The SEC has charged Citigroup for its inadequate controls that failed to detect “fraudulently-induced” loans made by a Mexican subsidiary. The failure ultimately resulted in $475 million of losses reported by Citigroup. The fraud occurred in a program where Citigroup’s wholly-owned subsidiary Banamex, S.A. de C.V. (Banamex) loaned $3.3 billion to Oceanografia, S.A. (OSA), a marine services provider for the oil industry. Some of the factored documents that Banamex received from OSA, amounting to about $400 million, were fraudulent and included forged signatures, according to the SEC.
The SEC says Banamex had sub-standard internal controls over the accounts receivable factoring program used by OSA. Banamex lacked the controls necessary to test the authenticity of the factored documents prior to advancing funds to OSA and recording them as accounts receivable. The SEC also says the banking subsidiary also lacked controls sufficient to identify and respond to “red flags that arose during the relationship between Banamex and OSA potentially warning Banamex of the ongoing fraud.”Citigroup recorded losses from the fraud in 2013 ($360 million) and 2014 ($113 million).
The bank agreed to pay a $4.75 million penalty to settle the SEC’s charges. It did so without admitting or denying the SEC’s findings and agreed to cease and desist from future violations. After the fraud was discovered in 2014, Banamex fired as many as 11 former employees.
