Citigroup Mexico Probe Examines Change to Loans Before Fraud

May 30, 2014 10:27 am ET

(Updates with share prices in the 14th paragraph.)

May 30 (Bloomberg) -- Mexican authorities are probing why Citigroup Inc.’s local unit boosted the size and length of loans to an oil-services firm in the months leading up to the discovery of a $400 million fraud, the nation’s chief banking regulator said.

Officials are examining a change Banamex made around September 2012 to extend due dates to about three months instead of three weeks, Jaime Gonzalez, head of the regulatory agency CNBV, said in an interview. He’s also looking into the decision by bank executives a year later to raise credit limits for Oceanografia SA, the oil-services firm at the center of the investigation, he said.

“You could argue they were being flexible and assuming the controls were there,” Gonzalez said in an interview in his Mexico City office. “What is surprising is that the controls weren’t there.”

Mexico regulators are reviewing executive communications after New York-based Citigroup said Oceanografia used fake invoices to get money from Banamex. Citigroup Chief Executive Officer Michael Corbat called it a “despicable” crime when it was disclosed in February and has since terminated a dozen people. Mexico carried out an arrest warrant yesterday for Oceanografia CEO Amado Yanez.

Mark Costiglio, a Citigroup spokesman, declined to comment on Gonzalez’s description of events. Yanez, reached by mobile phone, said he can’t discuss the case and declined to provide the name of an attorney representing him. Jorge Betancourt, an investor-relations official at Oceanografia, didn’t respond to a message. Mexico took control of that firm in February, putting it under the supervision of the Finance Ministry’s Asset Transfer and Administration Service, where a press office official referred questions back to the bank regulator.

Financing Increased

Banamex loaned money to Oceanografia secured by promises that Petroleos Mexicanos, the state-run oil company known as Pemex, would repay the bank for work performed by the oil- services firm. Such loans can help a contractor get money to cover upfront costs such as equipment and salaries. The bank gets reimbursed by proceeds from the finished job. Pemex participated in the arrangement, and tens of millions of dollars were loaned and repaid without incident.

In 2012, Citigroup agreed to extend the time between when it gave funds to Oceanografia and when Pemex repaid the bank to 90 days from 20, Gonzalez said. At the same time, the bank started accepting Oceanografia’s accounting of what Pemex owed rather than requiring documents verified by Pemex officials, as it had in the past, he said.

In 2013, the bank increased the amount of total financing it would provide to Ciudad del Carmen-based Oceanografia, Gonzalez said, declining to provide the figures.

Committee Review

At the end of 2012, Oceanografia had about 5.2 billion pesos, or about $403 million at the time, in discounted transactions under the Banamex program, according a document filed in support of a 2013 bond offering. That was up from 626 million pesos, or $48 million, at the end of 2010.

The bulk of the disputed $400 million was loaned within about 90 days before the fraud was discovered, Gonzalez said. Citigroup has said it learned of potential irregularities in February.

Safe Profit

Because Pemex repaid the debts on behalf of other firms, the bank considered its creditworthiness first when underwriting such loans, according to a person with direct knowledge of the situation. Loans to contractors were seen as a way to profit while relying on a safe counterparty such as state-backed Pemex, said the person, who asked for anonymity while confidential investigations continue.

“While the flow of resources was coming in, everybody was happy,” Gonzalez said.

Citigroup, the third-largest U.S. bank, discovered the bogus loans after learning Feb. 11 that the Mexican government had suspended Oceanografia from bidding on government contracts, according to a bank statement. After a review, Pemex told the firm on Feb. 20 that it couldn’t verify documents backing the full $585 million that Banamex had loaned to Oceanografia. Citigroup disclosed the events Feb. 28, saying it was forced to reduce previously reported profit for 2013 by $235 million.

The bank’s shares rose 0.6 percent to $47.54 at 10:05 a.m. in New York. The stock dropped 9.3 percent this year through yesterday, trailing the 0.9 percent decline in the 24-company KBW Bank Index.

‘Telltales’ Missed

Gonzalez’s office hasn’t been contacted by U.S. regulators, he said. Spokesmen for the U.S. Securities and Exchange Commission and Department of Justice, both of which are investigating, declined to comment or didn’t respond to messages seeking comment.

Corbat, 54, vowed repeatedly to find and punish anyone responsible for aiding the scheme or failing to find and stop it. The bank has been conducting its own investigation and terminated 12 people so far, including 11 this month, Corbat wrote in a May 14 staff memo. More people will be disciplined, he said.

Many of the employees failed to bring questionable practices to the attention of their bosses, Corbat said yesterday at an investor conference in New York.

“There were telltales along the way that people should have escalated and they didn’t,” Corbat said. “We need to continue to instill that comfort and that motivation of escalation in our people.”

The first employee terminated after the fraud’s discovery was a relationship manager, according to the person. The employee was detained earlier this year after trying to drive off in a Nissan Sentra with a detergent box full of documents including faked invoices, the person said.

Citigroup shared information from its own review of the fraud with law enforcement and regulatory agencies and left it up to them to determine whether there is any criminal liability, Corbat wrote in the memo announcing terminations.

--With assistance from Eric Martin, Adam Williams and Nacha Cattan in Mexico City and Boris Korby in New York.