Write a summary on Fraud in Mexico

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timer Asked: Mar 20th, 2014

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Citigroup Takes $400 Million Hit, Alleging Fraud in Mexico - WSJ.pdf 

MARKETS Citigroup Takes $400 Million Hit, Alleging Fraud in Mexico Bank Says Mexico Subsidiary Paid to Finance Falsified Invoices Email Print Sav e Comments B y S AAB I R A C H AU D H U R I , AMY G U T H R I E An d S H AYN D I R AI C E CONNECT Updated Feb. 28, 2014 6:39 p.m. ET Citigroup said it lost as much as $400 million to alleged fraud. Getty Images Citigroup Inc. C -1.65% said as much as $400 million was stolen from its Mexico unit in what the bank's chief executive called a "despicable crime." The New York bank announced Friday that it was cutting its fourth-quarter and full-year results by about $235 million after finding allegedly fraudulent billings at its Mexico unit,Banco Nacional de Mexico, CORPTRC.MX -0.21% or Banamex. Citigroup said the after-tax adjustment came after the bank investigated its dealings with a Mexican oil-services company, Oceanografía SA de CV, and found an apparent gap of $400 million in an account that owed money to Citigroup's Mexico unit. More CEO: Fraud 'Galling' Heard on the Street: Citi Caught Sleeping in Mexico The surprise loss represents a hit for Citigroup's CEO Michael Corbat, who has been trying since he started in the job in 2012 to make the sprawling global bank more boring and risk-averse. "Only two weeks ago I wrote to you about the absolute need for everyone at this firm to act in accordance with the highest ethical standards," Mr. Corbat wrote to employees in a memo Friday. "We now have a galling example of what happens when people fail this basic requirement." The problems started when Citigroup's Banamex unit extended credit to Oceanografía to finance amounts that were allegedly owed to the oil-services company by Petróleos Mexicanos, or Pemex, the Mexican state-owned oil company. Oceanografía has been a supplier to Pemex. Citigroup said that as of the end of last year, its Banamex unit had extended about $585 million of short-term credit to Oceanografía. On Feb. 11, Citigroup said, it learned that Oceanografía had been suspended from being awarded new Mexican government contracts. That triggered a review by the bank of its relationship with Oceanografía. Citigroup said it consulted with Pemex, which told it that a significant portion of the amounts allegedly owed to Banamex were based on fraudulent invoices from Oceanografía. In the internal memo, Citigroup's Mr. Corbat said the invoices from Oceanografía "were falsified to represent that Pemex had approved them." He said a Banamex employee had processed the falsified invoices. "At this point, it is not clear how many people were involved in the fraud," Mr. Corbat told employees in the memo. Citigroup said that it was reviewing the matter. The bank employee who approved the allegedly fraudulent invoices is suspected by Citigroup of being complicit, according to a person familiar with the matter. The bank is questioning employees and taking written statements, according to another person familiar with the case, to determine the extent of the alleged fraud. Pemex said in a statement Friday that the alleged "irregular activities by Oceanografía" were "an isolated case that will be dealt with by the appropriate authorities." It said the order to ban Oceanografía from receiving government contracts for almost two years wasn't related to the alleged fraud involving Banamex. The bank said it estimated that only about $185 million of the $585 million of short-term credit represented valid invoices. Mexico Attorney General Jesus Murillo Karam said Friday that the government had seized control of Oceanografía in order to preserve records and maintain operations as officials investigated the alleged fraud. He said that a preliminary investigation found "inconsistencies in documentation," but that no arrests had been made. A representative of Oceanografía didn't respond to requests for comment. Citigroup said Banamex had about $33 million in loans outstanding to Oceanografía or letters of credit it had issued on behalf of the company. Citigroup said it was analyzing whether any of that, or the $185 million in remaining accounts receivable, was impaired. Citigroup said in its statement that it was exploring its legal options and coordinating with law-enforcement agencies in Mexico. It also said it was examining other accounts receivable programs at Banamex and across the rest of Citigroup. Citigroup said Friday that the alleged fraud in Mexico would lower its 2013 net income to $13.7 billion from $13.9 billion. Citigroup said its annual report, to be filed Monday, will reflect the adjustments and changes to its fourth-quarter numbers. "Fraud is always going to be a part of banking; the key is to keep it small and rare," said CLSA analyst Mike Mayo. The U.S. Federal Reserve last year slapped Citigroup with a consent order demanding improvements in the bank's anti-money-laundering procedures and related internal audits. That action came less than a year after orders from the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. over similar issues. A Citigroup spokeswoman said at the time that the bank "has made substantial progress in strengthening" its compliance with rules to prevent money laundering. Mexico state-owned oil company Pemex said a significant portion of the amounts allegedly owed to Banamex were based on fraudulent invoices. Agence France-Presse/Getty Images —Laurence Iliff contributed to this article. Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com, Amy Guthrie atamy.guthrie@wsj.com and Shayndi Raice at shayndi.raice@wsj.com Email Print Sav e Comments Order Reprints

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