An eight-year court case in Mexico involving the New York lender remains unresolved. And it could take another two years to reach a settlement.

US mega-lender Citigroup, as I reported last week, has decided to abandon its retail and business banking operations in Mexico. It will instead focus exclusively on the needs of its investment banking and private banking clients, just as it is doing in many emerging markets in Asia. But the New York lender appears to have hit a snag: at the end of last week, a Mexican judge presiding over an 8-year case involving Citi’s Mexican subsidiary, Citibanamex, and one of its former business clients, Mexican shipping company Oceanografia, blocked the sale of the subsidiary until the lawsuit is resolved. That, he said, could take up to two years.

“The precautionary measures requested by the plaintiff (Oceanography) are decreed justifiable, as a result of which the defendant Banco Nacional de México, SA will be required to refrain from selling or transferring shares, assets and other tangible and intangible assets, until the main The trial is resolved in a final judgement,” ruled Judge Mario Salgado Hernández in his resolution.

The judge, head of Mexico City’s 71st Civil Court, said that if Citi sells Banamex, payment of the amount demanded in the lawsuit must first be guaranteed before the Court. That amount is $5.2 billion (or its equivalent in national currency), which is a lot of money even for a bank of Citi’s size. To put the money in perspective, Citi reported 7.4 billion pesos (around $400 million) of net income in 2020, down from 20 billion pesos in 2019.

“They have announced their intentions to sell Banamex as of March of this year, so we have a justifiable fear that they will leave the country without complying with the obligations of the resolutions issued by the court,” said Jorge Betancourt, Oceanografia’s legal representative. “So, to prevent that from happening, we asked the court to block the sale of the bank until the trial is over or if they leave the amount we are requesting, $5.2 billion, in the form of a guarantee.”

After the judge announced the precautionary measure, Citibanamex said in a statement that “there are no legitimate legal foundations for the judge” to have taken such an action, “particularly given the baseless allegations contained in the lawsuit.” The bank plans to appeal the ruling, adding that it does not expect the matter “to have any impact on its timetable for selling our consumer business in Mexico.”

Accusations of Corruption, Influence Peddling and Money Laundering

The case against Oceanografia, launched in 2014, is one of the biggest corruption and influence peddling cases in recent Mexican history. It still hasn’t been resolved. The scandal came to light when senior management at both Citibanamex and the Mexican state-owned oil The company Petróleos Mexicanos (Pemex) accused the shipping company of using a $585 million credit line provided by Citibanamex to obtain hundreds of millions of dollars in cash advances secured by fraudulent invoices purportedly for work performed for Pemex.

In February 2014, Pemex informed Citigroup that $400 million worth of Oceanografia invoices presented as approved by Pemex were forged. As a result, the bank cancelled the credit line, precipitating Oceanografia’s bankruptcy. The New York bank’s then CEO Michael Corbat called Oceanografia’s bogus billing a “despicable crime” — far in excess, of course, of any of the crimes Citi has committed over the years — and cut its fourth-quarter and full year results by about $235 million.

Mexico’s Ministry of Public Function investigated the contracts Oceanografia signed with Pemex between 2011 and 2012, applied a fine of 24 million pesos and disqualified the company from working with federal public administration agencies for 21 months. Amado Yañez, who was CEO and majority owner of Oceanografia when the scandal broke in 2014, was arrested and jailed, only to be released in 2017 on the posting of a 7.5 million peso bail. Yañez still faces charges of fraud and wears an ankle bracelet to this day.

Yañez claims he is a victim of a plot by businessmen and politicians to take possession of his company, founded by his father in 1968. Before the scandal broke it was one of the largest shipping companies in Latin America with 11,000 employees, 100 vessels and 42 active contracts with Pemex. In 2013, the Peña Nieto government was on the verge of passing its long-awaited energy reforms, which were about to open up huge opportunities for companies and investors in Mexico’s oil and gas sector, including in shipping.

