Citigroup Mexico Worker Said to Take Documents Tied to Fraud

Apr 11, 2014 10:21 am ET

(Updates with share performance in ninth paragraph, Citigroup spokesman’s response in 13th.)

April 11 (Bloomberg) -- A Citigroup Inc. employee in Mexico left the bank’s offices with documents related to a suspected $400 million loan fraud, according to two people briefed on the incident.

The junior worker at the bank’s Banamex unit took invoices bearing forged signatures from an office in Ciudad del Carmen on the Gulf Coast after the New York-based lender discovered the fraud in February, said one of the people, who requested anonymity because the information wasn’t public. The employee has since been fired, the other person said, declining to specify whether the documents have been recovered.

Mark Costiglio, a bank spokesman, declined to comment.

Bogus loans to oil-services firm Oceanografia SA, also based in Ciudad del Carmen, reduced the bank’s 2013 profit by $235 million, Citigroup announced on Feb. 28. At the time, Chief Executive Officer Michael Corbat called it an isolated incident and a “galling example” of what happens when employees fail to act with the highest ethical standards.

The losses occurred in a program used to finance bills owed to Oceanografia for work it conducted for state-owned oil company Petroleos Mexicanos, or Pemex. The bank’s own inquiry is looking at when the program began, when it was last approved and how recently it was audited, one of the people said.

State Department

That examination is being run by Cheryl Rathbun, Citigroup’s chief operating officer for risk management in the institutional clients group, the people said. She reports to Brian Leach, the bank’s head of franchise risk and strategy. Rathbun also is in charge of examining any internal-control lapses that let the fraud happen, the people said. No senior executives are under suspicion of committing fraud, one person said.

Rathbun spent 11 years at the U.S. State Department before joining Citigroup in 1998 as a vice president focused on country and cross-border risks, according to her LinkedIn profile. She has graduate degrees in national security strategy from the National War College in Washington and international affairs from Columbia University in New York, the profile shows.

The bank’s legal department also is conducting an investigation, with help from law firm Shearman & Sterling LLP, that includes efforts to determine whether executives were negligent or failed to properly supervise employees, one of the people said. The New York field office of the Federal Bureau of Investigation also is examining what happened, a person with knowledge of the matter said last month.

Workers Interviewed

Citigroup, the third-largest U.S. bank, fell 1.7 percent to $45.46 at 9:40 a.m. in New York trading. The shares slumped 11 percent this year through yesterday, the second-worst performance in the 24-company KBW Bank Index, after First Niagara Financial Group Inc.’s 16 percent decline. The bank is set to report first-quarter results on April 14.

The company disclosed the alleged loan fraud on Feb. 28. That day, Mexican Attorney General Jesus Murillo Karam said the government had seized control of Oceanografia, and authorities searched its offices.

Since the start of Mexico’s probe, workers in Banamex’s credit department also have been interviewed by authorities, though they were considered people with information about the case rather than suspects, two government officials said in early March. A spokesman for the attorney general declined to comment.

Secrecy Act

Citigroup said last month that its Banamex USA unit also received federal grand jury subpoenas from the U.S. Attorney’s Office in Massachusetts related to compliance with the Bank Secrecy Act and anti-money-laundering requirements. That inquiry focuses on whether the bank failed to flag suspicious money transfers by people along the U.S.-Mexico border that in some cases involved suspected drug-cartel members, the Wall Street Journal reported late yesterday, citing unidentified people familiar with the probe.

Christina DiIorio-Sterling, a spokeswoman for the U.S. attorney’s office in Boston, which Citigroup has said is conducting the inquiry, declined to comment. Costiglio declined to comment on the Journal’s story.

The bank was ordered by the Federal Reserve last year to show it had tightened safeguards to prevent money-laundering violations, after a U.S. regulator said the lender failed to conduct proper due diligence on customers and was too slow to report suspicious activity.

Stress Test

Corbat, 53, was dealt another setback last month when Citigroup failed an annual stress test administered by the Fed, which rejected the company’s request to quintuple its dividend and repurchase $6.4 billion of shares.

The Banamex debacle “may have been a big enough alarm” to spark a bigger regulatory action, said John Crowley, a money manager at Boston-based Eaton Vance Corp., which oversaw more than 10 million shares of Citigroup at the end of 2013.

Corbat, in response to the stress-test failure, asked Eugene McQuade, the departing CEO of Citibank N.A., to cancel his retirement and lead the company’s submissions to the Fed over the next year, according to a memo obtained by Bloomberg News last week. The regulator, in rejecting Citigroup’s capital plan, cited deficiencies in the bank’s ability to project losses in “material parts of its global operations.”

‘Bail Out’

Citigroup, the biggest bank among the five that failed the stress test, tumbled 5.4 percent the next day, the biggest drop in more than a year.

Failing the test was “really a gut check for many investors,” Eaton Vance’s Crowley said in a phone interview.

Shareholders had to ask themselves whether they were “willing to continue to hold the security or bail out and go to another stock,” he said. “For investors who were shorter-term, the pain was too great and they bailed.”

The bank will find it more difficult to reach a 2015 target for return on tangible common equity, a measure of profitability that Corbat set at 10 percent.

“Our target clearly requires increasing the amount of capital returned to our shareholders in the coming years, subject to regulatory approval,” Chief Financial Officer John Gerspach said in a March 3 presentation.

In the two weeks since failing the stress test, Citigroup reached a $1.13 billion settlement with bond investors and said it would sell its Honduran consumer bank and one-third of its branches in South Korea. The bank also is in talks to sell its retail and credit-card business to Banco Popular Espanol SA, the Madrid-based lender said in a filing last week.

--With assistance from Zachary Tracer in New York and Edvard Pettersson in Federal court in Los Angeles.