Citigroup Faces SEC Investigation Over Fraud in Mexico
Last week, financial services firm Citigroup Inc. (NYSE:C) reported that it was forced to downwardly revise its 2013 earnings by $235 million (or $360 million before taxes) after discovering fraud at one of its subsidiaries in Mexico. This week, a source familiar with the situation told Reuters that the U.S. Securities and Exchange Commission is investigating the firm for possible accounting fraud or any violations of the Foreign Corrupt Practices Act.
The adjustment, charged to Citi’s fourth-quarter Transaction Services operating expense, amounts to a 1.4 percent reduction in full-year earnings to $13.7 billion. The fraud was discovered at at a company called Oceanografia S.A. de C.V. (OSA), a Mexican oil services company that is a primary supplier to Petroleos Mexicanos, or Pemex, the Mexican state-owned oil company. OSA earns as much as 97 percent of its revenue from Pemex.
Through Banco Nacional de Mexico, or Banamex, Citigroup extended about $585 million in short-term credit to OSA in order to finance accounts receivable from Pemex. This means that Citigroup lent OSA money and OSA used its accounts receivable from Pemex as collateral. Banamex, acting as a sort of intermediary, also had about $33 million in loans directly outstanding to OSA or tied up in standby letters of credit issued on behalf of OSA.
The credit appeared to be in good standing until February 11, when the Mexican government barred OSA from acquiring new business with Pemex for 21 months. The ban was enforced by Mexico’s anti-corruption agency, which accused OSA of violating agreements with the state oil company.