WHEN OFFICIALS FROM the state auditor-general's office went to the Shanghai branch of the Bank of China (BOC) to conduct an audit in 2001, they discovered improper and illegal use of funds totalling more than one billion yuan (HK$942.5 million). Did the money go to property tycoon Chau Ching-ngai? And was it approved by Liu Jinbao, head of BOC's Shanghai branch, before he headed its Hong Kong operations? The information comes from the latest issue of the Caijing magazine, which was printed but is not available on newsstands across China because the government banned the media from further reporting of the case. It advances a little further our understanding of the relationship between the two men, who were detained at the end of May in the biggest financial scandal of the year. The revelations about what is supposed to be China's most international and best managed bank are shocking. The money included 900 million yuan illegally spent on the stock market, an illegal loan of 1.5 billion yuan to a private company and an illegal letter of credit for US$76 million to a Shanghai metals company. A total of 590 million yuan has not been recovered. Officials of the bank's head office in Beijing were unavailable for comment. The magazine stopped short of saying that it was Mr Liu himself who approved the payments and that it was Mr Chau who benefited from them.According to one Shanghai banker, the two men were good friends. 'Chau paid Liu's expenses, [including] his evenings in the karaoke bars and night clubs,' he said. 'This was common knowledge among the city's elite.' Caijing said that six state banks in Shanghai were owed between 10 billion and 12 billion yuan by Mr Chau and his many companies, whose assets have been frozen. Since his detention, the banks have been holding emergency meetings to discuss how to minimise their losses. Mr Chau's biggest asset is a piece of land covering 180,000 square metres in a prime site between Suzhou Creek and Beijing Road, from where he was going to move 10,000 households in order to redevelop the site. An auction or an invitation to another developer to take over the project are the most likely fates of the site. This means that the six residents of the area who brought a lawsuit against Mr Chau for illegal purchase of the land will still have to leave and that, as in other cases, the government will back the developer. The district court of Jingan had a first hearing of the case on May 28. The banker said: 'Land should be auctioned or sold by public tender, which would bring the highest revenue to the city government. But this will not happen, even after this scandal, because it brings no financial benefits to officials of the district government. 'They want to continue the current system of bilateral deals between them and developers. Land sales are the biggest single source of money for local officials. Beijing allows it as part of its unwritten deal with local governments. You enforce our orders - against Falun Gong, Sars and unauthorised births, for example - and we give you this perk.'