Citic Bank uncovers near-Rmb1 billion bill fraud

For the second time in a week, a Chinese bank discloses it is the victim of a scam involving the alleged embezzlement of cashed bills for investment in local stock markets.

The spectre of embezzlement in Chinese banking reared its ugly head for the second time in a week on Thursday after China Citic Bank, a unit of China's largest investment conglomerate Citic Group, said it had uncovered a fraud totalling Rmb969 million ($147 million). 

The Beijing-headquartered bank said in a filing with the Shanghai exchange that it is cooperating with a police investigation after two people with knowledge of the matter earlier told FinanceAsia about the matter. 

Attention is focused on a branch of Citic Bank in the northwestern city of Lanzhou, which has allegedly long worked with a bill agency in Zhejiang, an eastern coastal province where the grey bill market is massive. The agency generally provides qualified documents and collateral to collect Citic Bank’s bills on behalf of clients. But last year it allegedly cashed some of the bills and embezzled the proceeds and invested part of them in the country’s once-booming stock market.  

The incident at Citic Bank, China’s ninth largest lender by assets, is the second in one week after a similar fraud allegation of Agricultural Bank of China surfaced last Friday.

Two employees at ABC’s Beijing branch allegedly cashed bank acceptance bills worth Rmb3.92 billion ($596 million) and also invested some of the proceeds in the stock market. The embezzled cash was subsequently not returned due to the losses sustained as the market plunged since last summer.

Both cases highlight operational risks at Chinese lenders, where the bill financing business has developed quickly, jumping by 60% to Rmb4.58 trillion in value over the course of 2015, according to the People's Bank of China.

“Citic Bank has been conducting comprehensive checks across all branches. One director in charge of bill financing was dispatched to check the Hangzhou branch one month ago,” said one Beijing-based person at the bank, referring to the capital of Zhejiang province where the bill-financing business is very active.

Bank acceptance bills, much like bank drafts, are widely used as a form of payment in Chinese commercial transactions. The holder can sell the bill for cash on a secondary market or cash it at a bank – both at a discount to its face value.

In principle, banks should issue bills with a maturity of up to six months based on genuine commercial transactions and make them work much like post-dated checks.

Common practice

But industry insiders say most bills are issued in the form of paper in China because they are less likely to attract government scrutiny than electronic versions.

But the dependence on paper means speculative agents can often cash the same bill at multiple banks, as lenders do not verify the note carefully enough - in particular as they cash bills between themselves to inflate their balance sheets. 

In the light of lax internal controls, the banking regulator late last year issued new guidance requiring banks to review the risky business practice in an effort to prevent repeated use of the same bill and bill issuance for fraudulent transactions.

Chinese big-four bank ICBC and two other large lenders China Everbright Bank and Mingsheng Bank told FinanceAsia separately that they haven’t received any official notice to suspend the bill financing despite the government's tightening of its regulatory approach.

“You cannot shut down the whole business due to a few incidents, although each bank could more or less have similar problems. Just the amount involved wouldn’t be as big as ABC and Citic Bank,” said one [Beijing-based] person in the note department at Everbright Bank.

“The suspension will greatly hit the market liquidity. Otherwise there will be no business, no harm,” she said.

Shares in Citic Bank ended down 3% and 0.5% in Shanghai and Hong Kong, respectively, on Thursday. 

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