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China’s regulator targets supply chain finance fraud

China’s banking regulator is applying stricter requirements to banks and insurers offering supply chain finance (SCF) solutions in an effort to prevent fraud, according to recent reports in China Daily.

Measures being introduced by the China Banking and Insurance Regulatory Commission (CBIRC) will require banks and insurance companies to validate trade transaction and documents to combat the risk of fraud.

China Daily cites reports from Beijing media group Caixin Media, which suggest that banks will be required to obtain primary, original documentation from the corporate borrower and its trading partner to stronger finance underwriting.

The CBIRC also wants banks to extend its risk assessment beyond the corporate buyer and supplier to include other organisations along their supply chains.

Recent cases

The reports come as the fallout continues from alleged fraud in a case involving e-commerce conglomerates Suning.com and JD.com.

According to Caixin Media, Chinese wealth and asset management firm Noah Holdings has warned that US$490 million worth of asset management products, backed by conglomerate Camsing Global’s accounts receivable from JD.com, are now at risk of default. A similar dispute involves accounts receivable from Suning.

An unnamed source close to Noah told reporters that the alarm was raised after Camsing made changes to its account and requested an increase in financing. Noah then notified the police of suspicious activity and some Camsing Global executives have been detained by the authorities.

JD.com claims to have no knowledge of the issue and is now accusing Camsing Global of providing false accounts receivable documents to obtain the financing. JD.com also suggests Noah is at fault for failing to mitigate risk and implement controls that would have verified documentation that supposedly shows Camsing’s accounts receivable from JD.com. Noah, however, claims that it had verified all documentation with JD.com.

Suning has similarly denied involvement after asset manager and financial services group Yunnan International Trust reported its suspicions to police over asset management products issued to Camsing backed by Suning accounts payable; Suning also accuses Camsing of falsifying its trade documents.

Regulators respond

Chinese regulators appear to have decided that the disputes expose a need for more stringent trade document verification among banks and other providers of  trade finance products.

“How to prevent operational risk, such as collusion between financial officers of a core company with other businesses in the upstream and downstream of a supply chain to commit loan fraud, is a major problem to be solved by banks providing supply chain finance solutions,” said the National Institution for Finance and Development’s (NIFD) deputy director Zeng Gang told China Daily.

“Banks should repeatedly verify whether or not a transaction is real by improving business process management and reducing manual operational risk to the greatest extent with the use of financial technologies.”

The regulator has also encouraged financiers and insurance firms to adopt technologies such as the Internet of Things (IoT) and blockchain to strengthen their document verification processes and create greater transparency within supply chains to combat fraud.

Zeng added that financial institutions must be proactive in their underwriting and risk mitigation efforts to promote the availability of SCF without opening the door to fraud. Technology, he said, is key to these efforts.

“As the risk of SCF relies heavily on the business conditions of core companies, banks should also strengthen forward-thinking research of a particular industry,” he said.

“Based on the results of studies, banks could set an upper limit on the line of credit and make decisions on when to develop SCF, when to contain the business, and when to withdraw from it.”


This item appears in the following sections:
Bank Relationship Management & KYC
Know Your Customer
Cash & Liquidity Management
Cash & Liquidity Management in Asia-Pacific
Region
Asia
Regulation & Tax
Risk Management
Financial Risk Management
Trade & FSC Management
Financial Supply Chain Platforms
Trade Finance

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