Tabasco sauce

WHEN Citibank said it had lost $400m to fraud at its Mexican subsidiary, Banamex, back in February, the details were murky but intriguing. The story, set in Tabasco, a sultry state on the Gulf of Mexico oozing with oil money, involved not only Banamex, one of the country’s biggest banks and Citibank’s most profitable unit, but also Pemex, the state oil company, and Amado Yáñez, the flamboyant owner of two football teams.

On May 30th there was a new twist when Mexico’s attorney-general announced that arrest warrants had been issued for unspecified employees of Banamex, which so far has cast itself as the victim of the alleged fraud. On June 3rd Moody’s, a ratings agency, cut Banamex’s credit rating a notch, pending the results of investigations in Mexico and the United States. Both blows only deepened the woes of Banamex and Citibank, which had sought to draw a line under the scandal last month by firing 11 Mexican employees, including four of Banamex’s top executives.

When it sacked them, Citi stressed that the employees were paying the price for failing to detect the alleged fraud, not for taking part in it. The furore centres on Oceanografía, an oil-services firm doing business with Pemex. Oceanografía sought loans from Banamex to tide it over until Pemex paid it for contract work on its oilfields. Banamex says it lent Oceanografía $585m, which is a whopping sum for an individual borrower.

When a government audit prompted the suspension of Oceanografía’s work for Pemex in February, Banamex checked the invoices against which it had lent to Oceanografía with Pemex. It found that $400m of them were fake. The loss put a dent in Citi’s fourth-quarter results and further tarnished the parent bank’s reputation just as Michael Corbat, Citi’s chief executive, was trying to put years of scandal and mismanagement behind it.

On May 29th Mexican authorities arrested Mr Yáñez, Oceanografía’s football-loving boss, on fraud charges, and then released him on bail of 80m pesos ($6.2m). What perplexes Banamex is that prosecutors appear to be investigating its staff on even more serious charges.

Whatever the outcome, there is plenty for Banamex to be ashamed of. It lent a colossal amount to one company with little oversight. It mistakenly assumed the credit risk lay with Pemex, not Oceanografía. Enrique Díaz Infante of the Espinosa Yglesias Study Centre, a think-tank, says that Banamex may have cut corners to become Citi’s most profitable unit. “It was the jewel in Citi’s crown, yet it lacked internal controls.”

Many Mexicans, who have no love for banks that lend little to anyone but the well-connected, would be happy to see Banamex’s employees in the dock. The bank, however, says its own investigations reveal no criminal intent internally, except for one employee in Tabasco who has already been charged. Its executives fear the bank may be under the cosh just because it is an easy target. If that were the case, it would make firms planning to take advantage of the opening of Mexico’s murky oil industry to foreign investment think twice before doing so.

Correction: An earlier version of this article located Tabasco on Mexico's Caribbean coast. In fact it is on the Gulf of Mexico. This was corrected on June 13th.