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Two large frauds in China’s 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 bank’s 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 China’s 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 world’s 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 Ellwood-Russell, 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 didn’t 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 China’s 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 wide-reaching 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 bank’s 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.