Apr 19, 2017 07:48 PM

Minsheng Bank Official Probed for Alleged Fraud

(Beijing) — Wealthy individuals who invested their savings with China Minsheng Bank have found themselves embroiled in an alleged 3 billion yuan ($436 million) fraud — the latest scandal to expose the lack of internal risk controls at financial institutions that could threaten confidence in the banking system.

Minsheng Bank confirmed in a stock-exchange filing on Wednesday that the head of its Hangtianqiao sub-branch in Beijing, Zhang Ying, has been placed under investigation by police for suspected violation of the law. It did not specify the allegations against Zhang, saying only that the bank is cooperating with police to find out what happened, secure clients’ money and take legal responsibility where appropriate.

Sources close to the bank and the investigators told Caixin that Zhang was their main person of interest in the sale of a wealth management product to high-net-worth customers that raised about 3 billion yuan. The money was used by the bank to cover up a fraud involving bills of exchange, which are financial instruments similar to checks and promissory notes.

As of Wednesday, the police were still trying to locate Xiao Ye, vice president of the sub-branch, another suspect alleged to be involved in the scheme, according to the sources.

Minsheng Bank, co-founded by billionaire and former Vice Chairman Liu Yonghao in 1996, is the country’s biggest privately owned joint-stock bank and is listed in Hong Kong and Shanghai. Its original focus was lending to small and midsize enterprises and non-state-owned enterprises.

The fraud came to light last week after Minsheng Bank’s headquarters in Beijing received a tip that the branch had sold an unauthorized wealth management product to customers. It launched an internal investigation and found that the proceeds from the sale were loaned to a company to help it repay debt owed on the issue of the bills of exchange, the sources said.

The bill was initially issued as a commercial acceptance bill backed by the creditworthiness of the issuing company. It appeared that the bill had been guaranteed by the Hangtianqiao sub-branch of Minsheng Bank as a banker’s acceptance bill because it was stamped with the branch’s corporate seal. The seal basically put the bank in the position of promising to pay back the loan for the company.

The bill was then discounted several times at other banks, but when it matured, the seal was discovered to have been faked and the company that had originally issued the bill couldn’t pay the money due, according to the sources. Investigators are now trying to find out who faked the seal.

Wealthy Clients

The sources told Caixin that to help the company pay its debt, the branch granted it a loan of 3 billion yuan from the proceeds of a wealth management product sold to its private-banking clients — individuals with at least 10 million yuan of deposits and investments with Minsheng Bank. Investors were not told what the money would be used for and didn’t know that the product hadn’t been registered with the bank’s headquarters, the sources said.

Another source close to the bank told Caixin that more than 100 of the branch’s private banking clients had bought the product.

The scandal is the latest involving high-yielding wealth management products and underscores the government’s renewed push to regulate the booming asset management industry and banks’ sales of these products.

Investors have flocked to wealth management products over the last decade as they searched for higher returns than those offered on bank savings accounts. But the risks have also been growing amid a lack of regulation, increasing instances of illegal activity, maturity mismatches between the products and the underlying investments, and the potential losses to the financial institutions issuing the products stemming from the implicit guarantees that they would bail out investors if the underlying investments soured.

The first scandal to hit the headlines in China happened in 2012 and involved a Shanghai branch of Huaxia Bank, a midsize commercial bank. One of its wealth management products that had raised more than 100 million yuan from depositors missed its repayment deadline. The bank initially refused to compensate customers because it said the product had been sold by employees without authorization, although it eventually paid them back from bank funds.

But despite regulators’ repeated pledges to stamp out such activity, the problem has not gone away, and reports occasionally surface of misconduct by bank employees who lure depositors into thinking they are buying the bank’s own wealth management products. But the plans are in reality sold without official bank approval and they are not registered with the bank’s headquarters.

In a renewed effort to crack down on fraud, the China Banking Regulatory Commission (CBRC) has told banks to make sure all employees involved in sales have video and audio recordings of their communication with clients when they promote wealth management products and other services to them. The requirements were part of a policy document issued to banks in late March and seen by Caixin.

‘Severe Problems’

The document, which orders banks to conduct comprehensive internal reviews of their operations, says particular attention should be paid to whether sales personnel are following appropriate procedures to inform investors of a product’s risk and provide them with other relevant information. The results of the reviews should be submitted to the regulator by the end of May. Banks will be graded based on their reports and spot checks will be carried out by officials from the commission, according to the document.

The fraud at Minsheng Bank reflects “severe problems” with the bank’s internal control system, Huang Tao, a law professor at Shanghai Jiao Tong University, told Caixin. But such problems are by no means limited to Minsheng, he said.

Rules are already in place to prevent fraud, but in practice they are often ignored, he said. “Internal controls are costly, and not only do they require additional input of human and other resources, they also slow down operations.

“So in practice, many financial institutions routinely neglect proper procedures or merely pay lip service to them,” he said. “This is especially the case when a bank’s top executive has too much power and can decide things on his own.”

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