400 M USD Fraud at Banamex

[Sapphire Capital]

Citigroup said on Friday that it had recently uncovered fraud in its Mexican banking unit, Banamex, forcing the bank to restate its 2013 earnings.
Citigroup said as much as $400 million was misappropriated in the fraud. In a harshly worded memo to employees, Mr. Corbat said it was unclear how many people were involved in the activity, which centered on the oil services company Oceanografía.

[ukipa]

Mexico Said to Interview Citigroup Workers in Oceanografia Probe

Mexican authorities questioned Citigroup Inc. (C) employees and seized records from Oceanografia SA to examine how the bank allegedly was cheated out of hundreds of millions of dollars, two government officials said.

Credit-department workers at Citigroup’s Banamex unit were interviewed as people with information about the case rather than as suspects, according to the officials, who asked not to be named because they weren’t authorized to discuss the probe by Mexico Attorney General Jesus Murillo Karam. Authorities also searched Oceanografia’s offices in Ciudad del Carmen on the Gulf coast for auditing documents, one of the people said.

Citigroup said Feb. 28 it cut last year’s profit by $235 million after scrutinizing short-term credit to Oceanografia. The bank was supposed to recoup money as Oceanografia received payments from state-owned oil company Petroleos Mexicanos, known as Pemex. Instead, Pemex told the bank that a portion of those so-called receivables were fraudulent.

Mark Costiglio, a spokesman for Citigroup, and Jorge Betancourt, the head of investor relations for Oceanografia, an oil-services provider, declined to comment on details of the investigation. Murillo said at a Feb. 28 press conference that the government has taken over management of Oceanografia and that he’s working with financial authorities and Citigroup to establish any criminal responsibility.

Seizing Oceanografia

Mexico’s finance ministry is now running Oceanografia, according to one of the government officials. The Wall Street Journal reported that Mexican police had questioned a junior Citigroup worker suspected of participating in the alleged fraud. The employee, who may no longer be at the bank, isn’t in custody, the newspaper said, citing an unidentified person familiar with the matter.

Oceanografia Chief Executive Officer Amado Yanez, who hasn’t been accused of wrongdoing, controlled 80 percent of the company and has run it since 1994, according to regulatory filings. He’s the son of founder Amado Yanez Correa, Betancourt said.

Four days before the government seized Oceanografia, the younger Yanez took to Twitter, sending posts on martial arts icon Bruce Lee and the Virgin of Guadalupe. The next post from Yanez, who owns the Mexican professional soccer league’s White Roosters franchise in the central city of Queretaro, was more ominous: “The team isn’t for sale, and there are no plans to move it.”

Oceanografia provides maintenance and support services for offshore oil projects, with 11,459 workers and at least 69 vessels, including drilling ships and tugboats, according to its website. The company had plans to generate an additional 4,376 new jobs in the next few years, according to the site.

Assets Impounded

Yanez didn’t respond to an interview request sent through Betancourt, and Betancourt didn’t respond to an e-mailed list of questions about Yanez’s businesses. No one answered a call to the company’s main business line, where a greeting said the voice-mail box was full and not accepting additional messages.

Yanez’s Twitter account disappeared briefly on Feb. 28. That night, he posted a message saying “My account was deactivated without my permission; I’m back.”

Mexico’s anti-corruption agency banned Oceanografia on Feb. 11 from bidding on government contracts for 21 months after saying it violated agreements with Pemex. Oceanografia gets 97 percent of its revenue from Pemex.

After working with Pemex, Citigroup determined that only $185 million of the collateral backing $585 million of loans to Oceanografia could be verified, according to the bank.

‘Despicable Crime’

“There will be accountability for those who perpetrated this despicable crime and any employee who enabled it,” Citigroup CEO Michael Corbat wrote in a Feb. 28 memo to staff.

The U.S. Securities and Exchange Commission is examining whether Citigroup engaged in accounting fraud or violated the Foreign Corrupt Practices Act, Reuters reported yesterday, citing an unidentified person familiar with the probe. The inquiry is in the early stages, it said. Citigroup’s Costiglio and John Nester, an SEC spokesman, declined to comment.

According to a bond prospectus, Yanez got a bachelor’s degree in civil engineering in 1989 and a master’s in marine engineering in 1990, both from Texas A&M University. The elder Yanez, who also earned a master’s from Texas A&M, founded Oceanografia in 1968 and in the early 1970s helped construct the supply of potable water for Holbox island, north of Cancun off of Mexico’s Caribbean coast, according to the prospectus. As of September, he was still serving on the board of directors.

Oceanografia defaulted on its bonds last month after the expiration of a 30-day grace period on a $19 million interest payment due Jan. 15.

Lee’s ‘Dragon’

As recently as Feb. 14, Yanez led a conference call with investors and analysts to explain his company’s request for an extension of a bond-payment deadline in light of the anti-corruption agency’s probe, which led to a freezing of its bank credit lines.

“The company is working as normal,” Yanez said. At least one unidentified bondholder asked if Yanez was being truthful, according to a transcript. Yanez said a couple times that the company had $50 million in its bank account, before clarifying later in the call that the amount was $15 million.

On Feb. 22, as Oceanografia’s bonds due in 2015 fell to 35 cents on the dollar from 97 cents five weeks earlier, Yanez retweeted a photo of Lee flexing his muscles from the 1973 film, “Enter the Dragon.” The bonds plunged to 17 cents on Feb. 28.

White Roosters

The White Roosters, who play in a 33,000-seat stadium, have lost four of their past five matches and have a 3-1-5 record in the season that began in January, according to soccer website Medio Tiempo. Yanez, who bought the team in May 2013, hasn’t paid players for more than a month, according to a league press official who asked not to be named, citing league policy. Under the league’s bylaws, Yanez could lose his franchise if convicted of a crime, the official said.

Some Oceanografia employees told the newspaper El Financiero that they hadn’t been paid for two months. Newspaper El Universal also reported that authorities entered Oceanografia offices to gather information.

As criticism of his company from bondholders mounted, Yanez kept up his Twitter account, bearing Oceanografia’s logo, a seahorse.

Yanez retweeted a post from an account called Virgen de Guadalupe, the name of Mexico’s patron saint:

“Sometimes you have to risk doing new things,” according to the message. “If you’re right, you’ll be rewarded, and if you’re wrong, it will be a lesson.”

To contact the reporters on this story: Eric Martin in Mexico City at [e-mail]; Nacha Cattan in Mexico City at [e-mail]

To contact the editor responsible for this story: Carlos Manuel Rodriguez at [e-mail]