Pedestrians walk outside a Banamex bank branch
The fraud was linked to Banamex loans to Oceanografia

Citigroup said it had discovered alleged fraud at Banamex, its Mexican unit and a crown jewel of the global business, forcing it to lower fourth-quarter and full-year earnings.

Citi cut its full-year net income to $13.7bn from $13.9bn on Friday, saying it had found fraud linked to Banamex’s loans to Oceanografia, a troubled Mexican oil services company. Banamex was lending to Oceanografia based on invoices for work it said were approved by Petróleos Mexicanos, the state-owned company, which Citi said turned out to be falsified.

“The financial impact will lower our 2013 net income by approximately $235m,” chief executive Michael Corbat said in a memo to staff on Friday. “The impact to our credibility is harder to calculate.”

Citi is trying to rebuild its global image after being deeply scarred by losses during the financial crisis. Under Mr Corbat, the bank has been assessing its global footprint, pulling back from less profitable markets and investing in others as he tries to strengthen the sprawling international bank.

Citigroup said $400m was misappropriated as a result of the alleged fraud, which centred on false approvals of invoices that were processed through its accounts receivables financing programme for Oceanografia. The bank said the actual receivables were worth only $185m, much less than the $585m that Banamex had lent out to Oceanografia.

The $400m was charged as an operating expense in the bank’s transaction services unit in the fourth quarter, with $40m coming from Banamex employees’ pay.

Jorge Betancourt, Oceanografía’s investor relations director, declined to comment. Pemex officials were not immediately available for comment.

“Although this may be an isolated incident, the news is somewhat troubling given Mexico is Citigroup’s largest non-US market and where we believe internal controls should be strongest,” analysts at Keefe, Bruyette & Woods wrote in a note to clients.

The transactions were processed by a Banamex employee, the bank said, adding that it was unclear how many people were involved in the fraud. Accounts receivables financing typically allows companies to manage liquidity in the period before they are paid for their services or products.

“At this point, we believe this is an isolated incident,” Mr Corbat said. He added: “All will be held equally responsible and we will make sure that the punishment sends a crystal clear message about the consequences of such actions.”

On February 11 the bank learnt that Oceanografia had been suspended from getting new Mexican government contracts, prompting it to look into its dealings with the company. The government ban lasts 21 months and was determined after Mexico’s Comptroller Ministry found several irregularities and violations on different contracts Oceanografía signed with state-owned oil monopoly.

As a result of the ban, executives of Oceanografía were forced to ask creditors for a 60-day waiver on paying interest on one of the company’s global bonds.

After the Citigroup announcement, Mexico’s attorney-general’s office said it had seized Oceanografía due to a criminal complaint filed by Banamex. Oceanografía will be administered by the government entity Servicios de Administración y Enajenación de Bienes (SAE), or Service for Administration and Sale of Goods, it said.

Mexico’s bank regulators said in a statement that the impact on Banamex’s finances was not disrupting. The National Banking and Securities Commission, or CNBV, calculated that impact to be worth 2 per cent of Banamex’s capital, not representing serious damage to the bank’s capital as it remained above minimum requirements.

Citigroup acquired Grupo Financiero Banamex-Accival for $12.5bn in 2001, at that point the largest corporate merger between the two countries. The integrated operation included more than 1,400 branches and more than 4,200 cash machines.

The timing of the discovery is particularly galling given Mr Corbat’s memo sent out on February 12 to staff at the bank that focused on ethics. In that memo he wrote: “As much as I hate to say it, it appears that even now – five years after a crisis in which the financial services industry shouldered its fair share of blame – there are some people who still don’t get it.”

US banks can revise their earnings data between the reporting of their results and the filing of their annual 10-K filings under SEC rules. Morgan Stanley revised its fourth-quarter earnings lower earlier this month after announcing a $1.3bn settlement with a US regulator over mortgage-backed securities.

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