A loan of $585 million went out the door at Banamex, and only $185 million of it could be accounted for. The other $400 million, Citigroup says, was drawn against paperwork that later looked suspicious.
The borrower was Oceanografía S.A. de C.V., an oil services company that claimed to be working for Mexican state oil giant Petróleos Mexicanos, known as Pemex. The documents have gone to Pemex accountants, who are checking whether Oceanografía did the work listed in them.
What Citigroup disclosed
In late February, Citigroup said it was restating its fourth-quarter 2013 results. The revision cut profit by a net $235 million. Citigroup told IBTimes UK that the hit to its balance sheet left 2013 net income at $13.7bn. The bank learned of the problem through Mexican government reports of suspended contracts, then looked into Oceanografía alongside Pemex to measure the damage.
Oceanografía itself admitted to holding only $50 million in its accounts. Mexico has barred the company from contracts with the government or any state-owned firm, Pemex included.
Investigators on both sides of the border
US authorities moved quickly. The Federal Deposit Insurance Corp. and the US Attorney’s Office for Massachusetts sent subpoenas to Citigroup. IBTimes UK, citing a source, reported that the Securities and Exchange Commission would look at accounting fraud and at whether the parent company broke the Foreign Corrupt Practices Act.
In Mexico, the Attorney General and the Bank and Securities Commission opened their own inquiries into Banamex and its staff. Attorney General Jesús Murillo Karam told a press conference in early March that investigators suspected money laundering behind the deal.
Citigroup CEO Michael Corbat promised a harsh response. “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,” he said in a statement.
Pay was hit too. Citigroup co-president Manuel Medina-Mora, who oversees the Mexican unit, received “only” $9.5m for 2013, down from $11m a year earlier, according to a company filing. The same filing said the bank would cut pay and bonuses in 2014 to recover part of the $235m loss.
Negligence or complicity?
What nobody has settled is whether anyone at Banamex knew. Investigators are still weighing active involvement against plain failure to vet Oceanografía.
Luz Rainov, a former vice-president of finance and administration at Citigroup, doubted anyone broke ethics rules on purpose. Decisions like this pass through several people at different levels, she said, and a large group being in on a crime was “impossible.” She pointed to pressure. A non-negotiable work quota, plus a looser Mexican way of doing business, may have let a request slide through. “It is all more informal, a system of trust and prestige, of vouching for somebody because you know them or of them,” said Rainov, who was born in Mexico and worked for Citigroup in New York for three years. She still called it “extreme malpractice, clearly.”
Scott McCleskey, a senior adviser at the Ethisphere Institute, put it on the controls. “The controls were just not being enforced,” he said. In his view, Oceanografía’s condition had been visible for a while. “So, did [Banamex] see the red flags and overwrote them, or simply did not do the [due] diligences?” he asked. He argued that a company of Citigroup’s size needs one corporate culture worldwide, and that staff in Mexico, Singapore or the Philippines should hear it from a local manager who shares their background.
Mike Mayo, a banking analyst at CLSA, took a blunter view. “Fraud will always be part of banking,” he said. “The key is to keep it small and infrequent.”
The timing was awkward for Citigroup. It employs 251,000 people and was due to post first-quarter results on 14 April, with analysts expecting net income to slip by nearly 5% to $3.63bn. Sources told IBTimes UK the bank planned to cut 200 to 300 jobs in its stock and bond trade handling division because of weaker profits there. Citigroup declined to comment on the cuts, though a spokesperson said the bank continues to manage expenses tightly while adding some talent strategically.
Sources
- Analysts, Former Citigroup Employee Weigh In On Mexico Fraud Scandal
- Citi Axing 300 Jobs Amid Banamex Scandal and Profit Drop
Sources
- Why Did Banamex Grant $400M Loan To Oceanografía? | IBTimes
- Citi Axing 300 Jobs Amid Banamex Scandal and Profit… | IBTimes UK
