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Citi Affiliate’s Troubles Multiply as Money-Laundering Subpoenas Follow Fraud

A headache is growing for Citigroup as a banking affiliate involved in money transfers across the Mexican border has become ensnared in a criminal investigation.

The disclosure of the inquiry on Monday follows the bank's admission on Friday that it had been defrauded of $400 million in a scheme involving a financially shaky oil services company in Mexico.

A Citigroup affiliate based in Los Angeles received a grand jury subpoena from federal prosecutors in Massachusetts related to anti-money-laundering compliance, the bank said in a securities filing on Monday. The focus of the subpoenas is unclear. The affiliate has also received a subpoena from the Federal Deposit Insurance Corporation related to its anti-money-laundering program and the Bank Secrecy Act.

(Read more: SEC investigating Citigroup over Mexico fraud: Source)

The affiliate, Banamex USA, provides banking services to individuals and small businesses in the United States and Mexico. Until recently, it was a large player in transferring money across the border between family members, industry experts say.

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The affiliate, Banamex USA, provides banking services to individuals and small businesses in the United States and Mexico. Until recently, it was a large player in transferring money across the border between family members, industry experts say.

In public statements on Friday detailing the purported fraud at Banamex in Mexico, Citigroup's chief executive, Michael L. Corbat, did not mention the inquiries involving the Banamex affiliate in the United States.

People briefed on the matter say that the two issues — one involving fraud and the other involving money-laundering compliance — are unrelated. But together they show the perils of building a large banking business in and around a country that has wrestled with drug trafficking and corruption. Mexico accounts for some 13 percent of Citigroup's total revenue.

In recent years, federal regulators have been pressuring many United States banks to bolster their surveillance of suspicious transactions in an effort to thwart terrorists and other criminals from laundering money.

Regulators have previously said that Citigroup lacked effective governance and internal controls to oversee anti-money-laundering compliance at Banamex USA.

(Read more: Citi discovers fraud in Mexico unit, cuts 2013 earnings)

In 2012, Banamex USA entered into a consent order with the F.D.I.C. and California Department of Financial Institutions to improve its oversight and tracking systems. A year later, Citigroup entered into another consent order with another regulator, the Federal Reserve, and agreed to take companywide actions also intended to bolster its compliance efforts.

Citigroup's chief compliance officer at the time of last year's consent order has since stepped down from that role, but is still at the bank, according to two people briefed on the matter.

Long known for its sprawling operations, Citigroup has struggled for years to improve its controls, working to centralize its compliance and audit functions.

One of the bank's recent run-ins with regulators stemmed in part from improvements gone awry, several current and former executives with the bank said. In 2006, during an overhaul of the business units that process some of Citi's foreign transactions, an error in one of the bank's computer systems isolated the system from the anti-money-laundering operations that scrutinize the money flowing into the bank, the executives said. Once Citi discovered the problem in 2010, the bank immediately alerted regulators, but while the error was in effect, some payments were not completely vetted.

Regulators called for extensive change at Banamex USA, like more compliance training for senior executives and tellers and holding monthly meetings to review the company's progress in adhering to the 2012 consent order. The affiliate was also ordered to retroactively review a year's worth of wire transfers between $10,000 and $50,000.

The Federal Reserve noted in its consent order last year that the bank had made some progress toward improving its anti-money-laundering controls.

Separately, regulators in the United States are also looking into whether compliance and oversight problems may have contributed to the fraud at Banamex in Mexico. Bank officials suspect at least one Banamex employee may have enabled the fraud, which centered on the oil services company Oceanografía.

Banamex advanced $585 million to Oceanografía, which supplies marine services to the Mexican government oil monopoly. The bank also lent $33 million to the company directly. The fraud forced Citigroup to restate last year's earnings.

(Read more: Theft at Target leads Citi to replace debit cards)

In an effort to strengthen oversight at the Mexican banking affiliate, Citigroup last month appointed Michael Helfer, the company's departing general counsel, to the Banamex board, a person briefed on the matter said.

But strengthening compliance can collide with another of Citigroup's major goals: cutting costs. Bank officials have been on a mission since the financial crisis to make the large bank more efficient and less expensive to run.

Banamex USA underwent a downsizing last year. The company had a sizable business in taking money from third-party agents in the United States and then remitting the money back to an extensive network of Banamex bank branches in Mexico, industry experts say.

But now Banamex USA will transfer money from the United States to Mexico only from its own customers, a spokeswoman said. Last year, Banamex USA also reduced the number of its branches in California, Arizona and Texas, three states with large Mexican immigrant communities, to three from 11.

Citigroup said the changes at Banamex USA are part of the bank's global restructuring of branches and businesses. But industry participants suspect that the moves may have more to do with avoiding the costs and risks of trying to meet anti-money-laundering regulations.

"It's very unfortunate," said Mario Trujillo, chief executive of DolEx Dollar Express, a large money transfer company operating between the United States and Latin America. "The majority of family remittances are sending money at low amounts. That has not been proven to be the major source of money laundering at the large banks."

By Michael Corkery and Jessica Silver-Greenberg of The New York Times

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