Bank of China has been fined US$20 million by US and Chinese authorities after investigators found evidence at its New York branch of misconduct that included the facilitation of a fraudulent letter of credit (L/C) scheme.

Misconduct by the former New York branch management resulted in significant losses according to the to the US Office of the Comptroller of the Currency (OCC) which also said special treatment was shown to customers who had personal relationships with the management.

Preventative measures

The bank's New York branch will pay a US$10 million penalty to the and the parent bank in Beijing, will pay an equivalent amount in local currency to the People's Bank of China, for a total of US$20 million.

The People's Bank of China is the home-country regulator of Bank of China. The OCC - which supervises Bank of China's US-based branches two in New York and one in Los Angeles - noted that the bank's current management cooperated with the investigations and have begun to implement measures to prevent future misconduct.

Investigators' actions

Actions taken by the new management of the bank include removing officers suspected of misconduct, uncovering and reporting acts of misconduct to the two regulatory agencies, and requiring the US branches to implement several action plans over the past 18 months to correct misconduct of prior management.

The OCC supervises Bank of China's three US-based federal branches - two in New York and one in Los Angeles. The OCC's monetary penalties were levied against one of the New York branches, where the misconduct was uncovered, but the remedial measures cover all three branches.

Personal relationships

Misconduct at the New York Branch, included showing preferential treatment to certain customers of the New York branch who had personal relationships with some members of the New York branch's prior management.

Examples of misconduct uncovered by the investigators included a US$1 million credit line extended to a metals trading firm operated out of its owner's apartment. The credit line later grew to $18 million but according to the OCC, it eventually had to be written off. The same entity was also extended a $50 million loan at a preferential interest, which was banked at another branch where the money attracted a better rate of interest.

Concerns

The OCC had a number of other concerns about the Bank of China's US branches under the former bank management, including the facilitation of a fraudulent L/C scheme, the facilitation of a loan fraud scheme, large exposures to a single borrower, the unauthorised release of collateral and the concealment of that action, and other suspicious activity and potential fraud.

In its consent order, the OCC required Bank of China's federal branches to: develop procedures to guard against fraud; strengthen their Risk Management Division; provide for adequate customer due diligence and use an independent third party to verify compliance.

Prohibited accounts

Specifically in respect of L/C and other transactions, the bank has been ordered to cease doing business with 28 named individuals and affiliated entities as well as eight specified entities and their affiliates.

The Consent Order issued in January by the US treasury department and the OCC demands that:

"Effective immediately, the [US] Branches [of Bank of China] shall close, and, if already closed, shall not reopen, any and all deposit accounts, shall not receive, complete or initiate wire transactions, shall not extend any new credit, shall not renew, extend, or modify any existing credit, shall not issue or process any new letter of credit or any other Trade Settlement Transaction and shall not, in any manner, provide any extension of credit whatsoever, to or for, any of the [named individuals and entities]."

The Consent Order and additional information on this matter are published on the OCC web site at www.occ.treas.gov

Dismissal

The head of Bank of China's US operations from 1988-93 and the its president between 1993-2000, Wang Xuebing, was sacked this month from his current post at the China Construction Bank in Beijing. No reasons have been given for his dismissal.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.