GLOBAL ECONOMY

U.S. Financial Giant Citigroup Rocked By Probes Into Its Mexico Affiliate, Banamex

  • In this Jan. 14, 2014 file photo, a person walks past a Citibank location in Philadelphia. Citigroup reduced its 2013 earnings by $235 million on Friday, Feb. 28, 2014, saying it was a victim of fraud committed by a Mexican oil services company to secure hundreds of millions of dollars in short-term loans. (AP Photo/Matt Rourke, File)

    In this Jan. 14, 2014 file photo, a person walks past a Citibank location in Philadelphia. Citigroup reduced its 2013 earnings by $235 million on Friday, Feb. 28, 2014, saying it was a victim of fraud committed by a Mexican oil services company to secure hundreds of millions of dollars in short-term loans. (AP Photo/Matt Rourke, File)

  • NEW YORK - APRIL 19: The building formely known as the Citigroup Center, which continues to house the company, is seen in midtown Manhattan on April 19, 2010 in New York City. Citigroup Inc. has reported a first-quarter net income of $4.43 billion, its strongest results in nearly three years.  (Photo by Spencer Platt/Getty Images)

    NEW YORK - APRIL 19: The building formely known as the Citigroup Center, which continues to house the company, is seen in midtown Manhattan on April 19, 2010 in New York City. Citigroup Inc. has reported a first-quarter net income of $4.43 billion, its strongest results in nearly three years. (Photo by Spencer Platt/Getty Images)  (2010 Getty Images)

Citigroup, the third largest bank in the United States as measured by its assets, has suffered a number of hits from its overseas operations in the last few days, among them its $130 million of net investments in Ukraine that are threatened by the escalating crisis with Russia.

Closer to home, Citigroup has been rocked by two incidents involving its Banamex (Banco Nacional de Mexico) affiliates, which have helped to send its stock on a roller coaster ride this week.

On Friday, the financial giant adjusted its 2013 profits, lowering them to $235 million because the bank found that Banamex had been defrauded in a scheme involving an marine oil services company named Oceanografía.

Citi said that Oceanografía overstated by $400 million the business it was doing with Mexico's state-owned oil company Petroleos Mexicanos, or Pemex. Oceanografía used falsified invoices as collateral for $585 million in loans from Banamex, Citigroup said. But according to the Associated Press, after an investigation, Citigroup could only verify $185 million of invoices.

Then on Monday, the U.S. Attorney’s Office for the District of Massachusetts and the Federal Deposit Insurance Company (FDIC) issued subpoenas against both Citigroup and Banamex USA in Los Angeles in an investigation involving potential violations of anti-money-laundering regulations. The Securities and Exchange Commission is also reported to be looking into the matter.

A Citigroup spokesperson told the Wall Street Journal that the company is cooperating fully with all investigations. According to unnamed sources cited by the New York Times, the two incidents are not related.

Investment banking firm KBW analyst Brian Kleinhanzl pointed out to the Journal that Citigroup execs are fond of saying that their “large global footprint is an asset, but it’s looking like a liability.”

Mexico accounted for around 13 percent of Citigroup’s total revenues of $17.8 billion in 2013. The company's stock dropped from $49.28 a share after noon on Friday to a low of $47.61 at the close of Monday, though its value has rebounded since then.

Banking regulators both in the U.S. and Mexico are reportedly looking into the Oceanografía case and the possible involvement of one or more employees.

On Thursday, the International Business Times reported that troubles at Oceanografía, which held large contracts with Pemex for more than a decade, were public enough that the Mexican Public Administration Ministry barred the company in February from entering into any new agreements with state-owned entities, such as Pemex.

In talking about the oil services company, Mexican attorney general, Jesús Murillo Karam, suggested that money laundering may have been involved. “Money laundering can start with the initial crime of fraud, but it does not stop there,” he said.

According to Reuters, in a memo to Citigroup employees, CEO Michael Corbat noted that it was "not clear how many people [at Banamex in Mexico] were involved in the fraud."

He further 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." 

The Journal reported that the New York office of the FBI is looking into the Mexico unit incident for possible criminal violations.

The Banamex USA subpoenas may not surprise a lot of regulators. Citigroup has a long history of risky loans throughout the world, and it came under some financial strain because of bad loans in Latin America in the 1980s. More recently, both Citigroup and Banamex USA were cited by the Federal Reserve for having deficient anti-money laundering compliance programs in 2013.

The year before, Banamex USA entered into a consent order with the FDIC and the California Department of Financial Institutions to improve its oversight and tracking. 

Citigroup went through a global restructuring last year and targeted Banamex USA for downsizing. As a result, the affiliate reduced the number of branches in California and Texas from 11 to 3 and eliminated third-party money transfers between U.S. and Mexico, now allowing only bank customers to send remittances.

Was that a measure designed to increase anti-money-laundering compliance?

“The majority of family remittances are sending money at low amounts,” Mario Trujillo, the chief executive of DolEx, a large money transfer company, told the Times. “That has not proven to be the major source of money laundering at the large banks.”

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