Mexico City, May 28, 2014: In the grand scheme of banking misdemeanours a $400 million fake invoicing fraud at Banamex, the Mexican unit of Citigroup and the country’s second biggest bank, is not the worst ever to happen. Only two years ago its rival HSBC was fined $1.9 billion because its Mexican unit laundered $881 million for the Mexican and Colombian drugs cartels.
But an affiliate, Banamex USA, now also faces a criminal investigation into its anti-money laundering compliance. This is likely to lead straight back to Banamex Mexico – whose shortcomings in the fake invoicing fraud, according to Citigroup, were limited to a handful of staff and the oversight failures of senior individuals. There have been 12 dismissals and further sanctions in the form of docked pay and bonuses are expected as investigations, including by the Securities and Exchange Commission, continue.
In Mexico, Banamex is trying its best to paint the incident – false invoices presented by Oceanografía, a company serving state oil giant Pemex – as an isolated episode of malpractice, even though the fraud had been going on apparently unnoticed for more than three years. But it is more bad news for a giant company that even insiders admit has been plagued by image problems for over a decade – including the Parmalat affair, rigging of benchmark interest rates, and cancellation of its Japanese private banking licence.
News of a rogue trading scandal at Banamex in Mexico, in which two bond traders were fired, also came to light this year, although it happened in 2013. Questions about Banamex’s internal controls led to Manuel Medina Mora, Mexican co-president of Citi, having his compensation cut: the US government found its money laundering controls lax and Citi promised to take action.
Yet Banamex Mexico managers feel unfairly maligned. They admit there was negligence and that the bank failed to spot a plethora of warning signs in the fraud in which shipping and oil services company Oceanografía allegedly presented more than 200 false receipts for work not supported by orders from Pemex dating back to 2010. But they deny an institutionalised culture of contempt for proper practice.
Instead, they blame Pemex. If corruption were not such an accepted fact of life at Pemex, the bank believes, the case that erupted when Citi announced a $235m hit to 2013 profits as a result of the affair could never have happened. Bank officials paint Banamex as the victim and pointedly underscore that while Citi has fired staff and taken a further $165m first-quarter charge, at Pemex it is business as usual.
The alleged fraud has triggered ongoing investigations against Citigroup on both sides of the border, including in the US by the Department of Justice, the Federal Bureau of Investigation and US attorney’s office in Manhattan. In Mexico, the banking regulator has wrapped up its own investigation although not published its findings or penalties, and the possibility exists that a probe by the Mexican attorney general’s office could turn into criminal proceedings against some of those dismissed. Some have already been called in for questioning, according to one source close to the investigation.
Banamex’s own suspicions centre on a former employee, whose wife worked for Oceanografía and who left the bank to work there. He is considered the brains behind the fraud, and is suspected of having doctored internal procedure manuals to enable cash to be advanced on the basis not only of invoices, but also of notices of work, that is, documents detailing purported contracts won by Oceanografía.
Pemex’s reputation as a cast-iron credit risk – it is Mexico’s biggest company, supplying a third of the national budget – appears to have blinded Banamex to what should have been obvious. Some of the forged invoices, according to sources, were almost indistinguishable from the real thing, replete with stamps. However, others were crude – or blasé – documents drafted on Word. Inside Banamex, the sheepish realisation is that money flowed as if on a merry-go-round. Oceanografía was a major client in Banamex’s factoring business, despite having a reputation as a late payer to its bondholders, suppliers and workers and having been investigated by Congress.
But while Banamex feels it is being forced to wear sackcloth and ashes, with more tawdry details likely to emerge and the threat of more sanctions, it is “surprised” at the lack of a mea culpa from Pemex.
Corruption is rife at Pemex and other contractors are commonly involved in invoicing scams that never come to public attention, according to industry sources. This suggests that Oceanografia somehow fell foul of the authorities and Banamex was collateral damage – but what may have happened, and why, remains unclear.
Pemex has been circumspect about the affair, announcing new procurement procedures but deftly ducking the heat. Oceanografía had a 40-year relationship with Pemex and its main exploration and production subsidiary, Exploración y Producción (PEP). Between 1999 and 2013, Oceanografía won more than 160 competitive bids for services worth more than $2 billion, making it the main contractor for Pemex during the administrations of presidents Vicente Fox and Felipe Calderón, both of the Partido Accion Nacional party (PAN).
Instead, Pemex is focusing on Mexico’s historic energy reforms that are set to open up oil and gas exploration to private investment for the first time in more than three-quarters of a century, under the government of President Enrique Peña Nieto, of the Partido Revolucionario Institucional party (PRI).
The state oil behemoth already has its work cut out to dump decades of accumulated bureaucracy, becoming fitter and faster at learning new technology as it strives to enter into a brave new world of competition. And the government has vowed the utmost transparency in tendering oil and gas exploration and production licences ahead. But Pemex needs to prove that murky episodes like that involving Oceanografía have been consigned to the history books. And that Pemex managers will be as contrite as those at Citi.