06/05/14 (written by cshriver) — In the past week, Mexican authorities issued arrest warrants for a number of executives of Banamex, the Mexican subsidiary of New York-based Citigroup Bank. The arrest warrants were in reaction to the uncovering of a large scandal in which Banamex had overlooked fake contracts, allowing for $400 million (USD) in fraudulent loans to Mexican company Oceanografía.
The scandal, which came to Citigroup’s attention in February, involved a Mexican oil services company, Oceanografía, which borrowed $585 million against contracts it claimed to have with state-owned oil enterprise, Pemex. However, it was found that as many as $400 million of those contracts did not exist, and that Oceanografía had used fake documents to secure the loans. The fake contracts had said that Pemex would repay the loans. According to Citigroup, over the past three years, more than 200 fake invoices were filed to Banamex by Oceanografía, stating that Pemex would repay the loans made to the latter.
In 2012, Banamex agreed to extend the deadline for the contracts submitted from three weeks to three months. Additionally, they agreed to accept accounting paperwork done by Oceanografía about what Pemex owed, in lieu of accouting by Pemex officials that would have normally been required. Between 2010 and 2012, loans to Oceanografía increased from approximately $48 million to $403 million, and according to Bloomberg, the majority of those loans were dispersed within three months of the fraud being uncovered.
Although Citigroup headquarters is now aware of the arrest warrants, Mexican officials have refused to release the names of those involved, and have not stated how many people they have warranted for arrest. The only name that the Mexican government has publicly released is the CEO of Oceanografía, Amado Yáñez Osuna, who will be sent to jail upon his release from the hospital where he was recovering from emergency surgery. Yañez had actually turned himself in in March, and has since been held under what has been described as “a form of house arrest.” Mexican Attorney General Jesús Murillo Karam commented to the New York Times, “Yes, there are warrants, but I won’t say who.” Citigroup, which has already terminated almost a dozen people involved, is determined to fire anyone else found to be involved.
Banamex had considered loaning to a Pemex contractor a safe investment, as Pemex had repaid loans on behalf of other firms, and they were backed by the state. Citigroup’s headquarters was alerted of the scandal in early February. Bloomberg explains that Citigroup found out about the fraud when “the Mexican government had suspended Oceanografia from bidding on government contracts, according to a bank statement.” Oceanografía, a private Mexican company, had become a major supplier of oil to Pemex over the last decade, but since the scandal was uncovered in February, the company has remained under state control with the Finance Ministry’s Asset Transfer and Administration Service.
Citigroup is the third largest bank in the United States. Banamex, a 130-year-old Mexican company that was acquired by Citigroup in 2001, represented a large share of the company’s profits. In some years, Banamex has represented as much as 13% of Citigroup’s total revenues and is considered an important part of the company’s global portfolio. This scandal has severely damaged Citigroup’s global reputation, causing the company to take a $235 million hit in profits in this year alone. Since the scandal was made public over the past few weeks, Citigroup’s stocks have fallen about 10%, according to Bloomberg. However, in recent trading, Citigroup stocks appear to have begun to stabilize and are now sitting at about $47 per share.
Originally there was speculation that the estimated dollar amounts of the fake contracts were elevated. However, it has been confirmed that at least $400 million of the contracts were fake. Citigroup’s CEO Michael Corbat commented that Banamex employees overlooked the signs of fraud that they should have alerted to their superiors, and that this could have been avoided had the employees done their job. Corbat called the scandal, which has led to Citibank’s investigation in both the United States and Mexico, a “despicable crime.”
Since the publication of this article, Mexican courts provisionally suspended the case against Amado Yáñez Osuna by a federal order on the grounds of an amparo, or court-ordered injunction.