Banking & Finance

Another bank job

How a fake bank went unregulated in China

Bank w

Looks like a bank, but it’s not...

During a bank heist in Guangzhou, the armed robbers explained why employees shouldn’t give them any trouble: “This is the state’s money. But this is your life,” they reasoned. Everyone in the bank did as they were told and the gang got away with Rmb20 million ($3.2 million).

Actually, this never really happened – it’s the opening of a Chinese joke (for the punchline, see the end of this article). Bank robberies, especially successful ones, are rare in China owing to the vast number of surveillance cameras that tend to foil successful getaways.

But why bother to rob a bank, if it is easier to start a fake lender and embezzle the deposits of unsuspecting savers?

In appearance Nanjing Mengxin Rural Economic Special Cooperative looked just like any another state bank branch. TV panels displayed live financial data. Uniformed clerks worked behind counters, processing standard banking documents. The branch opened on a busy street in the major city of Nanjing in late 2013. There were even security guards outside.

So it came as a shock when state media reported last month that the bank was a fake. Xinhua reported that Nanjing Mengxin has swindled almost 200 savers out of Rmb200 million ($31.95 million). Most of the victims are private business owners from Zhejiang province, who were promised higher interest rates than those on offer at bigger, better-known banks.

The fraud was revealed when a businessman told police he couldn’t withdraw his money. The cops then found that Nanjing Mengxin was registered as a rural cooperative but had none of the accreditation required to operate as a deposit-taking business.

In a country that has seen fraudsters faking everything from ATM machines to local government headquarters, the public initially viewed the case as yet another amusing shanzhai story (for our first mention of this term, see WiC1). But financial critics soon warned of more serious regulatory issues exposed by the fraud. “This fake bank has been operating for more than a year. Where are all the banking regulators and who should be responsible?” the Beijing Times asked, not unreasonably.

The answer is complicated. The newspaper noted that all deposit-takers have to get a licence from the central bank, but that the institution itself doesn’t have law enforcement power. Theoretically the CBRC, the banking regulator, should supervise the system and take action against those taking deposits illegally. Yet when questioned by the Global Times, the CBRC said that Nanjing Mengxin was registered as a rural cooperative by the local commerce and industry administration. “If its activities had caused a negative impact for the financial system, then we would have intervened,” a CBRC official explained to the Beijing Times.

What this means, points out Xinhua, is that a banking system with – on paper at least – strict regulatory oversight can permit a fake institution to go largely unregulated.

Perhaps this is one reason why conmen have been establishing a growing number of shanzhai banks. This month the Economic Observer reported on another case involving a rural cooperative in Hubei that improperly gathered deposits of Rmb8 billion. It did so, incredibly enough, over a seven-year period. (It has now been shut down.)

Because of the growth of internet financing activities in China – which include peer-to-peer lending as well as crowdfunding – banking analysts told Xinhua that regulators need to clarify their supervisory responsibilities. The domestic media expects new proposals could emerge during the coming legislative session (or so-called ‘Two Meetings’) in Beijing next month.

Meanwhile, the Global Times hasn’t ruled out the possibility that the fake bank in Nanjing was given a “protective umbrella” – an inference that corrupt officials might have been party to the scam.

Which brings us back to the joke’s punchline. The af0re-mentioned robbers are watching the news on state broadcaster CCTV, and are shocked to hear reported that Rmb100 million was taken in the heist.

“We risked our lives but only took Rmb20 million,” one of the robbers complains to the other. “But the bank manager took Rmb80 million with a snap of his fingers…”

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