On March 1, 2014, worldwide banking giant Citigroup announced that it discovered approximately $400 million in fraudulently obtained loans. The company traced the losses to a Mexican subsidiary, and indicated that employees may have been perpetrators of the scheme. As a result, Citi takes a profit hit because of fraud, officially decreasing its 2013 profit figures to $13.67 billion; the amount represents a loss of $235 million.
The Main Players
This widespread scheme to defraud involves several perpetrators throughout Mexico issuing bad loans, which wouldn’t have been made by prudent investors.
- High-risk loans were obtained by Oceanografia, a Mexican oil services enterprise.
- Oceanografia is the civilian corporate contractor of state-owned oil company Pemex.
- Using forecast payments to be received from Pemex as collateral for loans, Oceanografia borrowed funds from Citigroup’s Mexican subsidiary, Banamex.
- In late 2013 and early 2014, Banamex obtained information that revealed false invoices from Oceanografia to Pemex. The documents were used by Oceanografia to prove that Pemex was making the payments relied upon as collateral. Oceanografia secured loans in the amount of $400 million as a result of the bogus invoices.
- Upon discovering the discrepancy February 11, Pemex banned Oceanografia from obtaining government contracts for over 21 months. Almost all of Oceanografia’s revenue is derived from Pemex, thus gravely impacting the company’s profitability.
The Investigation Begins
After the suspension by Pemex, Citigroup initiated an investigation into its involvement with Oceanografia in an attempt to determine risk exposure due to the loans. According to CEO Michael Corbat, the Banamex subsidiary is looking into legal options seeking to recover damages, if possible. As Citi Bank takes a profit hit because of fraud, its balance sheet, reflecting over $1.9 trillion of assets, will show $400 million in problematic loans.
Mexican officials are also closely examining the company’s activities for potential fraud. In the meantime, the attorney general’s office has seized Oceanografia property and assigned an administrator to save whatever assets remain.
Stateside, the FBI has been briefed on the loan losses and is monitoring the ensuing investigations to determine whether crimes have taken place. The agency is holding off on becoming involved for the time being, but will continue to review any developments in the case.
CEO Promises Accountability
Corbat announced that a Banamex employee was directly involved in processing the fake invoices to Pemex, though it’s not clear how many other perpetrators were involved. He stated: “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.”
While Citi takes a profit hit because of fraud, the aftermath of the investigations may cause corporate stock values to drop based on concerns about additional bad loans. Though Citigroup is expected to authenticate $185 million of the accounts receivable that Oceanografia listed as borrowing collateral, the $400 million in problematic loans remains. The company will adjust its fourth quarter operating expenses to account for the shortfall amount.
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Veriti Consulting LLC provides professional fraud investigation services across the U.S. Veriti is also a licensed private investigation agency. Learn more about our financial fraud investigation services by calling 855.232.4410 or contact us via email.