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 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
<OCNGR.UL>, a contractor for Mexican state-owned oil company Pemex <PEMX.UL>.
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 invoices.
On February 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 Friday.
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 decision.
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 February 11 that Pemex's internal control body
sanctioned Oceanografia, sparking an investigation by Citi of its
loans.
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ACCOUNTABILITY
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 losses.
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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