Today Citigroup (C -1.49%) announced it will be reducing its fourth-quarter and full-year results due to fraudulent activity found in its subsidiary in Mexico. As a result of the fraud, Citigroup will be revising its pre-tax income down by $360 million, and its after-tax income by $235 million. As a result, Citigroup is lowering its full-year 2013 net income from $13.9 billion to $13.7 billion.

Banamex building in Mexico City. Source: Thelmadatter.

According to the company, at the end of 2013 Citi had extended roughly $585 million in short-term credit to an oil services company in Mexico called Oceanografia S.A. ("OSA") through its Banco Nacional de Mexico ("Banamex") subsidiary. Banamex issued the credit through an accounts receivable program. OSA was a supplier to the state-owned oil company in Mexico, Petróleos Mexicanos ("Pemex").

Yet on Feb. 11, Citi found out OSA had been suspended from new government contracts from the Mexican government, Citi said. Upon a review of its credit exposure to OSA, with the assistance of Pemex, Citigroup determined only $185 million of the $585 million in accounts receivables owed to Banamex by Pemex were legitimate. Citigroup will charge the $400 million difference as an operating expense to its Transaction Services business. In addition, Citigroup will in turn offset compensation expenses of $40 million as a result of the variable compensation plan at Banamex, resulting in the $360 million pre-tax expenses.

"Although our inquiry into this fraud is continuing, we have been responding forcefully over the past week by assessing the overall exposure to Citi, coordinating with law enforcement, pursuing recovery of the misappropriated funds, and seeking accountability for anyone involved," noted CEO Michael Corbat in the company's press release. The company said the fraud is seemingly isolated to its involvement with OSA.

Corbat said the company is conducting a "rapid review" of all lending programs throughout its global operations similar to the one between OSA and Banamex. In addition, it is working with legal and law enforcement personnel in Mexico and it said this could result in the recovery of the damages as a result of 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," concluded Corbat in the press release. "[W]e will make sure that the punishment sends a crystal clear message about the consequences of such actions."