China AgBank staff accused of $578m embezzlement Gabriel Wildau in Shanghai
Police and regulators are investigating two junior employees at China’s third-largest bank who allegedly embezzled Rmb3.8bn ($578m) to invest in the once-booming stock market, local media have reported.
Liu Shiyu, Agricultural Bank of China chairman, is said to be “furious” over a lapse in internal controls that allegedly allowed employees at its Beijing branch to illegally obtain cash through bankers acceptances, according to Caixin, a respected financial news website.
The employees reportedly intended to return the cash after completing stock trades, but the sharp decline in China’s stock market led to losses.
The case highlights operational risk at large Chinese banks, where acceptance bills — a type of IOU — are still issued and exchanged in paper format. At one point, paper bills that should have been held in AgBank’s strongbox were allegedly swapped for newspaper, according to the Caixin report on Friday.
Given the large amount of money involved, the banking regulator and the Ministry of Public Security have reported the case to China’s cabinet.
Bankers acceptances are widely used in China as a form of payment. A bank client can obtain an acceptance bill to present to a supplier as a promise of future payment. But if the holder of a draft needs money immediately, he can cash the bill at a bank at a discount to its face value, often using a repurchase agreement.
In principle, banks should issue acceptance bills linked to specific commercial transactions, ensuring that the client’s account will have money in it when the bill comes due. But bankers said that dubious use of drafts to obtain cash for stock market investments was widespread last year before the market soured in late June.
In the latest case, AgBank allegedly financed a bill from another bank and should have held it until the repo expired. But a bill-cashing agent from Chongqing was allowed to remove the bill from the Beijing branch strongbox and discount it at a third bank through another repo, creating a Rmb3.8bn liability for AgBank when the second repo expired. The money was “unable” to be repaid as a result of funds lost in the stock market, Caixin reported.
Fraud related to bankers acceptances is nothing new in China. The banking regulator issued new guidance last year after spot inspections at banks uncovered risky practices and lax controls.
AgBank declined to comment. The China Banking Regulatory Commission and the Ministry of Public Security did not respond to requests for comment.
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