China Citic Bank to uncover $152m bill fraud
China Citic Bank Corp, a unit of the nation's largest investment conglomerate, uncovered a fraud case at its bill-financing business involving about 1 billion yuan ($152 million) late last year, people familiar with the matter said. An employee at the Beijing-based bank's branch in Lanzhou city allegedly conspired with other people between May and July to fake documents that were used as collateral to obtain a bankers' acceptance, said the people, who asked not to be identified as they aren't authorized to speak publicly. The acceptance was later sold on several times at discounted prices, bringing total exposure to 900 million yuan to 1 billion yuan, they said. The proceeds were invested in stocks, and the fraud was uncovered after Chinese equities slumped, one of the people said. An official at Citic Bank declined to comment when contacted by phone.
The incident underscores the poor internal controls at some Chinese banks and the risks involved in the bill-financing business, which has doubled in value to 4.6 trillion yuan in the past two years. The bills are used for short-term corporate lending, but have often been used to fund speculative investment in real estate and shares. Banks have sometimes used the bills to inflate their balance sheets to meet regulatory requirements.
"Bill financing is a business rampant with loopholes and operational risks, and is taken advantage of by many banks for regulatory arbitrage," said Ma Kunpeng, a Shanghai-based analyst at Sinolink Securities Co. "These are not isolated cases. The regulator has tried to fix it many times but failed each and every time."
Agricultural Bank of China Ltd., the nation's third-largest lender, revealed last week a 3.9 billion yuan case of bill fraud at its Beijing branch. In a sign of tighter scrutiny, the China Banking Regulatory Commission issued a notice earlier this month asking banks to review bill-financing businesses for violations and risks, people familiar with the matter have said.
Onsite checks of some banks' bills businesses last year by the regulator found "imprudent behavior," according to the notice seen by Bloomberg News. The CBRC identified violations including fraudulent transactions, the use of the financing to inflate deposits and loans, and adjustments intended to lower capital charges, the notice showed.
An Industrial & Commercial Bank of China Ltd. branch has suspended such lending for iron ore, steel trading and coal-trading companies, and limited transactions to select banks, a person familiar with the matter said last week.
The regulatory clampdown on bill financing has tightened market liquidity and added to the pressures on China's central bank, which this week added the most funds to the financial system in three years to prevent a cash crunch as money demand picks up before the weeklong Lunar New Year Holiday.
Citic Bank shares were down 1.1 percent in Hong Kong as of 1:40 p.m., after declining as much as 1.6 percent. In Shanghai, the shares lost as much as 2.7 percent. The bank's parent is Citic Ltd., a conglomerate with more than 5 trillion yuan of assets and interests in financial services, resources, manufacturing and real estate.