Citigroup Inc (NYSE:C) is revising its full pre-tax 2013 results lower by $360 million due to fraud in its Mexican subsidiary.  The charge to earnings revises 2013 net income to $13.7 billion.

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Fraudulent customer accounts receivable at issue

The issue stems from $585 million in short-term loans Citigroup Inc (NYSE:C) provided to Oceanografia S.A. de C.V. (OSA), a Mexican oil services company, through an accounts receivable financing program. OSA has been a key supplier to Petróleos Mexicanos (Pemex), the Mexican state-owned oil company.

When it was discovered that OSA was suspended from being awarded Mexican government contracts, both Cit and Pemex reviewed their credit exposure.  The review found that fraudulent receivables were placed on the books, upon which the loans were based.  Citigroup Inc (NYSE:C) estimates that it is able to support the validity of approximately $185 million of the $585 million of accounts receivables.  This $185 million consists of approximately $75 million supported by documentation in Pemex records and approximately $110 million of documented work performed that was still going through the Pemex approval process. The difference of an estimated $400 million has been charged to operating expense in Transaction Services in the fourth quarter of 2013, with an offset to compensation expense of approximately $40 million associated with the Banamex variable compensation plan.

“Although our inquiry into this fraud is continuing, we have been responding forcefully over the past week by assessing the overall exposure to Citi, coordinating with law enforcement, pursuing recovery of the misappropriated funds, and seeking accountability for anyone involved,” Citi CEO Michael Corbat said in a statement.

Citigroup assures accountability for those who committed crime

“I can assure you there will be accountability for those who perpetrated this despicable crime and any employee who enabled it, either through lax supervision, circumvention of our controls, or violating our Code of Conduct. All will be held equally responsible and we will make sure that the punishment sends a crystal clear message about the consequences of such actions,” Corbat concluded.

Citigroup Inc (NYSE:C) will release a revised quarterly financial supplement reflecting changes to its fourth quarter of 2013 financial results.