Money Matters

You can always bank on China for the most amazing scams

PUBLISHED : Friday, 29 January, 2016, 8:51pm
UPDATED : Friday, 29 January, 2016, 10:11pm

China’s banking industry is hardly a stranger to fraud. But what makes a recent 3.92 billion yuan swindling case at Agricultural Bank of China shocking is not the size of the scam but the sheer crudity of the scheme as well as the number of people likely to have been involved in it.

The bank said the scam was related to its “business of notes held under resale agreement”. In lay terms, a note is a promise of payment issued by one bank that can be encashed at a discount at another bank.

The Beijing branch of the bank loaned out billions of yuan through notes only to find out one hazy morning that the papers had disappeared from the safe. Instead, snugly wrapped inside the brown envelopes were piles and piles of old newspapers.

READ MORE: Agricultural Bank of China employees devised ‘scam’ which caused 3.9billion yuan loss

Now, how could that happen? Chinese banks have learnt some expensive lessons from past failures and the regulators have imposed some severe guidelines to prevent their recurrence.

Each note carries its own serial number. Each transaction, and therefore the number, must be keyed into a computer system that can be viewed by all banks. The notes must be locked up and counted regularly.

So why and how did all these steps fail? The answer is short. None of the transactions was recorded, according to mainland media. So far, two mid-level, but well-connected, bank executives have been arrested.

To get to the bottom of the matter, I approach – who else – my old banker friend George. And, as usual, he doesn’t fail to elucidate, with a personal anecdote to boot.

George was into his second year as the head of a foreign bank in Shanghai. Business was good thanks to the strong appetite among private entrepreneurs for a new, juicy cross-border arrangement. Among them was a Jiangsu conglomerate.

The conglomerate imported some material via its Hong Kong subsidiary, which got letters of credit issued by a state bank. The subsidiary pledged them to a Hong Kong bank for US dollar loans.

To the conglomerate, the gain was three-pronged. One, it had free liquidity in Hong Kong, a diverse market with many things to bet the money on. Two, it was cheaper to borrow in Hong Kong. Three, there was the gain from yuan appreciation.

There was normally more than 300 days to play around with. As long as the yuan appreciated and the stock market did well, everyone was happy.

That was until the phone on George’s desk rang one day. It was the internal audit team in Hong Kong. It had checked the documents that came with the letters of credit against shipping records and found out that the trades never happened.

George set about to do his forensics and to his utter shock, found out that his bank’s total lending to this conglomerate had ballooned to 200 million yuan. He demanded repayment. As expected, the conglomerate begged forgiveness.

But what happened next was completely unexpected. His relationship manager on this account knocked on his door. The young banker was not there to save his well-paid job. He was here to tell George that the conglomerate was bringing in a fee of US$1 million a year for the bank, or a 3 per cent rate of return. It was among the top five clients in Jiangsu and the loan was “guaranteed” by a state bank. George was unmoved.

On day two, the conglomerate’s financial director arrived with a senior foreign banker whom George had met at a cocktail party.

“These are typical carry trades. Of course, not every one of them is genuine. We all know that. Every bank has been doing that, so has my bank,” said the foreign banker. “There is no reason to panic,” he assured George.

On day three, the financial director returned with an officer from the Jiangsu branch of the state bank that had issued the letters of credit. George had once exchanged name cards with her at a conference.

She said George should not worry as the letters of credit were all fully backed by deposits from the conglomerate.

“They have been doing us a big favour,” said the state banker, adding that the deposits added to the bank’s assets while the contingent liabilities that come with the letters of credit were off the balance sheet. “That helps our book.”

What George was witnessing was a massive web of intertwined interests and connections that went beyond bribes. But he remained adamant because, he thought, a lie is a lie. After many a sleepless night, he recouped most of the money.

The conglomerate did not. Its boss disappeared within a month of repaying George. The three bankers who had pleaded his case with George continue to grace the industry, though currently at different banks.