By David Henry and Elinor Comlay NEW YORK/MEXICO CITY, Feb 28 (Reuters) - Citigroup Inc said on Friday that it has discovered at least $400 million in fraudulent loans in its Mexico subsidiary and said employees may have been in on the crime. The bank wrote down bogus loans to a company whose assets Mexican law enforcement officials have now seized. Citigroup's 2013 profit fell by $235 million to $13.67 billion after the write-down. Citigroup Chief Executive Officer Michael Corbat called the incident a "despicable crime" and said the bank believes it was an isolated episode. The bad loans were made to Mexican oil services company Oceanografia , a contractor for Mexican state-owned oil company Pemex. Oceanografia borrowed from Citigroup's Mexican unit, Banco Nacional de Mexico, known as Banamex, using expected payments from Pemex as collateral. In recent weeks, Banamex learned that Oceanografia appeared to have falsified invoices to Pemex that were collateral for loans, Corbat said in a separate memo to employees. The bank wrote down about $400 million of loans backed by the bogus invoices. On Feb. 11, Pemex suspended Oceanografia from receiving any government contracts for 21 months and 12 days, a serious blow for a company that receives about 97 percent of its revenue from the Mexican oil company. Public records show that Oceanografia was awarded almost $3 billion through more than 100 contracts with Pemex between 2003 and last year. Citigroup said it began looking at its exposure to Oceanografia after the suspension. Mexico's attorney general's office said on Friday it was investigating Oceanografia for possible crime, and said it had seized the company's assets and appointed an administrator to salvage whatever business is left. Calls for the press representative at Oceanografia and an email to an investor relations official were not returned. Corbat said in the statement that Banamex is exploring legal options. Criminal actions "may allow us to recover damages," he added. Citigroup has about $1.9 trillion of assets on its balance sheet, and so far the bank has found $400 million of Oceanografia loans that it has trouble with. Mexican officials had raised questions about Oceanografia before. In 2012, the nation's Federal Audit Office published a report criticizing Pemex for failing to investigate what appeared to be contract irregularities with Oceanografia as well as overpayment for work that was not running on time. But it was not until Feb. 11 that Pemex's internal control body sanctioned Oceanografia, sparking an investigation by Citi of its loans. ACCOUNTABILITY In the memo to employees, Corbat noted that a Banamex employee had processed the fraudulent invoices that appeared to be from Oceanografia, and said that it is "not clear how many people were involved in the fraud." "I can assure you there will be accountability for those who perpetrated this despicable crime and any employee who enabled it, either through lax supervision, circumvention of our controls or violating our Code of Conduct," Corbat said. Citigroup shares have fallen in recent weeks on concerns that slowing growth in emerging markets may reveal bad loans and may trigger more trading losses. In the third quarter of 2013 problems with about $300 million of loans that Banamex had made to three Mexican homebuilders prompted Citigroup to book reserves for expected losses. Sources told Reuters that executives in New York had rejected at least some loans to the homebuilders because they were not comfortable with the risk. Banamex made loans anyway, the sources said, adding that the unit has room to make loans that do not get vetted by New York, as long as its overall portfolio is safe enough. Citigroup spokesman Mark Costiglio, said in a statement regarding the homebuilder loans, "The origination and management of the homebuilder loans, as with all loans in Mexico, was conducted under the oversight and framework of Citi's independent risk management function, and any suggestion to the contrary is false." He added, "Citi has a robust and independent risk management framework that provides oversight for lending decisions that are made in every country in which we operate. This framework results in a loan portfolio that is diversified by obligor, industry and region." Citigroup is the third-largest U.S. bank by assets. The company views its international business as a competitive advantage over other big banks in the United States. The bank estimates that it is able to validate $185 million of the $585 million of accounts receivable that Oceanografia used as collateral for borrowing. Citigroup said it is charging the $400 million difference to operating expenses in its previously announced fourth-quarter results. The total pre-tax expense is $360 million after adjusting Banamex compensation expense by $40 million, the statement said. Citigroup said it has not determined if it faces losses on another $33 million for outstanding loans made directly to Oceanografia and letters of credit issued for the company. The bank's shares closed down 0.1 percent at $48.63 on the New York Stock Exchange.