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UK-CITIGROUP-MEXICO-FRAUD:Citigroup reports fraud in Mexico unit, lowers 2013 results
Reuters A Citi sign is seen at the Citigroup stall on the floor of the New York Stock Exchange, October 16, 2012. REUTERS/Brendan McDermid

(Reuters) - Citigroup Inc said on Friday that it discovered fraudulent loans in its Mexico subsidiary and that its employees may have been in on the crime.

Writing down the loans will reduce the bank's 2013 net income by $235 million (140 million pounds), bringing the previously reported total to $13.91 billion, the bank said in a statement.

Citigroup said it believes at this point that the incident was an isolated episode.

The bad loans were made to Oceanografia SA de CV, a Mexican oil services company that is a contractor for the nation's state-owned oil company, Pemex. Oceanografia is in the middle of a corruption probe in Mexico.

Oceanografia borrowed from Citigroup's Mexican unit, Banco Nacional de Mexico or Banamex, using expected payments from Pemex as collateral.

Banamex discovered in a recent review that Oceanografia appeared to have falsified invoices to Pemex that were collateral for loans, Citigroup Chief Executive Michael Corbat said in a separate memo to employees. The bank wrote down about $400 million of loans backed by the bogus invoices.

On February 11, Oceanografia was suspended from receiving government contracts for 21 months and 12 days. Oceanografia says that 97 percent of its revenues are from Pemex.

Corbat said in the statement that Banamex has "worked with Mexico's attorney general to initiate criminal actions" over the matter and that it is exploring legal options. Criminal actions "may allow us to recover damages," Corbat said.

In the memo to employees, Corbat noted that a Banamex employee had processed the fraudulent invoices, and that it is "not clear how many people were involved in the fraud."

"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," Corbat said.

Mexico's attorney general's office was due to hold a news conference about Oceanografia on Friday. Pemex said it will also participate.

Citigroup shares have fallen in recent weeks on concerns that slowing growth in emerging markets may reveal bad loans, as well as increase the risk of trading losses.

In the third quarter of 2013 problems with about $300 million of loans that Banamex had made to three Mexican homebuilders prompted Citigroup to book reserves for expected losses on the loans.

Citigroup is the third-largest U.S. bank by assets. The company views its international business as a competitive advantage over other big banks in the United States.

The bank said it estimates that it is able to validate $185 million of the $585 million of accounts receivable. Citigroup said it is charging the $400 million difference to operating expenses in its previously-announced fourth-quarter results. The total pre-tax expense is $360 million after adjusting Banamex compensation expense by $40 million, the statement said.

Citigroup said it has not determined if it faces losses on another $33 million for outstanding loans made directly to Oceanografia and letters of credit issued for the company.

Citigroup shares rose 0.4 percent to $48.90.

(Reporting by David Henry in New York and Elinor Comlay in Mexico City; Editing by Jeffrey Benkoe and Phil Berlowitz)