DealBook: Citigroup Says 1t Has Fired 12 in Mexico 0ver Fraud

Adrian Virgen/ReutersTwo ships owned by Oceanografía, the oil services company at the center of a $400 million fraud against a Mexican Citi affiliate, Banamex, that may have erased 19 percent of its 2013 profits. Related Links

Citigroup disclosed on Wednesday that it had fired a total of 12 employees in Mexico, including some senior executives, in connection with a $400 million fraud involving a Mexican oil services company.

In an internal memorandum to Citigroup employees, the bank's chief executive, Michael L. Corbat, disclosed the terminations of the employees, including several managing directors, two of whom were business heads at the bank's Banamex unit.

"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," Mr. Corbat said in the memo.

Only one of the 12 employees – a lower level worker – had been fired earlier by the bank and arrested by authorities in Mexico around the time the bank first disclosed the fraud in February.

Pablo Martinez Monsivais/Associated PressMichael Corbat has been chief executive of Citigroup since 2012.

The bank fired the other 11 Banamex employees "for not doing enough to protect the company" from the fraud, Mr. Corbat said in his memo. Citigroup's internal investigation had not turned up any evidence that the 11 employees had personally benefited from the fraud, through bribes or other means, according to a person briefed on the matter, who was not authorized to speak publicly about the inquiry.

The fraud involved a short-term loan that Banamex extended to the oil services firm Oceanografía, which the company could not pay back. Oceanografía – whose business is almost entirely dependent on Pemex, Mexico's state-owned oil monopoly – has had a history of financial trouble and has been accused of having political ties to the country's ruling elite.

Citigroup has not fired any employees based in the United States in connection with the fraud, though the bank's internal investigation is continuing. Citigroup has turned over the early results of its internal examination to prosecutors in Mexico.

The fraud has also sparked an investigation in the United States, overseen by the F.B.I. and prosecutors from the United States attorney's office in Manhattan. That investigation is focusing in part on whether holes in the bank's internal controls contributed to the fraud.

The bank also faces a parallel civil investigation from the Securities and Exchange Commission's enforcement unit.

In an acknowledgment of the lax controls on its accounts receivables program – under which the bank gave short-term credit to Oceanografía backed by invoices from Pemex – that program has been restructured with stronger controls, according to a person familiar with the matter. Banamex discovered the fraud when it checked the invoices with Pemex and found that some of them were fraudulent.

Edgard Garrido/ReutersAn advertisement for Banamex in Mexico City.

Here is a copy of Mr. Corbat's memo:

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 in 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.

– Mike

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