Citigroup was today forced to slash its profits for last year due to a major fraud uncovered in Mexico described by its chief executive as a “galling example” of staff failing to act to the highest ethical standards.
The affair will cut $235m off its net profits, but chief executive Michael Corbat admitted to staff in an internal email seen by The Independent: “The impact to our credibility is harder to calculate.”
Citi’s Mexican subsidiary lent $585m to a local oil industry services company called Oceanografia through its accounts receivables financing programme. This is where the bank lends money secured against the value of invoices the client has sent out to customers and awaiting payment. But the invoices were faked, and as much as $400m was stolen from Citi during the course of the fraud.
Since uncovering the scandal, Citi has been working with police to seek to recover the missing money and find out who is accountable. Criminal actions have begun.
In a clear warning to staff, Mr Corbat wrote: “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. All will be held equally responsible and we will make sure that the punishment sends a crystal clear message about the consequences of such actions.”
The faked invoices made it look like Oceanografia’s customer, the state oil company Pemex, had approved the payments, when in fact it had done no such thing. An employee at Citi’s Mexican division, Banco Nacional de Mexico, processed them.
Mr Corbat wrote to staff: “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 and explained how failing to do so jeopardizes everything we work for. We now have a galling example of what happens when people fail this basic requirement.”
Oceanografia has already come under scrutiny by the Mexican government over its contracting business, according to reports.
Citigroup appears to have decided to look more closely at its lending to the firm earlier this month when it was suspended from winning new Mexican government contracts. That review exposed the fact that only about $185 million of the $585 million of accounts receivables owed to it by Pemex at the end of 2013 are valid.
The disclosure is a blow for Chief Executive Michael Corbat, who recently disappointed investors by announcing 2013 results that showed he wasn't as successful as many had hoped at cutting costs and generating profit growth.
Citigroup also said that its Mexican division – the country’s second biggest with about 1,700 branches - had about $33 million it loans outstanding to Oceanografia or letters of credit it issued on behalf of the company.
Citi's disclosure comes as it and other banks have suffered losses on a complex program to hedge price risks for Pemex, The Wall Street Journal reported earlier this week.