New China bills financing frauds spark

trade finance fear

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Two large frauds in Chinas booming bills financing market have raised fears over the security of
trade finance transactions in the country once again.
Citic Bank reported a Rmb969mn (US$147mn) risk incident at a branch in Lanzhou, where an
employee faked documents, which they then used as collateral for obtaining a bank acceptance. The
acceptance was then sold on numerous occasions, with the proceeds invested in the stock market.
This came after Agricultural Bank of China uncovered a similar case, in which bankers bills were
illegally removed from the banks safe and cashed out through repo transactions. Again, the
proceeds were invested in the stock market. This fraud was worth Rmb3.8bn (about US$578mn)
and the scam was uncovered after Chinas stock market crash saw the employees investments
wiped out.
The bills of exchange business in China has doubled in value over the past few years, and is now
worth more than Rmb5tn. It is used as a form of short-term corporate lending, in which debt is issued

to companies, usually for six months, in the form of bankers acceptance, which can be sold onto to
other banks prior to maturity, usually at a discount.
Experts say that the trade has since dipped, with the Industrial and Commercial Bank of China
(ICBC), the worlds biggest bank by assets, suspending the practice for certain commodity sectors.
Combined with numerous high-profile frauds, particularly the infamous case at Qingdao, these
events are increasing the risk perception of trade finance in China.
Trade and commodity-related fraud in China is of course nothing new. But it does add to a growing
perception that trade finance is an unsafe way of financing or transacting generally. In trade
transactions that perception is exaggerated, provided that the banks and trade participants
understand, document and structure their trade and supply chains appropriately, Jolyon EllwoodRussell, partner at law firm Simmons & Simmons, tells GTR.
The banks involved are said to be fuming at the lapses that allowed the fraud to take place. But
with one scandal seemingly following another, the conditions are clearly open to manipulation. At an
event in Beijing last year, GTR was in the audience as the head of trade service at Agricultural Bank
of China, Zhang Zhaojie, said: In the past, Chinese banks didnt care about fraud just the
paperwork.

Securely addressing the cause, rather than treating the symptoms, is the
recommended practice, Ross Wilkinson, Bolero
Furthermore, most of Chinas bill financing is done manually, using paper, which in itself leaves
banks more vulnerable to fraud.
The moving from paper to digital processes provides the opportunity to reduce operational risk
whilst also affording business efficiencies. Securely addressing the cause, rather than treating the
symptoms, is the recommended practice, Ross Wilkinson, Asia Pacific director at trade finance
software provider Bolero, tells GTR.
The Chinese government is taking steps to eradicate such practices, but also to clamp down on the
lucrative trade, just as it did with the collateral trade, which led to the Qingdao scandal. Chinese
authorities found that a metals trading company was using fake warehouse receipts in order to
secure multiple loans using single cargoes of copper and aluminium as collateral, stored at Qingdao
Port.
This case spawned a host of law suits and a High Court battle between Citi and Mercuria which
threatened to rewrite the rules of the repos market. The Citic case could have similarly widereaching impact.
This [the Citic case] is largely being viewed by the legal community as a case relevant to Chinese
banks internal regulatory failures when issuing bills of exchange and engaging in bill financing. The
China Banking Regulatory Commission (CBRC) has recently required Chinese banks to undertake a
wholesale review of their checks and procedures when issuing bills of exchange or undertaking bill

financing activities although calls of the practice to be suspended completely have been dismissed,
Linos Choo, partner at law firm DLA Piper, said in an email exchange.
The regulator is demanding that banks strengthen their internal controls in this area. Some practical
measures I understand include banning employers from taking any banks stamp and other bank
documents certifying their status within the bank abroad in order to prevent conducting of highly
suspicious bill finance transactions abroad while travelling and outwit the scrutiny of the accepting
bank, he added.
Given the swiftness with which the Citic announcement followed that of Agricultural Bank, the odds
on further frauds being announced are short. For these cases, government intervention will have
come too late.