During that same year Yáñez Osuna was allegedly pressured to leave Oceanografia in foreign hands. A trio of businessmen — Aaron Omar Olvera Monroy, a lawyer connected to Pemex’s former CEO Emilio Lozoya, both now in prison on corruption charges, Fabián Narváez Tovar, director of the Mexican shipping company Administradores Navieros del Golfo, and Arturo Herníquez Autrey, a former Pemex executive who is also under investigation for corruption and money laundering — approached him with a derisory offer he ended up rejecting. Yañez assumes they were doing Lozoya’s bidding.

One of Mexico’s richest and most connected families, the Hank Rhon, also made an offer for Oceanografia that Yañez ended up turning down. Not long after the two rejections, Pemex and Citibanamex accused Oceanografia of fraudulent billing.

No Smoking Gun

Eight years later, Citibanamex has still not been able to demonstrate in a court of law that Oceanografia committed fraud against it. In March 2017, Oceanografia, now out of bankruptcy, filed a counterclaim against Citibank in Manhattan federal court, as the Courthouse News Service reported at the time:

“Citibanamex committed bank fraud in Mexico and, on information and belief, in the United States when it recorded loans to Oceanografía as the purchase of rights to collect on invoices owed by the Mexican national oil company, Petróleos Mexicanos (commonly known as Pemex), ” the complaint says. (Parentheses in original.)

The loan description allowed the bank to book the loans at an AAA rating and lend more than it otherwise would have to Oceanografia directly. Citibank allegedly made millions more in profits using this scheme.

“When outside circumstances made it impossible for Citibanamex or Citigroup to continue to conceal Citibanamex’s bank fraud, Citigroup publicly took over the relevant operations from Citibanamex and conducted a purported investigation into Citibanamex’s loans to Oceanografía,” Oceanografia claims.

The lawsuit continues, “Rather than take responsibility for Citibanamex’s misconduct, however, Citigroup chose to portray itself as victim and whistleblower. That plan, however, required a scapegoat – Oceanografía.”

In 2018, Mexico’s Supreme Court dismissed Citibanamex’s lawsuit against Oceanografia preventing the New York lender from collecting more than 6,7 billion pesos in damages. The judicial body dismissed two appeals from Citibanamex, describing them as unfounded since the bank could not legally verify factoring operations by Oceanografia. In response Citibanamex asserted that the ruling did not alter the fact that it had suffered from fraud.

“[The ruling] is independent of the criminal trial currently under way against Amado Yáñez Osuna. Citibanamex trusts that the law will be applied correctly for the resolution of any related legal issues.”

More Questions Than Answers

Yañez has since launched a counterclaim against Citibanamex for up to $5.2 billion in damages. According to El Economista, Oceanografia is estimated to have suffered losses of approximately 30 billion pesos ($1.45 billion) as a result of the operations related to Banamex alone, without considering the damages suffered due to the lack of operations and fulfilment of the contracts that it had signed with Pemex, as well as the obligations the company has to its other creditors, mainly foreign investors, shipowners and international ship operators.

This group has also taken legal action against Banamex for damages caused eight years ago. They have also threatened to launch fresh lawsuits, which could further hamper Citi’s exit from Mexico.

In the meantime, expectations are rising that Lozoya, currently in jail, will end up ratting out his ex-bosses, Mexico’s former President Enrique Peña Nieto and former Treasury Secretary Luis Videgaray Caso, both of whom are accused of orchestrating and operating a network of bribes worth at least $10 million dollars. The money was allegedly distributed among high-level operators in the PRI election campaign of 2012, when Peña Nieto was elected, and opposition legislators to encourage them to approve the energy reform of the following year.

Sources close to Lozoya claim he is also willing to testify that the actions taken against Oceanografia were part of a plot cooked up by the former Secretary of the Treasury to acquire what was then the most important shipping company in the country. If true, what role did Citibanamex play? Did it knowingly participate in a plot to bankrupt one of its own clients? If so, what kind of price will it end up paying, if any? After all, Citi is a TBTF Wall Street bank and this is Mexico we’re talking about. In 2021, Mexico’s antitrust watchdog imposed fines totalling a measly 35 million pesos ($1.75 million) on seven international banks, including Citibanamex, for rigging government bond prices.

At the moment, there are far more questions than there are answers. Loose ends are everywhere. But one thing is clear: the case between Oceanografia and Citibanamex will go on. And that is the last thing Citi wants.