Updated from 9:27 a.m. ET with additional comment from Citigroup CEO Michael Corbat from an internal company memo.
Citigroup's Mexican subsidiary, Banco Nacional de Mexico, commonly called Banamex, lent $585 million to Oceanografia S.A. de C.V. ("OSA"), a Mexican oil services company, with the loans secured by accounts receivable, as is typical for many commercial and industrial loans. Banamex also had $33 million in loans made directly to OSA or letters of credit issued on behalf of OSA.
OSA had been a "key supplier" to Petroleos Mexicanos, or Pemex, Mexico's state-owned oil company. But in February, OSA was suspended from new Pemex contracts. After Citigroup and Pemex reviewed OSA's accounts receivable securing the loans, "Pemex asserted that a significant portion of the accounts receivables recorded by Banamex in connection with the Pemex accounts receivable financing program were fraudulent and that the valid receivables were substantially less than the $585 million referenced above."
Citigroup estimates that only $185 million of the accounts receivable pledged by OSA are legitimate. The $400 shortfall has been charged to operating expenses within the company's Transaction Services unit for the fourth quarter, "with an offset to compensation expense of approximately $40 million associated with the Banamex variable compensation plan."
In an internal company memo, Citigroup CEO Michael Corbat gave more details about the fraud: "It appears that invoices from OSA were falsified to represent that Pemex had approved them. A Banamex employee processed them, and as much as $400 million was misappropriated throughout the course of the fraud. At this point, it is not clear how many people were involved in the fraud."