Citigroup Loses Millions Due to Fraud in Mexico



If you’re a major financial services company like Citigroup Inc. (NYSE:C), not all press is good press. Citigroup reported on Friday that it is adjusting downward its fourth-quarter and full-year 2013 earnings by about $235 million (or $360 million before taxes) after discovering fraud at one of its subsidiaries in Mexico. The adjustment amounts to a 1.4 percent reduction in full-year earnings to $13.7 billion. The loss was charged to Citi’s fourth-quarter Transaction Services operating expense.

The fraud was discovered at at a company called Oceanografia S.A. de C.V. (OSA), a Mexican oil services company that is a primary supplier to Petroleos Mexicanos, or Pemex, the Mexican state-owned oil company. Through Banco Nacional de Mexico, or Banamex, Citigroup had extended about $585 million in short-term credit to OSA in order to finance accounts receivable from Pemex. This means that Citigroup lent OSA money, and OSA used its accounts receivable from Pemex as collateral. Banamex, acting as a sort of intermediary, also had about $33 million in loans directly outstanding to OSA, or tied up in standby letters of credit issued on behalf of OSA.

Everything appeared to be in order until February 11, when Citigroup learned that OSA had been barred from new acquiring new business with the government — which means no new business with Pemex. The specific reason for the suspension is unclear, but it understandably raised some red flags at Citigroup. Together with Pemex, a review of OSA’s financials were conducted, with Citigroup checking its credit exposure to the company and Pemex investigating accounts receivable.

The review found that of the $585 in supposed accounts receivable owned by OSA, just $185 million was valid. That is, Pemex had just $185 million worth of work on its books. Citigroup CEO Michael Corbat said that, “Although our inquiry into this fraud is continuing, we have been responding forcefully over the past week by assessing the overall exposure to Citi, coordinating with law enforcement, pursuing recovery of the misappropriated funds, and seeking accountability for anyone involved. Specifically, we have been taking the following actions: first, we immediately began a ‘rapid review’ — throughout Banamex and the rest of Citi — of programs similar to the one at issue here. At this point, we believe this is an isolated incident.”

Overall, the financial impact isn’t that bad, but it is still bad news for Citigroup, which struggled in its year-end quarter and is facing investigations into its foreign exchange division. Citigroup confirmed on January 17 that it had suspended two currency traders working in New York and London locations a week after the bank’s firing of its head of Forex trading in London. Citi’s internal investigations prompted the move following a sweep by regulators through the bank’s London offices.

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