Banking & Finance

Daylight robbery

Fraud at Shandong bank sparks concerns

Not going to IPO anytime soon

In 2007, the Agricultural Bank of China suffered what has to be one of the more foolhardy bank heists.

Two bank managers walked out with nearly $7 million in cash. They then punted the whole lot on lottery tickets. The theory was that they’d be sure to win, and could then return the money before anyone noticed. When they failed to win big, the plan broke down and the pair were arrested.

These days China’s banking regulators have bigger problems on their minds than a couple of jackpot chasers. Last month, they were surprised when lending from the state-owned banks exceeded targets, for instance. Another $1.17 trillion in government-mandated bank lending last year helped keep the economy growing. But fears over inflation and bad loans are now taking centre stage.

That means a stricter regulatory regime is on the cards. In anticipation of (another) hike in the reserve requirement and capital adequacy ratio both Agricultural Bank and China Minsheng Bank have now announced plans to return to the capital markets to buttress their balance sheets (for $7.6 billion and $3.2 billion respectively).

But the most important change to China’s banking system (if it’s implemented) will be the regulator’s bid to scrap the yearly loan quota system altogether. The People’s Bank of China is indicating that banks’ new loan limits may be set individually in future – and would entail far closer balance sheet scrutiny.

Just as the debate over the new banking standards picks up, another scandal is hitting the headlines. The victim this time is Shandong-based Qilu Bank, which is 20% owned by the Commonwealth Bank of Australia.

The sum involved is at least $227 million, and the subterfuge seems a little more sophisticated than the ‘lottery ticket’ fiasco from four years ago.

It’s said that bank robberies often involve an inside man, and this case doesn’t appear to have been an exception, having been masterminded by high-flying local banker Liu Jiyuan, who had previously been credited with an enormous contribution to the group’s deposits and commercial paper business. It now seems that he was taking out fraudulent loans secured against non-existent deposits – and funnelling the money into companies he controlled.

Liu’s scheme was finally exposed when a bank employee came across a fraudulent deposit certificate, and sent it to the police. It very nearly unravelled a year earlier, according to the 21CN Business Herald, but management fired the independent auditor compiling the 2008 accounts (PricewaterhouseCoopers discovered that interest income didn’t match the size of the loans outstanding, and wasn’t willing to offer an unqualified report.)

Ironically, Liu exploited what are supposed to be among the safest banking instruments, defrauding Qilu, other banks and the companies that inadvertently guaranteed the loans. “Third-party deposit certificate secured loans are a conventional low-risk business and the procedures are relatively mature,” a bank regulator told Century Weekly.

The scandal has hit both Qilu and the local banking system. “We have suspended acceptance of Qilu Bank’s notes… and we do not know when to resume,” an officer from the Jinan branch of the Bank of Communications told Century Weekly. “The case involves several local banks and we are now more cautious.”

Qilu will also be forced to delay its planned IPO – the regulator says by at least “five years” – and local credit rating agency Dagong has placed the bank on a watch list for possible downgrading.

China’s media has pointed to the Qilu fraud as evidence that regulatory oversight of the banking system remains anything but foolproof.


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