One of Talking Points

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One of Talking Points’ Hong Kong correspondents sends on links to two excellent articles (“China’s Banks under a Cloud” and “The Bank of China’s Black Hole”) on a current scandal involving the Bank of China, the financial institution which, as we mentioned last week, loaned (US) $100 million to Dai Xiaoming to purchase Asia Securities International in 1994.

For those readers who read the Dai post last Friday, one portion of the second Business Week article, though describing an unrelated deal, gives an indication why such transactions raise an element of suspicion:

In setting up their operation, the Kaiping gang allegedly used a scam common among Chinese companies in the go-go 1990s, when China-linked stocks boomed on the Hong Kong bourse. Many mainland Chinese set up so-called “window” companies to speculate in stocks and real estate in Hong Kong–China’s window on the rest of the world. In local parlance, window companies that indulged in such speculation were “stir-frying” investments. According to investigators, Fan and his confederates cooked up a storm.

Some of the window companies were legal, while many occupied a gray area. All had to contend with strict Chinese laws against moving money from the mainland. Often, funds were diverted from mainland companies and banks by employees who wanted to play the markets. Those who “borrowed” this way would pay their employers back if they made money. If not, the scamsters relied on creative accounting to cover their tracks.

In the Bank of China case, Hong Kong authorities allege that Fan started skimming money in the early 1990s, when he worked at the Kaiping branch. In 1999, he was promoted to a managerial job at the Guangzhou regional headquarters. From 1999 until he fled last October, Hong Kong authorities assert, he conspired with two managers at the Kaiping branch, Xu Guojun and Yu Zhendong, to steal almost $75 million. What happened to the $405 million that disappeared before Fan’s promotion isn’t yet clear.

Fan’s principal Hong Kong window company, authorities say, was Ever Joint Properties, founded in 1993. Fan is said to have recruited a relative, Hui Yat-sing, to set up Ever Joint. Hui was arrested in Hong Kong in October, along with his wife and two others. Contacted through a spokesperson, Hui refused to comment. The lawyers of the other arrested suspects couldn’t be reached.

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