Financial regulation

China’s regulator slaps nation’s biggest fine on Guangfa Bank for fraud, and for covering it up

Branch staff had created fraudulent letters of guarantee for two bonds that later went into default

PUBLISHED : Friday, 08 December, 2017, 10:29pm
UPDATED : Friday, 08 December, 2017, 11:12pm

China’s bank regulator has slapped the home-grown lender in the country’s southern powerhouse province of Guangdong with the industry’s largest penalty, in a sign that monetary authorities are not letting up on their campaign to crack down on financial malpractice and malfeasance.

Guangfa Bank, the dominant lender based in Guangzhou city, was fined 722 million yuan (US$109 million) by the China Banking Regulatory Commission for issuing fraudulent guarantees for loans, and seeking to cover up the scale of its bad debts.

The case was one of the most blatant examples of “criminal collusion” between a bank’s employees with outsiders, cutting across different companies, industries and markets, the regulator said in a Friday statement on its website.

“The amount of money involved was very large, the number of companies involved were numerous, the circumstances were serious and the impact on society was extremely bad, ” the CBRC said.

Guangfa’s misdemeanour revolved around two bonds worth a combined 1 billion yuan that went into default on December 20 last year. The bonds were issued by two units of the phone maker Cosun Group, and sold on Ant Financial Holdings’ Zhaocaibao online wealth management platform.

Ant Financial and 10 other banks sought compensation for investors from Zheshang Property and Casualty Insurance, which had provided insurance coverage on the debt, only to discover that the insurer had been issued fake letters of guarantee by Guangfa’s branch in Huizhou city. The fraudulent documents were created using counterfeit corporate seals made by branch staff. The case involved as much as 12 billion yuan, as the bank tried to channel money to cover its mounting bad loans and operational losses.

Ant Financial is an affiliate of Alibaba Group Holdings, owner of the South China Morning Post.

“As a service platform providing information on financial products, Zhaocaibao will continue to put investors’ interest first, strive to protect market openness, transparency and fairness,” Ant Financial said in a statement. Guangfa could not be reached to comment.

Six Guangfa employees involved in the case have been banned from working in the banking industry for life, and were handed over to authorities for prosecution, the regulator said. The bank had all of its illegal profits forfeited, with the fine equivalent to 8 per cent of Guangfa’s 2016 profit, Reuters reported, citing its own calculation.

“Guangfa did everything that regulators hate the most,” said Chen Shujin, chief financial analyst at Huatai Securities. “They gave an under-the-table guarantee, and made illegal interbank investments to cover up a non-performing loan.”

China Minsheng Bank handed fine in fake wealth management products case

The CBRC, China’s banking regulator, has been taking a stricter line on wrongdoings this year.

Last week, it fined China Minsheng Banking Corporation 27.5 million yuan for selling fake wealth management products.

Still, the latest case did not reflect a systemic risk in Chinese banking, even if it is likely to spark a tighter round of checks by the bank regulator, said DBS Vickers’ research director Ken Shih.

“The incident obviously stems from a local branch manager’s malicious behaviour and is a reflection of loose internal control, rather than rising credit risk,” he said. “Loose internal controls exist especially among small Chinese banks, which may lead to operational and even franchise risk among the small banks. I expect the CBRC to conduct new rounds of scrutiny on China banks in the near future to correct any wrongdoing.”