Mexican subsidiary Banamex, made to oil services firm Oceanografia OCNGR.UL and backed by apparently fraudulent invoices to state-owned oil company Pemex PEMX.UL.

Banamex, Mexico's No.2 bank by assets, has since disclosed a total loss of $565 million on loans to Oceanografia and another unidentified Pemex supplier through the end of March that are under investigation by Mexican and U.S. regulators.

Some $532 million of the credits were so-called factoring loans, which allowed contractors to borrow based on expected payments from Pemex for work they were doing.

Pemex would then pay Banamex directly when an invoice was received saying the work had been done.

Jaime Gonzalez, president of the Comision Nacional Bancaria y de Valores (CNBV), said accounting rules only require Banamex to record Pemex as the company that owed money to the bank.

"When we looked in our database, at who is the debtor, we don't see Oceanografia," Gonzalez told Reuters in an interview. "These are, maybe, the things we would like to change to have more visibility about the true operative risk."

Gonzalez said he had rejected a first proposal to change the factoring rules but that a revised draft of the rules should go into effect "by the fourth quarter at the latest."

A review of Mexico's banking system after the Oceanografia fraud revealed that not all banks are complying with their internal controls for factoring loans as well, he added.

For example, Gonzalez said, some do not call to verify a work invoice, or do not have procedures in place that send out an alert when the call is not made.

In the case of Banamex, "It has to do with people that don't necessarily do what their own manual says," he noted.

Oceanografia was a top service provider to state-run oil giant Pemex over the past decade, winning billions of dollars in contracts as a supplier of engineering and maintenance services on offshore oil platforms and pipelines.

Mexico's government has taken control of Oceanografia, and begun a criminal probe. The U.S. Securities and Exchange Commission is investigating the transactions and the U.S. Department of Justice has requested information on dealings between the two companies.

Late last month the CNBV announced it had completed a site-based investigation of Banamex and would soon come to a conclusion about possible sanctions as well as a referral to the attorney general's office over a potential "financial crime."

(Additional reporting by Elinor Comlay in Mexico City and David Henry in New York; Editing by Bernard Orr)

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