BOC pushes banks 'plagued with corruption'


The Bank of China is preparing to sell up to $5 billion in stock in its Hong Kong subsidiary, a sale expected this year

Alex Frew McMillan

HONG KONG, China (CNN) -- In an attempt to show its past problems are behind it, the Bank of China is scouring its operations and airing the dirt it finds.

In the latest revelation, Chairman Liu Mingkang claims that five bank executives embezzled $483 million from the branch in Kaiping, in southern Guangdong.

He stated that the money was laundered through Las Vegas and Macau, both big gambling destinations.

The alleged embezzlers have fled. But Hong Kong police say they have arrested three lawyers in connection with the case.

The Kaiping case is yet another black mark on the books of the Bank of China. This year, it has revealed a series of substantial irregularities, as it prepares to sell stock in its Hong Kong subsidiary for the first time.

Bank leading reform on large problem

Analysts say the bank is leading the way for reform in China's banking sector. By some estimates, problem loans in China are so great that the economy would collapse if they were all recognized at once.

"The Chinese banking sector is plagued with systematic corruption, fraud and lending problems," Fred Hu, an executive director with Goldman Sachs in Hong Kong, told CNN on Monday.

China is overhauling its state-run, and often uncompetitive, companies. So bankers could justify most loans by claiming they were supporting reforms, bank analysts say, even if they were actually making loans to family members or business partners.

Low salaries for bank executives and a patronage system propagated by low-level Communist Party cadres have added to the graft, experts say.

But the Bank of China appears to be pushing change. It hopes to sell as much as $5 billion in stock in its Hong Kong subsidiary later this year. That would involve preparing financial statements along international accounting guidelines.

"The Bank of China has been doing a lot of work over the last year or so to change the system, to change the model of business, to increase transparency and preparing for capital markets listing," Hu added.

"Our duty"

Liu told reporters on Friday that it is "our duty" to clean up such cases as the Bank of China. Analysts thought the bank, China's main foreign-currency financial institution, was already China's best-run.

Authorities confirmed large-scale irregularities at the Bank of China in January. The bank landed a $10 million fine from U.S. regulators and a matching penalty from China.

Rumors of the scandal had circulated for some time. But analysts say China's hand was forced by the U.S. Office of the Comptroller of the Currency going public with its fine.

China detained Liu's predecessor, Wang Xuebing, and stripped him of his prestigious positions in Chinese banking in connection with that case. The penalty stemmed from questionable and preferential lending practices, as well as allegations of fraud.

Liu said the bank has recovered $53 million of the questionable loans in New York. He said the case would not affect the bank's bottom line.

He called a $70 million countersuit prepared by a Chinese-American couple who received some of the loans "ridiculous." According to China Securities Bulletin, he said the Bank of China had lent the couple $88 million in the 1990s to trade metal.

Liu also revealed a third problem area for the bank. More than 50 percent of loans at a branch in Chongqing are nonperforming, he said, because it had been so poorly run. A deputy general manager hanged himself when the bank started digging into the branch's performance, Liu said.