FCPAméricas Blog

Fraud at Oceanografía: Implications for FCPA and AML Risks in Mexico

Author: Matthew Fowler

OceanografíaConcerns about corruption risks in Mexico’s oil and gas sector were underscored on February 28, when the Mexican government seized control of Oceanografía, a Mexican engineering and oil platform services company. The events leading up to this seizure, which include fraud, corruption and money laundering concerns, are particularly relevant given Mexico’s recent efforts to facilitate private investment in the energy sector.

Mexico’s recent reforms effectively ended Pemex’s longstanding monopoly over the oil and gas sector. The newly opened markets are expected to attract significant foreign investment and generate substantial revenue for the government of Mexico. But the collapse of Oceanografía – which has already triggered fallout on both sides of the Rio Grande – suggests that participants eyeing new energy opportunities in Mexico should be mindful of corruption and related risks.

The Oceanografía Implosion

Oceanografía is closely tied to Pemex, Mexico’s state-owned oil company, with over 95% of its revenue coming from contracts with Pemex. Between 2000 and 2012 it signed nearly US$3 billion in Pemex contracts, making it one of the largest – if not the largest – contractors to Pemex during that period. A Pemex board member recently described Oceanagrafía’s services as “crucial” to Pemex’s operations.

On February 11, Mexico’s national anti-corruption agency banned Oceanografía from bidding on government contracts for 21 months and fined the company about $1.9 million for violating contracts with Pemex.

On February 28, the Government of Mexico seized control of Oceanografía in order to preserve records and maintain operations as officials investigated.

Collateral Damage

The fallout from this collapse has already spread to the United States. On February 28, Citibank announced a US$235 million write-down in its 2013 profits due to fraud that Oceanografia committed against Banamex, Citibank’s Mexican subsidiary. Oceanografia presented false documentation to Banamex as evidence of receivables owed by Pemex. Banamex accepted these receivables as collateral for US$585 million in short-term loans to Oceanografía, but later learned from Pemex that only about US$185 million of that amount was backed up by valid invoices.

Investigations

Citigroup is under criminal investigation by a federal grand jury regarding compliance with the Bank Secrecy Act and other AML statutes, and it has received a civil subpoena from the FDIC. The SEC is also investigating Citigroup for accounting fraud and to determine whether it violated the FCPA.

There is also suspicion that the Banamex staff who approved the fraudulent invoices may have been involved in the scheme – both Citibank and the Mexican Attorney General’s Office are reported to be interviewing Banamex staff to determine the scope of any such fraud.

Citibank’s FCPA and Money Laundering Risks

Citibank’s FCPA risk appears to center on whether it violated the internal controls provisions of the FCPA. Those provisions, described in greater detail here, require issuers to “devise and maintain a system of internal controls sufficient to assure management’s control, authority and responsibility over the firm’s assets.”

Citibank has run into trouble regarding internal controls recently – the U.S. Federal Reserve demanded that Citigroup improve its anti-money laundering controls less than a year ago. And the controls in question in this case are about basic bank operations –as Antony Currie noted in the New York Times, the Banamex fraud is notable for its size in one of the most “plain-vanilla” businesses in banking.

The Oceanografía implosion has potential FCPA implications that remain to be determined, much like the possible impact of this matter on Mexico’s efforts to attract private capital to its oil and gas sector.

The opinions expressed in this post are those of the author in his or her individual capacity, and do not necessarily represent the views of anyone else, including the entities with which the author is affiliated, the author`s employers, other contributors, FCPAméricas, or its advertisers. The information in the FCPAméricas blog is intended for public discussion and educational purposes only. It is not intended to provide legal advice to its readers and does not create an attorney-client relationship. It does not seek to describe or convey the quality of legal services. FCPAméricas encourages readers to seek qualified legal counsel regarding anti-corruption laws or any other legal issue. FCPAméricas gives permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author and to FCPAméricas LLC.

© 2014 FCPAméricas, LLC

Matthew Fowler

Post authored by Matthew Fowler, FCPAméricas Contributor

Categories: Anti-Money Laundering, Energy Sector, Enforcement, English, FCPA, Mexico, State-Owned Enterprises

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