Citigroup Fires 11 in Fraud Investigation - Analyst Blog


Following internal investigation spanning over two months regarding fraud worth $400 million in its Mexico-based subsidiary - Banamex, Citigroup Inc. ( C ) 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 scam.

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.

Financial Impact

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 equally accountable.

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 ( HSBC ) 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. ( MOFG ) with a Zacks Rank #1 (Strong Buy) and Associated Banc-Corp ( ASBC ) with a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: ASBC , C , HSBC , MOFG

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