Why Fraud scares Invoice Investors, Act II

Now that we are on the subject of fraud, did anyone see that Citibank restated their earnings? This was after one customer, one commercial borrower mind you, in its Mexican banking subsidiary committed fraud.  And it was all based on phony receivables.

Citigroup's Mexican subsidiary, Banco Nacional de Mexico, commonly called Banamex, lent $585 million to Oceanografia S.A. de C.V. ("OSA"), a Mexican oil services company, with the loans secured by accounts receivable, as is typical for many commercial and industrial loans.  Banamex also had $33 million in loans made directly to OSA or letters of credit  issued on behalf of OSA.

For Citibank, perhaps the growth requirements combined with how big business and political cronyism can become blurred lending in emerging markets led to the above.

No sooner had Citibank announced this the WSJ reported on massive losses Unicredit.  UniCredit reported an enormous $20.81 billion net loss for the fourth quarter, after a write-down on bad loans and M&A activity.  Ouch.

This leads me to ask what are the auditors up to. They are in a position not to sign off on their clients’ books.  Why do they not use this power? Are they being fooled?  Are they incompetent?  Or does it simply it comes down to not wanting to lose revenue so they look the other way?

If we lose auditor independence for any of these reasons, it is quite scary.  There’s a site that looks at auditors and their conflicts of interest.  I highly recommend it. It's written by Francine McKenna.

We continue to see evidence why trade credit, and financing and selling receivables, is not easy.  It’s not just about the technology.  With the receivables finance business growing by rates above 20% year-on-year (YOY), we need to all be aware.

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