February 28, 2014 / 2:35 PM / 4 years ago

UPDATE 7-Citigroup reports fraud in Mexico unit, lowers 2013 results

(Adds FBI monitoring situation in paragraphs 9-10)
    By David Henry and Elinor Comlay
    NEW YORK/MEXICO CITY, Feb 28 (Reuters) - Citigroup Inc 
said on Friday that it has discovered at least $400 million in
fraudulent loans in its Mexico subsidiary and said employees may
have been in on the crime.
    The bank wrote down bogus loans to a company whose assets
Mexican law enforcement officials have now seized. Citigroup's
2013 profit fell by $235 million to $13.67 billion after the
write-down. Citigroup Chief Executive Officer Michael Corbat
called the incident a "despicable crime" and said the bank
believes it was an isolated episode.      
    The bad loans were made to Mexican oil services company
Oceanografia, a contractor for Mexican state-owned
oil company Pemex.
    Oceanografia borrowed from Citigroup's Mexican unit, Banco
Nacional de Mexico, known as Banamex, using expected payments
from Pemex as collateral.
    In recent weeks, Banamex learned that Oceanografia appeared
to have falsified invoices to Pemex that were collateral for
loans, Corbat said in a separate memo to employees. The bank
wrote down about $400 million of loans backed by the bogus
    On Feb. 11, Pemex suspended Oceanografia from receiving any
government contracts for 21 months and 12 days, a serious blow
for a company that receives about 97 percent of its revenue from
the Mexican oil company. Public records show that Oceanografia
was awarded almost $3 billion through more than 100 contracts
with Pemex between 2003 and last year. 
    Citigroup said it began looking at its exposure to
Oceanografia after the suspension. 
    Mexico's attorney general's office said on Friday it was
investigating Oceanografia for possible crime, and said it had
seized the company's assets and appointed an administrator to
salvage whatever business is left. Calls for the press
representative at Oceanografia and an email to an investor
relations official were not returned.
    The U.S. Federal Bureau of Investigation is aware of the
loan losses and is monitoring the situation for possible
criminal activity, a person familiar with the matter said on
    The source said it was too early to determine whether an
investigation was merited, but the FBI was continuing to look at
new developments in the case before making a
    Citigroup CEO Corbat said in the statement that Banamex is
exploring legal options. Criminal actions "may allow us to
recover damages," he added.
    Citigroup has about $1.9 trillion of assets on its balance
sheet, and so far the bank has found $400 million of
Oceanografia loans that it has trouble with. 
    Mexican officials had raised questions about Oceanografia
before. In 2012, the nation's Federal Audit Office published a
report criticizing Pemex for failing to investigate what
appeared to be contract irregularities with Oceanografia as well
as overpayment for work that was not running on time. 
    But it was not until Feb. 11 that Pemex's internal control
body sanctioned Oceanografia, sparking an investigation by Citi
of its loans.
    In the memo to employees, Corbat noted that a Banamex
employee had processed the fraudulent invoices that appeared to
be from Oceanografia, and said that it is "not clear how many
people were involved in the fraud."  
    "I can assure you there will be accountability for those who
perpetrated this despicable crime and any employee who enabled
it, either through lax supervision, circumvention of our
controls or violating our code of conduct," Corbat said.  
    Citigroup shares have fallen in recent weeks on concerns
that slowing growth in emerging markets may reveal bad loans and
may trigger more trading losses.
    In the third quarter of 2013 problems with about $300
million of loans that Banamex had made to three Mexican
homebuilders prompted Citigroup to book reserves for expected
    Sources told Reuters that executives in New York had
rejected at least some loans to the homebuilders because they
were not comfortable with the risk. Banamex made loans anyway,
the sources said, adding that the unit has room to make loans
that do not get vetted by New York, as long as its overall
portfolio is safe enough. 
    Citigroup spokesman Mark Costiglio, said in a statement
regarding the homebuilder loans, "The origination and management
of the homebuilder loans, as with all loans in Mexico, was
conducted under the oversight and framework of Citi's
independent risk management function, and any suggestion to the
contrary is false."
    He added, "Citi has a robust and independent risk management
framework that provides oversight for lending decisions that are
made in every country in which we operate. This framework
results in a loan portfolio that is diversified by obligor,
industry and region."
    Citigroup is the third-largest U.S. bank by assets. The
company views its international business as a competitive
advantage over other big banks in the United States.    
    The bank estimates that it is able to validate $185 million
of the $585 million of accounts receivable that Oceanografia
used as collateral for borrowing. Citigroup said it is charging
the $400 million difference to operating expenses in its
previously announced fourth-quarter results. The total pre-tax
expense is $360 million after adjusting Banamex compensation
expense by $40 million, the statement said.
    Citigroup said it has not determined if it faces losses on
another $33 million for outstanding loans made directly to
Oceanografia and letters of credit issued for the company.
    The bank's shares closed down 0.1 percent at $48.63 on the
New York Stock Exchange.

 (Additional reporting by Alexandra Alper, Anahi Rama and Dave
Graham in Mexico City and Dan Wilchins and Emily Flitter in New
York; Editing by Jeffrey Benkoe, Phil Berlowitz, Richard Chang,
Leslie Adler and Lisa Shumaker)
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