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SEC Opens Probe Into Citigroup’s Mexican Operations

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The Securities and Exchange Commission is investigating Citigroup for accounting fraud and possible violations of the Foreign Corrupt Practices Act after the bank revealed a number of fake loans that had been issued from its Mexican unit, Banamex, Reuters reports.

Citigroup reduces 2013FY earnings

Citigroup Inc (NYSE:C) reported last Friday that it had discovered $400 million in bad loans originating from Banamex, and that it was reducing its 2013 full year earnings by $235 million, down to $16.37 billion, to account for the loss. The SEC opened its probe following the bank’s announcement.

The loans went to Mexican oil services firm Oceanographic, which works as a contractor for state-owned oil firm Pemex, whose assets have since been frozen. A Banamex employee has been questioned in connection with the bad loans, and Citi is looking at its options for recovering damages from the company. The Federal Bureau of Investigation is watching the case, but it hasn’t started a formal investigation. The SEC probe may refer the case to the Department of Justice, but it’s still early in the process and too early to judge what it will find.

Fed raised concerns about Banamex last year

Even if the probe concludes that Citigroup Inc (NYSE:C) hasn’t broken any laws, the lapse in oversight reveals that the bank has more work to do in monitoring its international operations. Citigroup came under fire from regulators last year because its money laundering controls were too lax.

The Federal Reserve said that Citigroup didn’t have the necessary tools to flag, report, and block dubious transactions from taking place, and the Banamex subsidiary was specifically names as being potentially problematic. Now it looks like the Fed was right to be concerned. Even if the recent Banamex incident isn’t related to money laundering, the same tools that are supposed to be in place to prevent money laundering should have caught these fraudulent loans as well.

While Citigroup Inc (NYSE:C) hasn’t been fined for the lax controls, other banks have faced enormous penalties because of illegal transactions. Most of the fines are from violating sanctions on countries like Iran and Myanmar, but the largest such fine was to HSBC Holdings plc which was fined $1.9 billion for illegal transactions to Iran and Mexico.

Citigroup is also being investigated by the SEC in another mortgage fraud probe, which also includes Barclays PLC (ADR) (NYSE:BCS) (LON:BARC), Deutsche Bank AG (NYSE:DB) (ETR:DBK), Goldman Sachs Group Inc (NYSE:GS), JPMorgan Chase & Co. (NYSE:JPM), Morgan Stanley (NYSE:MS), Royal Bank of Scotland Group plc (ADR) (NYSE:RBS) and UBS AG (NYSE:UBS). That probe is also in the early stages, having come to light last month when the banks received subpoenas for documents relevant to the investigation.

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