China’s Bank Watchdog Goes After Supply Chain Finance Fraud

China’s banking regulator is introducing stricter requirements on banks and insurance institutions that provide supply chain financial solutions in an effort to curb fraud, according to China Daily reports last week.

The China Banking and Insurance Regulatory Commission (CBIRC) is introducing new measures that require banks and insurance companies to validate trade transaction and documents to combat the risk of fraud. According to the publication, citing reports from Beijing media group Caixin Media, banks will be required to obtain primary, original documentation from the corporate borrower and its trading partner to stronger finance underwriting.

The CBIRC is also urging banks to assess the risks not only of the corporate buyer and supplier, but of other organizations further up and down their supply chains.

JD.com, Suning.com Spark Concerns

Reports pointed to the ongoing fallout of allegations of fraud in a case involving eCommerce conglomerates Suning.com and JD.com.

Previous reports by Caixin Media revealed that Chinese wealth manager Noah Holdings has warned that $490 million worth of asset management products, backed by Camsing Global’s accounts receivable from JD.com, are now at risk of default. A similar dispute has also risen stemming from accounts receivable from Suning as well.

An unnamed source close to Noah told reporters that red flags were raised after Camsing made changes to its account and requested an increase in financing. Noah subsequently reported that suspicious activity to police, reports said, noting that some Camsing Global executives have been detained by authorities.

JD.com claims that it has no knowledge of the issue and is now accusing Camsing Global of providing false accounts receivable documents to obtain the financing. Further, JD.com is pointing to Noah for failing to mitigate risk and implement controls that would have verified the 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 Tunnan Trust reported suspicions to police regarding asset management products issued to Camsing backed by Suning accounts payable; Suning also accuses Camsing of falsifying its trade documents.

Regulators Step In

The most recent reports reveal regulators’ reaction to these disputes, requiring more stringent trade document verification among banks and providers of such trade financing 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 Deputy Director Zeng Gang in an interview with 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 extend with the use of financial technologies.”

The regulator has also encouraged financiers and insurance firms to adopt technologies like Internet of Things and blockchain to promote their document verification processes and promote transparency within supply chains to combat financing fraud.

Zeng also told the publication that financial institutions must be proactive in their underwriting and risk mitigation efforts to promote availability of supply chain finance without opening the door to fraud. Technology, he said, is key to that endeavor

“As the risk of supply-chain finance relies heavily on the business conditions of core companies, banks should also strengthen forward-thinking research of a particular industry,” he stated. “Based on the results of studies, banks could set an upper limit on the line of credit and make decisions on when to develop supply chain finance, when to contain the business, and when to withdraw from it.”