Liu Jinbao, once one of the most high-profile mainland bankers in Hong Kong and overseas, will reportedly face a corruption trial during the next few weeks. There has already been speculation the former Bank of China (Hong Kong) chief executive could face a firing squad for allegedly embezzling more than 41 million yuan. A key indictment against Liu is that he set up unauthorised, off-balance-sheet accounts to siphon money from the Bank of China's Hong Kong operations for personal purposes. If Liu is found guilty, it would have implications for most mainland companies listed in Hong Kong as top executives of those firms are involved in similar schemes. Unless the central government does something drastic to reform the ridiculous salary and incentive system for overseas-based mainland companies, more corruption cases like Liu's are bound to emerge. Liu was recalled to Beijing in May 2003 and arrested on corruption charges in February. According to mainland magazine Caijing - which obtained Liu's indictment papers - he will go on trial for embezzlement, taking bribes and failing to account for assets valued at more than 41 million yuan. According to the indictment papers, Liu approved the use of funds from the off-balance-sheet accounts to pay bonuses nearly 30 times between 2000 and 2003. Sources say more than 50 senior mainland officials working at BOCHK - including almost all department heads - were involved in the scheme, receiving various sums. It remains a mystery why Liu and three other senior executives - Ding Yansheng, Zhu Chi and Zhang Debao - were arrested on corruption charges while the rest remain free. The case has again highlighted controversial issues surrounding off-balance-sheet accounts and the salary system for overseas-based mainland officials. Ever since the late 1970s when the mainland started to open up and allow more firms to establish a presence overseas, a double salary system has been in force. Officials declare their salaries in annual reports and in statements to local tax authorities, with the figure expected to reflect their status and the image of the companies they work for. In the case of BOCHK, its 2003 annual report said the top four executives had a combined salary of $11 million, with the highest earner paid between $3 million and $3.5 million. But officials' reported salaries are just a fraction of what they take home, with the difference deposited in the off-balance-sheet accounts, commonly known as 'little treasuries'. The little treasuries also contain money siphoned from corporate accounts by fabricating accounts and other book-cooking techniques. Funds in the little treasuries are generally used for entertainment expenses and bonuses for mainland staff. This practice is widespread and it is safe to assume that most of the 3,000 Hong Kong-based mainland companies maintain such treasuries. Leaders in Beijing have long realised the folly of the double-salary arrangement and have started tinkering with the system. They have allowed mainland representatives on international institutions such as the World Bank to retain their full salaries, and junior mainland executives in Hong Kong to receive salaries comparable with their colleagues hired locally. However, Beijing finds it difficult to 'localise' the salaries of senior mainland executives because of simple logic - how can you pay an executive like Liu $3.5 million a year while his boss and colleagues of the same rank in Beijing are paid less than 10 per cent of that? A direct result of this folly is that most mainland officials have used little treasuries to pay themselves huge bonuses to compensate their salaries, pitiful compared with those of their counterparts at other companies in Hong Kong. But this has raised serious legal and moral issues, as the practice has violated not only mainland regulations but also laws and regulations in Hong Kong. First of all, some officials could have siphoned off money from the listed companies for their little treasuries. Secondly, the fact that officials publicly declare a huge amount of money but privately receive a fraction of that can be seen as a disadvantage to shareholders because this has inflated the costs of a listed firm. Thirdly, officials usually destroy all documents after they dispense bonuses from little treasuries to evade detection and avoid paying personal income tax, like Liu did. This clearly violates the relevant laws in Hong Kong. Fourth, the practice also clearly violates the Securities and Exchange Commission ordinance which requires public companies to disclose sensitive corporate information. Fifth, mainland officials living in a society where their counterparts at other companies earn more would find it hard to resist the temptation to find compensation through illegal means. This means more officials will be tempted to follow Liu's path and cause irreparable damage to the reputation of mainland companies. And, more importantly, this is a systemic issue, which requires the combined efforts of the central government and Hong Kong authorities, including the Hong Kong Monetary Authority, the Securities and Exchange Commission and the stock exchange.