Update: Cash-for-Ratings Probe Nets Former Executives at State-Run Credit Ratings Agency

Two former executives at a state-owned credit ratings agency are being probed on suspicion of taking bribes to inflate the ratings of certain companies, as the central bank moves to strengthen its oversight of the industry.

Jin Yongshou, a former general manager of Golden Credit Rating International Co. Ltd., and Cui Runhai, a former general manager at the company’s Jiangsu branch, were found to have illegally assisted the unidentified companies for “massive (financial) gain,” according to a Monday statement (link in Chinese) from China’s top anti-corruption agency.

The probe into the two former executives underscores the government’s push to tighten scrutiny of the credit ratings industry in the wake of corruption scandals involving a series of bond defaults by highly rated companies and state-owned agency Dagong Global Credit Rating Co. Ltd., where both Jin and Cui had also previously served as executives. Cui was detained by the watchdog in early January and a few days later Jin turned himself in to investigators, according to the statement.

The statement did not disclose the names of the companies that had paid the bribes or how much the two had accepted in total, but said Cui confessed that he had taken 2 million yuan ($305,000) from a “client” to help a company receive a higher rating.

Jin wrote in his confession that he was not directly involved in credit ratings reviews, but he had “communicated in private” with those who did to influence the results, according to the statement. Jin said that about 80% of the bribes he took were from his “good friends,” and that he “did not dare to keep the money at home or spend it (himself)” and instead lent most of it to his friends.

On Monday, the Beijing branch of the China Securities Regulatory Commission ordered (link in Chinese) Golden Credit Rating to undergo a three-month rectification as it found the agency had broken the rules. During that time, Golden Credit Rating will not be allowed to engage in new ratings business. The regulator said that the agency failed to give adequate reasoning for some of its ratings upgrades and also noted the agency’s information system did not meet internal control and compliance requirements.

The anti-graft watchdog said that the Golden Credit Rating case, indicative of corrupt practices specific to the industry, marks another step in China’s expanding anti-corruption efforts in the financial industry, from the traditional credit sector to the intermediary information services sector. It said that in such cases determining ratings came down to how much money the companies being rated were willing to pay and required a number of people within the agency to collude to carry out their illicit scheme.

Pan Gongsheng, a deputy governor of the People’s Bank of China, said in a Friday meeting (link in Chinese) that problems including inflated credit ratings remained, curtailing the development of the country’s bond market. He said that the central bank will work together with relevant authorities to tighten oversight of the industry.

China currently has the world’s second-largest corporate bond market and credit ratings market, according to the anti-graft watchdog’s statement.

The country’s domestic ratings services have long been plagued by unreliability. But as the government opens up the market to foreign agencies, pressure has been increasing for domestic players. In January 2019, global credit ratings agency S&P Global Ratings Inc. won approval to be the first foreign firm to independently conduct a credit ratings business on the Chinese mainland through a wholly owned subsidiary.

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Regulators Unveil New Rules to Clean Up Credit Ratings

In November, China unveiled new regulations to improve its scrutiny of the sector. The measures stipulated the responsibilities of credit ratings firms, explicitly banned certain activities — such as soliciting bribes or providing consulting services to bond issuers — and detailed punishments and fines that could amount to 50% of income received for a rating that is found to have violated regulations.

Contact reporter Timmy Shen (hongmingshen@caixin.com)

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