(Reuters) - Citigroup Inc said on Friday it has discovered fraud in its Mexico subsidiary and is reducing its previously reported 2013 net income by $235 million.
The company said in a statement the matter involved about $585 million in short-term credit extended by its Banamex unit to Oceanografia SA de CV, a Mexican oil services company that has been a supplier to the Mexican state-owned oil company, Pemex.
CITIGROUP (C.NY)CEO Michael Corbat said in the statement that Banamex has "worked with Mexico's attorney general to initiate criminal actions" over the matter and that it is exploring legal options.
Corbat said, "At this point, we believe this is an isolated incident."
The announcement comes after Citigroup shares have fallen in recent weeks on concerns that slowing growth in emerging markets may reveal bad loans, as well as increase the risk of trading losses.
In the third quarter of 2013 problems with about $300 million of loans that Banamex had made to three Mexican homebuilders prompted Citigroup to book reserves for expected losses on the loans.
Citigroup is the third-largest U.S. bank by assets.
Oceanografia was recently banned for 21 months and 12 days from participating in government contracting processes after an internal review by Pemex found irregularities in its contracts with the firm, according to a notice in Mexico's official gazette on February 11.
According to the statement from Citigroup on Friday, Banamex extended the credit to Oceanografia based on accounts receivable due the oil services company from Pemex. The bank said that after it learned of the ban on new contracts it began detailed reviews of its risk with Oceanografia.
Citigroup said that Pemex asserted on February 20 that a "significant portion" of the accounts receivable backing the loans were fraudulent and that "valid receivables were substantially less" than the $585 million of short-term credit Banamex had extended.
Citigroup said it estimates that it is able to validate $185 million of the $585 million of accounts receivable. The bank said it is charging the $400 million difference to operating expenses in its previously-announced fourth-quarter results. The total pre-tax expense is $360 million after adjusting Banamex compensation expense by $40 million, the statement said.
Citigroup said it has not determined if it faces losses on another $33 million for outstanding loans made directly to Oceanografia and letters of credit issued for the company.
"Citi believes the fraud is isolated to this particular client within the Banamex accounts receivable financing program," the statement said.
Citigroup shares fell 0.3 percent to $48.57.
(Reporting by David Henry in New York and Elinor Comlay in Mexico City; Editing by Jeffrey Benkoe and Phil Berlowitz)
