Federal authorities have opened a criminal investigation into a recent $400 million fraud involving Citigroups Mexican unit, according to people briefed on the matter, one of a handful of government inquiries looming over the giant bank.
The investigation, overseen by the FBI and prosecutors from the US attorneys office in Manhattan, is focusing in part on whether holes in the banks internal controls contributed to the fraud in Mexico. The question for investigators is whether Citigroup as other banks have been accused of doing in the context of money laundering ignored warning signs.
The bank, which also faces a parallel civil investigation from the Securities and Exchange Commissions enforcement unit, hired the law firm Shearman & Sterling to lead an internal inquiry into the fraud, said the people briefed on the matter. At a meeting last month, the banks lawyers presented their initial findings to the government.
The bloom of activity stems from Citigroups disclosure in February that its Mexican unit, Banamex, uncovered an apparent fraud involving an oil services company. The disclosure that at least one Banamex employee processed falsified documents that helped the oil services company obtain a loan that cannot be repaid generated immediate interest from federal authorities. But the decision by the FBI and prosecutors to open a formal probe, a move that has not been previously reported, has now officially drawn a faraway crime to Citigroups doorstep.
The case represents another setback for the bank, which has also come under fire from regulators in Washington. Last week, the Federal Reserve rejected Citigroups plan to increase its dividend. The rebuke embarrassed the bank and raised questions about the reliability of its financial projections.
The scrutiny coincides with Citigroups recent announcement that it faces a separate, and perhaps more threatening, investigation from federal prosecutors in Massachusetts. The prosecutors, who have sent subpoenas to Citigroup, are examining whether the bank lacked proper safeguards against clients laundering money. Citigroup, the people briefed on the matter said, has hired the law firm Paul, Weiss, Rifkind, Wharton & Garrison to handle that case, which stems from the prosecutors suspicion that drug money was flowing through an account at the bank.
Together, the developments threaten to complicate Citigroups relationships with government authorities, who had previously lost faith in the bank after it required two bailouts and came to epitomize Wall Streets role in the financial crisis. While Citigroups CEO, Michael L Corbat, has repaired ties to regulators using a blend of contrition and self-accountability, the latest investigations could test those improvements. Still, the government scrutiny could be short-lived. Citigroup has not been accused of wrongdoing, and prosecutors might ultimately close the cases without extracting fines or imposing charges, which typically come only if wrongdoing was pervasive.
And Citigroup is sharing the spotlight with banks like JPMorgan Chase, whose missteps, including a $6.2 billion trading loss in London, make its own problems seem arguably manageable by comparison.
A Citigroup spokesman declined to comment. In a letter to shareholders last month, Corbat said: We continue to investigate what took place in Mexico and are working to identify any areas where we need to strengthen our controls through stronger oversight or improved processes.
Spokesmen for both the FBI in New York and Preet Bharara, the US attorney in Manhattan, declined to comment.
In a speech this week, however, Bharara emphasised the importance of investigating not only individual bankers and traders, but also the Wall Street firms that employ them. Effective deterrence sometimes requires that institutions be punished, because sometimes it is the institution that has failed, he told a conference of Wall Street lawyers.
At first glance, Citigroup appeared to be the victim of the fraud involving the Mexican oil services company Oceanografa. After all, the bank lost millions of dollars. But the FBI and prosecutors, the people briefed on the matter said, are questioning whether Citigroup was equal parts victim and enabler.
For one, it is unclear whether the wrongdoing at Citigroup was actually limited to a single Banamex employee, as early reports indicated. The authorities, according to the people briefed on the matter, are investigating whether the scheme involved co-conspirators at the banks offices in the US.