Following internal investigation spanning over two months
regarding fraud worth $400 million in its Mexico-based subsidiary -
) dismissed 11 employees in Mexico. The sacked staff members, which
included two business heads in Mexico, were fired owing their
failure to safeguard the bank from such fraudulent activities.
Notably, Citigroup already laid off one person directly involved in
The fraud involved Banco Nacional de Mexico (Banamex), which is
Citigroup's Mexican unit, Oceanografia S.A. de C.V. (OSA), a
Mexican oil services company, and a key supplier to the Mexican
state-owned oil company, Petróleos Mexicanos (Pemex).
At present, Citigroup is continuing its review to recover
misappropriated funds and identify persons who are guilty in the
case. Moreover, the bank is examining its risk controls and
processes to review whether it complies with Citigroup's global
standards and best practices. Notably, Mexican authorities are
providing their full assistance.
In late February, following the fraudulent activity, the company
recorded post-tax $235 million (pre-tax $360 million) as charges,
which led its net income for 2013 to fall to $13.7 billion from
$13.9 billion. Further, the bank recorded $165 million as charges
in first-quarter 2014.
Ongoing Investigations and Enquiry
Since April, FBI and prosecutors from the United States attorney's
office in Manhattan have been looking into the matter. They are
skeptical about Citigroup's internal controls over its operations,
which led to such fraud. Though Citigroup believes that the fraud
is isolated, the regulators are examining whether the bank is
The regulators are also conducting probe to ascertain whether
Citigroup ignored warning signals related to its controls.
According to the law, following warnings related to any illegal
activity, banks must address such activity and initiate compliance
programs to examine the matter. If the banks fail to abide by such
laws, it is considered a criminal violation. Notably, in 2012
HSBC Holdings plc
) was blamed for substantial lapses in its anti-money laundering
compliance and was fined $1.9 billion for its misdeeds.
Further, Citigroup revealed the second criminal investigation over
Banamex's US unit's involvement in money laundering by prosecutors
in Massachusetts. However, this investigation differs from the
reported fraud in Mexico.
Earlier this month, the US Securities and Exchange Commission also
initiated a formal investigation into the matter. Additionally, the
Department of Justice has sought information related to Banamex's
dealings with Oceanografia. Moreover, the issue is also being
reviewed by the Mexican National Banking and Securities Commission.
Citigroup has come a long way since 2008, when it had to accept $45
billion as bailout money to survive the economic downturn. One can
consider a strong brand like Citigroup to be a sound investment
option, given its attractive core business.
However, the prevalent regulatory pressures and litigation issues
remain concerns. Further, in March, the Federal Reserve rejected
Citigroup's 2014 capital plan. The Fed did not cite the Mexican
fraud as a reason of rejection but the regulator is concerned over
Citigroup's incompetence in projecting revenue and losses in a
severely adverse scenario for major parts of its global business.
These factors along with other reasons raise questions over the
bank's capital-planning process, which led to the rejection.
Moreover, ongoing inquiries and such layoffs would dent the firm's
reputation and diminish investors' confidence.
Citigroup currently carries a Zacks Rank #3 (Hold). Some
better-ranked finance stocks worth considering include
MidWest One Financial Group, Inc.
) with a Zacks Rank #1 (Strong Buy) and
) with a Zacks Rank #2 (Buy).
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