The U.S. bank is seeking to recover the missing funds with the help of Mexican authorities.
The bank said that the oil services company — Oceanografia S.A. de C.V., or OSA — overstated by $400 million the business it was doing with Mexico's state-owned oil company Petróleos Mexicanos, or Pemex. OSA used falsified invoices as collateral for $585 million in loans from Citigroup's Mexican unit, Banamex, Citigroup said. But after an investigation, Citigroup could only verify $185 million of invoices.
Citi said that it believes the case is isolated, and it is moving to recover the money and identify anyone involved in the fraud.
Mexican authorities said they have taken control of OSA, in part, to help make sure Citi recoups the funds.
"We are exploring every available option to recoup the misappropriated funds and we will be relentless in pursuing their recovery," Citigroup CEO Michael Corbet said Friday.
One of the criticisms of Citigroup has been that it is so big, with so many businesses around the world, that it can't possibly stay on top of all of them. It gets more than half of its revenue from outside the U.S.
It appears that invoices from OSA were falsified to represent that Pemex had approved them, according to a memo from Corbat to employees on Friday.
A worker at Banamex processed them, Corbat wrote. It's not clear how many people were involved, he wrote.
He said Citi is doing a "rapid review" through Banamex, and all of Citi, of programs similar to the one involved in this case.
Corbat was a banker and a Citi lifer when he was named CEO in October 2012. The hope was that he would scrutinize Citi's operations in each country and make sure this sort of thing didn't happen, said Nancy Bush, an independent banking analyst.
"I think that there is still a great reservoir of goodwill toward Michael Corbat," she said. The fraud in Mexico doesn't completely disrupt Citi's prospects, "but I don't think you can have too many of these."
She said Citi might argue that Corbat's vigilance helped bring the fraud in Mexico to light.
Citi learned on Feb. 11 that OSA had been barred from getting more contracts with the Mexican government. OSA was doing work for Pemex.
On Friday, Mexico's Attorney General Jesus Murillo Karam said the government took control of OSA to preserve pertinent information and to ensure the company's continued operation during the investigation, as well as to help Citigroup get its money back. Murillo told reporters that no one has been detained.
He said his office is working with other government authorities and Citigroup "to establish as quickly as possible the appropriate criminal charges and to recover the funds from whoever committed these crimes."
In January, Citigroup reported 2013 net income of $13.91 billion. The changes drop its full-year profit to $13.67 billion.
"The impact to our credibility is harder to calculate," Corbat wrote in the memo to employees on Friday.
Shares of Citigroup Inc. fell 6 cents to close at $48.63 Friday.
Associated Press writer E. Eduardo Castillo in Mexico City and AP Business Writer Michelle Chapman in New York contributed to this report.