Citigroup is facing investigations from the US Securities and Exchange Commission and from Mexican authorities over fraudulent activity relating to its Banco Nacional de Mexico unit.
According to the group's 2013 financial results, Banco Nacional de Mexico – also known as Banamex – conducted a range of fraudulent activities over the year and unnamed sources are now saying that Citigroup will face two intensive investigations into this unit.
According to media reports, Banamex made the mistake of lending money to Oceanografia (OSA), an oil services company that supplies Mexican oil company Pemex.
Citigroup learned of the incident from Mexican government reports of suspended contracts.
Subsequently, the bank and Pemex investigated OSA to assess the damage. As much as $400m (£239m, €290m) was misappropriated in the fraud, which hit the bank's balance sheet by $235m, bringing its 2013 net income down to $13.7bn, according to Citigroup.
One source, cited by Reuters, said the SEC will investigate Citi for accounting fraud and will also see whether the parent company violated the Foreign Corrupt Practices Act.
Meanwhile, Bloomberg revealed that Mexican authorities grilled Citigroup employees and "seized records from OSA" relating to the missing millions.
"Although our inquiry into this fraud is continuing, we have been responding forcefully over the past week by assessing the overall exposure to Citi, coordinating with law enforcement, pursuing recovery of the misappropriated funds, and seeking accountability for anyone involved," said Michael Corbat, Citigroup chief executive officer.
"Specifically, we have been taking the following actions: first, we immediately began a 'rapid review' – throughout Banamex and the rest of Citi – of programmes similar to the one at issue here. At this point, we believe this is an isolated incident," he said.
As of 31 December 2013, Citi, through Banamex, had extended approximately $585m of short-term credit to Oceanografia (OSA), a Mexican oil services company, through an accounts receivable financing programme.
OSA has been a key supplier to Petróleos Mexicanos (Pemex), the Mexican state-owned oil company.
However, on 11 February 2014, Citi learned that OSA had been suspended from new Mexican government contracts.
Upon learning of this suspension, Citi, together with Pemex, commenced detailed reviews of their credit exposure to OSA and of the accounts receivable financing programme over the past several years.
Citi said it estimated that only about $185m of the $585m of short-term credit represented valid invoices.
The $185m consists of approximately $75m supported by documentation in Pemex records and approximately $110 m of documented work that was still going through the Pemex approval process.
Pemex said the order to ban Oceanografía from receiving government contracts for almost two years was not related to the alleged fraud involving Banamex.