NEW YORK (TheStreet) -- Citigroup's (C) - Get Report Mexico unit, Banamex, has been the subject of negative news of late and the importance of the division to the bank's overall operations is not to be underestimated.

Mexico is Citigroup's largest international market, according to a KBW report Wednesday. Since fraud at Banamex was first disclosed by Citigroup Feb. 28, shares are down nearly 2% versus a roughly 6% gain in the KBW Bank Index. Shares were down 1.43% to $47.55 Thursday afternoon, after The New York Timesreported U.S. authorities have opened a criminal inquiry into Citigroup tied to the issue.

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The fraud involves a $585 million loan Citigroup made to an oil services company called Oceanografia that was secured by accounts receivable from Pemex that turned out to add up to just $185 million instead of the promised $585 million, according to The New York Times' report Thursday. As part of its Feb. 28 announcement of the fraud, Citigroup revised 2013 and fourth quarter earnings downward by $235 million, including a $125 million tax write-off resulting from the loss.

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While $235 million is a small number in the context of Citigroup's more than $13 billion in 2013 profits, it may be indicative of deeper cracks within the institution, which is still trying to put itself together after it required a $45 billion government bailout during the financial crisis.

"Mexico is important to Citigroup because Manuel Medina Mora operates out of there and he runs the whole consumer finance business for Citigroup worldwide so if there's real problems in Mexico City it could be well beyond what is happening in just the Banamex operation," said Rafferty Capital Markets analyst Richard Bove in an interview Thursday.

The fraud may have been a factor in the Federal Reserve's rejection of Citigroup's plan to raise its dividend and increase its authorized share repurchase last month, according to a report from CLSA analyst Mike Mayo. Mayo also reiterated a suggestion that Citigroup consider selling the unit.

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The Fed did not mention Mexico specifically in its rejection of Citigroup's capital plan. The regulator's somewhat elliptical announcement expressed concerns over "Citigroup's ability to project revenue and losses under a stressful scenario for material parts of the firm's global operations, and its ability to develop scenarios for its internal stress testing that adequately reflect and stress its full range of business activities and exposures."

The troubles with the Oceanografia loan come after Citigroup was forced to increase loan reserves in the third quarter over exposure to the troubled Mexican homebuilder sector, an issue KBW analyst Christopher Mutascio brought up in Wednesday's report.

"Mexico is Citi's largest international market, so if we see a material slowdown in Mexico affecting Citi's Global Consumer Business (GCB) unit, then we believe forward estimates could come under pressure as well. Altogether, we are becoming more cautious on [Citigroup's] emerging market focus as growth projections outside the U.S. appear to be slowing and volatility is increasing," wrote Mutascio.

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