China Citic Bank to un­cover $152m bill fraud

The Pak Banker - - COMPANIES/BOSS -

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.

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