Banking & Finance

Scandalous acts

CSRC tightens net over financial fraud

CHINA ECONOMY

The CSRC’s new boss Yi Huiman

When it comes to lame excuses, it is hard to top that the dog ate your homework. Unless, that is, you are an executive from seafood company Zhangzidao Fishery.

Over the past few years, the Shenzhen-listed firm has regularly blamed sinking profits on dramatic drops in its scallop stocks. It has forged an infamous reputation for farming scallops “with legs” that enable them to “run away” (see WiC260 for our first mention of this Dalian-based seafood farm).

The China Securities Regulatory Commission (CSRC) suspected that something fishy was going on in the industry. Over the last year or so it began investigating several leading aquaculture firms including Zhangzidao.

What the market watchdog discovered were not disaffected scallops keen to escape fish farms for the freedom of the Bohai Gulf. Unsurprisingly, this turned out to be a red herring, covering up accounting irregularities. The CSRC ended up netting a number of executives and Zhangzidao was fined Rmb600,000 ($87,234) this month. Its chairman has been banned from holding roles at a listed company for life.

This is but one example from a series of CSRC investigations, after a slew of corporate scandals hit the financial press of late (see WiC452).

In addition to the fraud investigations, there have also been criminal cases such as the one involving Future Land chairman, Wang Zhenhua. He was formally charged with child sex offenses in Shanghai last week (see WiC459).

But some domestic commentators worry that the CSRC’s sanctions for financial wrongdoing are not punitive enough.

Orient Securities chairman, Shao Yu, told Xinhua that a Rmb600,000 corporate fine is “nothing” to a listed company. Dong Dengxin from the Financial Securities Institute at Wuhan University added that too many controlling shareholders regard their listed companies as private piggy banks – to the detriment of minority shareholders.

A recent case concerned laminating film manufacturer Kangde Xi Composite Materials. This January, it announced that it was unable to repay an Rmb1 billion short-term note, despite having reported a Rmb15 billion cash position the previous quarter.

The repayment problem triggered a cross-default clause on the property company’s outstanding $300 million offshore bond issue. Following a CSRC investigation, its chairman and major shareholder, Zhong Yu, was taken into custody in early May. The stock was then suspended at the start of this month. (The CSRC announced that Zhong had been embezzling funds, while the company had provided guarantees for his fundraising activities without knowing what they were for.)

The regulator has also fined Kangde Rmb600,000, but imposed a collective Rmb2.67 million in financial penalties on 28 other employees. It has also launched an investigation into Ruihua Certified Public Accounts, which audited the company.

Caixin Weekly reports that the accountancy firm has been sanctioned a number of times already. It was fined for failing to cooperate on a probe into Yunfeng Group in 2016 and temporarily banned from taking on new clients in 2017 after publishing misleading information in financial reports.

A second accountancy firm is also under investigation – this time in relation to overstated profits at Shanghai-listed Kangmei Pharmaceutical. This probe involves Guangdong’s largest auditing firm, GP Certified Public Accountants.

Most of the CSRC’s investigations were started under former head Liu Shiyu, who was replaced by Yi Huiman earlier this year. Liu himself is now the subject of an anti-graft investigation after turning himself in back in May (see WiC454).

Yi, its new boss, says the securities watchdog intends to make corporate governance a key focus. In June, it published a number of statements on its website about increasing its efforts to stamp out insider trading, fake disclosures and other issues relating to corporate transparency and honesty.

It also urged intermediaries to conduct proper due diligence, a sure sign that a broader crackdown is looming for the financial services sector in general.


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