A Case Study on Illegal Trade Financing

Trade financing has at times been used to violate foreign exchange control regulations. Such irregularities have led to losses of foreign exchange and had an impact on the reliability of official financial and economic data. The following article looks at one such case of irregularities related to trade credit. It examines the role of one bank -- to be referred to only as Bank A -- and how it eschewed its obligations as a gatekeeper and assisted domestic companies in improper activities.

In 2014，the Weifang central sub-branch of the State Administration of Foreign Exchange，on its examination of banking data，discovered a suspicious surge in trade financing in this area of Shandong province. Through an analysis of the income and expenditures of a number of enterprises，it discovered that one bank had ignored the three rules of business development - that banks know their customer，understand the customer's business and conduct due diligence. The same bank，in an effort to meet its business targets，assisted companies in falsifying required documents. In addition to reviewing the bank's activities，SAFE's Weifang branch extended its inspection to the suspected enterprises themselves. Ultimately，fines were imposed.

According to the requirements of the State Administration of Foreign Exchange on the special measures to strengthen internal controls and external supervision and restrain illegal activities，the SAFE Weifang branch conducted an off-site analysis of Bank A's foreign exchange business data. It discovered that the bank's trade financing business increased dramatically in 2014. Later it selected several enterprises and made a comparison of their export earnings，export declarations，export settlements and trade financing data. Inspections were conducted for those with a significant upturn in trade financing business.

Through this inspection，it determined that Bank A failed to make a reasonable effort in verifying the authenticity of trade documents in four questionable transactions that had a value of US$38.65 million. The SAFE Weifang branch inspected four enterprises suspected of making false customs declarations and submitting other falsified documents. 

In 2014，Bank A's Weifang branch had export bill purchases linked to four companies and amounting to US$38.65 million. In 12 instances，export declarations were altered. For example，on June 13，2014，there was one export bill purchase on behalf of Enterprise A amounting to US$20 million. There were two export declarations selected for audit. One declaration showed a stated amount of US$12.8 million worth of goods，but the actual transaction amount turned out to be US$11,000. Another declaration was for US$12.2 million，but the actual total was US$36,900.

Underlying Transaction

The above activities violated the provisions of Article 12 of the Regulations of the People's Republic of China on Foreign Exchange Control which state that foreign exchange earnings and expenditures should have a legitimate underlying transaction. Financial institutions conducting foreign exchange settlements and sales need to verify the authenticity of the underlying transaction and make an effort to determine that foreign exchange income and expenditures are reasonable. In this instance，the companies involved violated the provisions of Article 2 of the Notice on Issues Concerning the Improvement of the Foreign Exchange Control of Banking Trade Financing Business from the State Administration of Foreign Exchange (SAFE [2013]，No 44) which states that banks need to understand