MEXICO CITY (REUTERS) - Citigroup Inc said on Friday that it has discovered fraudulent loans in its Mexico subsidiary and that 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, cutting Citigroup's 2013 profit by US$235 million (S$297 million) to US$13.67 billion.

Citigroup Chief Executive 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 the nation's state-owned oil company, Pemex .

Oceanografia borrowed from Citigroup's Mexican unit, Banco Nacional de Mexico or Banamex, using expected payments from Pemex as collateral.

In recent weeks, Banamex discovered that Oceanografia appeared to have falsified invoices to Pemex that were collateral for loans, Mr Corbat said in a separate memo to employees. The bank wrote down about US$400 million of loans backed by the bogus invoices.

On Feb. 11, Oceanografia was suspended by Pemex's internal control group from receiving any government contracts for 21 months and 12 days, a serious blow for a company that receives about 97 per cent of its revenue from Pemex.

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 that 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.

Mr Corbat said in the statement that Banamex is exploring legal options.

Criminal actions "may allow us to recover damages," he added.

Citigroup has about US$1.9 trillion of assets on its balance sheet, and so far the bank has found just US$400 million of loans in Mexico that it has trouble with.

Mexican officials have 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 last month that Pemex's internal control body sanctioned Oceanografia, sparking an investigation by Citi of its loans.

In the memo to employees, Mr Corbat noted that a Banamex employee had processed the fraudulent invoices that appeared to be from Oceanografia, and that it is"not clear how many people were involved in the fraud... (But) 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."

Citigroup shares have fallen in recent weeks on concerns that slowing growth in emerging markets may reveal bad loans, as well as increase the risk of trading losses.

In the third quarter of 2013 problems with about US$300 million of loans that Banamex had made to three Mexican homebuilders prompted Citigroup to book reserves for expected losses on the loans.

Citigroup is the third-largest US 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 US$185 million of the US$585 million of accounts receivable. Citigroup said it is charging the US$400 million difference to operating expenses in its previously-announced fourth-quarter results. The total pre-tax expense is US$360 million after adjusting Banamex compensation expense by US$40 million, the statement said.

Citigroup said it has not determined if it faces losses on another US$33 million for outstanding loans made directly to Oceanografia and letters of credit issued for the company.

Citigroup shares rose 0.1 per cent to US$48.75 on the New York Stock Exchange at mid-afternoon.