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By Elinor Comlay and David Henry
April 1 (Reuters) - Citigroup's Mexican subsidiary Banamex fired two bond traders after uncovering rogue trading last year, two sources close to the matter said, raising fresh questions over what controls the troubled unit had in place to police employees.
Banamex suffered paper losses from unauthorized trading that ran into the millions or perhaps even tens of millions of dollars, the sources said.
A spokeswoman for Citigroup confirmed the bank had fired two fixed income traders for violating its code of conduct and said in a written statement that the bank "escalated the issue to regulators and took immediate action against" the individuals. She did not elaborate.
Mexico's bank and securities regulator, the National Bank and Securities Commission, is aware of the matter, which was investigated internally by the bank, a spokesman for the regulator said.
The trading loss, even if realized, would be small in the scheme of Citigroup's $13.7 billion of earnings for 2013. The Mexican unit, which has in the past enjoyed a good deal of autonomy, has suffered much bigger losses from bad loans to homebuilders and oil services company Oceanografia.
Some Citigroup officials are asking whether the U.S. Federal Reserve's decision last week to veto its plan to boost dividends and buy back more shares was linked to its Mexico troubles.
Citigroup has cut the compensation for Manuel Medina-Mora, who has run Banamex for many years and is also co-president of Citigroup - a role in which he oversees global consumer banking.
Medina-Mora was paid $9.5 million in total compensation for 2013, according to a proxy statement filed by Citigroup on March 12. That was down from the $11 million he received for 2012.
The filing said a factor in his pay was control issues at Banamex USA, a unit of Banamex, which the U.S. government has faulted for not doing enough to stop money laundering by customers. Citigroup last year consented to an order from the Federal Reserve to take corrective steps.
Medina-Mora has declined to comment on the pay cut.
The bank has also taken $40 million of pay back from Banamex employees' bonus pool and said in a filing that it may cut pay for 2014 for senior executives at the bank.
The Citigroup spokeswoman said Banamex was subject to the same oversight and controls required across the company. The bank was, however, working to "identify any areas where we need to strengthen our controls through stronger oversight or improved processes."
Last year Citigroup said it could lose as much as $80 million from bad loans to Mexican home builders. The loans had been rejected by management in New York, only to be made by Banamex officials in Mexico, sources told Reuters. Banamex has discretion to make some loans that do not get vetted by Citigroup's central risk managers.
Then in February Citigroup said Oceanografia had defrauded Banamex of $400 million. The Mexican government has begun a criminal investigation of Oceanografia and has taken control of the company, which has not commented on the allegations.
The Federal Reserve did not cite Citigroup's difficulties in Mexico in its rejection last week of the bank's request to return more money to shareholders. But it did say the bank failed to properly consider how global economic turmoil would affect all of the bank's businesses, implying to many analysts that regulators are concerned about the bank's global reach. Citigroup operates in more than 100 countries.
Managing such a vast empire is not easy, and for a long time, New York executives at the bank focused less on Mexico than on other areas of the world, because Banamex profits kept rolling in. Even accounting for the fraud at Oceanografia and the trading and homebuilder losses, Banamex generated some 10 percent of Citigroup's overall earnings last year. (Reporting by Elinor Comlay in Mexico City and David Henry in New York, additional reporting by Lauren Tara LaCapra in New York and Emily Stephenson in Washington; Editing by Dan Wilchins and Ross Colvin)