Citigroup Cleans House Over Mexico Fraud

NEW YORK (TheStreet) -- Citigroup (C) said on Monday it has fired 11 additional workers, including high-ranking members of the company's Mexican banking unit, as part of an investigation into a fraud the bank uncovered earlier this year. Citigroup's initial findings, first disclosed in February, prompted a $235 million adjustment to the banking giant's fourth quarter net income.

>> Read More: Citigroup Burned By Fraud In Mexico

In February, fraud was uncovered at Citigroup's Mexican subsidiary, Banco Nacional de Mexico, commonly called Banamex, which caused a $400 million charge and an adjustment of the bank's fourth quarter earnings. The fraud related to a $585 million loan to Oceanografia S.A. de C.V. ("OSA"), a Mexican oil services company, which was secured by accounts receivable, as is typical for many commercial and industrial loans.

OSA is a 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, both parties decided a substantial amount of those receivables were fraudulent. Of the $585 million in loans, only $185 million were legitimate, Citigroup said.

"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," Citigroup CEO Michael Corbat said in February.

In a first quarter media call, Citigroup said it had uncovered another fraud in its Mexican subsidiary related to a separate lending program. The bank, however, didn't disclose any financial impact of that fraud and declined to elaborate. Because of fraud investigations, Citigroup did increase its credit costs for the unit in the first quarter.

We now know that as part of Citigroup investigation into the apparent fraud, 11 more employees have been fired, including four managing directors, two of whom are business heads in Mexico.

While Citi previously fired the person it believed was responsible for the OSA fraud, it is unclear whether the further 11 fired employees are believed to have participated in the alleged fraud, or simply failed to catch it.

"While our internal investigation is ongoing, we have unfortunately identified additional employees across business and functional lines whose actions or inactions failed to protect our company from this fraud. As a result, these 11 employees have been terminated," Citigroup said in a memo obtained by TheStreet.

"While their roles, responsibilities and levels of seniority vary, they include four Managing Directors, two of whom are business heads in Mexico," the bank added.

Most worrisome is Citigroup's acknowledgement that there may be further firings inside and outside of Mexico before its internal probe is complete.

"Additionally, before our investigation concludes, we expect that several other employees, both inside and outside of Mexico, may receive forms of disciplinary action as well," Citigroup said in its internal memo.

When the fraud was discovered in February, Citi adjusted its 2013 earnings, lowering after-tax net income by $235 million to $13.673 billion, and lowering earnings-per-share by 7 cents to $4.35. The bank said it believed the fraud was "isolated," and that it was continuing a review to determine whether a remaining $33 million credit or $185 million in account receivables collateral due from Pemex was impaired.

Citigroup shares were falling by less than 1% to $47.03 in early Wednesday afternoon trading. Shares have fallen nearly 10% year-to-date on the fraud probe and the Federal Reserve's rejection of the bank's 2014 capital plan.

Below is a full copy of the memo from CEO Michael Corbat:

As you know, in February, we discovered a significant fraud in the Pemex accounts receivable supplier financing program. Since that discovery, we have been proceeding aggressively on several fronts:

First, we conducted a rapid review of accounts receivable financing programs globally. We concluded that none had issues similar to the Pemex supplier program, and we continue to believe this was an isolated incident. Second, we are reviewing our controls and processes in Mexico and are strengthening any area we think falls short of our global standards and best practices.

Third, we have been conducting a rigorous internal investigation, supported by external counsel, to determine how the fraud occurred. I have committed to you that we would hold accountable anyone who perpetrated the crime. We are sharing information with our regulators and law enforcement agencies, which will make any determinations as to criminal liability for the fraud. We've previously said that we terminated one employee, who we believe was directly involved in the fraud. We also said we would hold accountable any employee who enabled it, whether through lax supervision, circumvention of our controls, violations of our Code of Conduct, or otherwise.

While our internal investigation is ongoing, we have unfortunately identified additional employees across business and functional lines whose actions or inactions failed to protect our company from this fraud. As a result, these 11 employees have been terminated. While their roles, responsibilities and levels of seniority vary, they include four Managing Directors, two of whom are business heads in Mexico. Additionally, before our investigation concludes, we expect that several other employees, both inside and outside of Mexico, may receive forms of disciplinary action as well.

The financial impact of this fraud has been significant, causing a reduction of our 2013 net income and increasing our credit costs for the first quarter of 2014. But as I said to you in February, the impact to our credibility is harder to calculate. Arguably, it is more damaging than the financial costs. I expect every one of our colleagues to act with the highest ethical standards and be fully committed to the safety and soundness of our institution.

While the last few months have been difficult, Banamex is an institution with a rich, 130-year history of providing exceptional banking services to its clients. Since becoming part of Citi in 2001, it has contributed significantly to our net income and is an integral part of our global network and a source of great pride for our franchise. I look forward to spending time with our colleagues fin Mexico this week to express my support for their hard work and to encourage them to remain focused on our clients and our mission.

Thank you for your continued focus on serving all our stakeholders.

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-- Written by Antoine Gara in New York.

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