Citigroup Says Banamex Fraud Cost $165 Million in Quarter

Citigroup Inc., the third-biggest U.S. bank, said fraud at its Mexico unit cost the company about $165 million during the first quarter.

“The vast majority” of the costs were associated with Citigroup’s $33 million in direct exposure to oil-services firm Oceanografia SA and “uncertainty” about Petroleos Mexicanos’s obligation to pay a portion of accounts receivable involved in the case that total about $113 million, New York-based Citigroup said today in its quarterly filing with the U.S. Securities and Exchange Commission.

“The remaining incremental credit costs were associated with an additional supplier to Pemex within the Pemex supplier program that was found to have similar issues,” Citigroup said. Chief Financial Officer John Gerspach disclosed the $165 million expense during the company’s first-quarter earnings call last month.

Citigroup, which has called the Oceanografia fraud an isolated incident, said last month that it found a second case at its Mexico unit. The amount involved was less than $30 million, Gerspach said April 14.

The SEC has begun a formal investigation into the suspected fraud at the Banamex unit, where invoices backing as much as $400 million of loans to Oceanografia were found to be fraudulent, the firm said in the filing. The U.S. Department of Justice requested information related to Banamex’s relationship with Oceanografia, the bank said.

Legal Bills

Citigroup didn’t change its estimate for how much legal bills could exceed reserves. The firm said the figure stood at $5 billion at the end of March, where it’s been since the fourth quarter of 2012. That compares to Bank of America Corp., which lowered its projection to $5 billion at the end of the first quarter from $6.1 billion at year-end, the Charlotte, North Carolina-based lender said in a filing yesterday.

Citigroup Chief Executive Officer Michael Corbat, 54, is seeking to tighten controls and put legal liabilities behind him after losses during the credit crisis required a $45 billion government bailout. The bank faces investigations tied to mortgage-backed securities, rigging of currency markets and anti-money-laundering controls. In March, the Federal Reserve rejected the firm’s plan to return more capital to shareholders for the second time in three years, citing deficient processes.

Other Investigations

The bank is facing investigations from the U.S. Attorney’s Office for the District of Massachusetts and the Federal Deposit Insurance Corp., which are both probing its Banamex USA subsidiary over noncompliance with the Bank Secrecy Act and federal anti-money-laundering requirements, Citigroup said in its year-end filing.

Citigroup agreed last month to pay $1.13 billion to settle claims from 18 mortgage-bond investors. The settlement covers 68 securitization trusts that issued a combined $59.4 billion in mortgage bonds from 2005 to 2008, according to a statement. The accord must be approved by the Federal Housing Finance Agency.

Lenders have spent more than $100 billion to resolve mortgage and other legal disputes since the financial crisis.

Before it's here, it's on the Bloomberg Terminal.