The Problem Presented by Bank Fraud

The Problem Presented by Bank Fraud


Presented to:
Conference on Bank Fraud of The Bank of Communications, Shanghai, China.

Wednesday, 4^th July, 2007.

Presented By:
Martin S. Kenney

Martin Kenney & Co., Solicitors

Preferred Area of Practice: International Fraud

Third Floor, Flemming House

P.O. Box 4740, Road Town

Tortola

British Virgin Islands

British West Indies

Telephone: [phone]

Fax: [phone]

Email: <[e-mail]>

Website: <www.martinkenney.com>

© Martin Kenney & Co., Solicitors, 2007.

The Problem Presented by Bank Fraud.

1.0 Introduction.

1.1 Fraud in general has become a widespread problem for many foreign firms doing business in China. Attracted by staggering statistics and undeniable growth potential, many foreign firms opt to cash-in on the incredible business potential. The past year has seen significant investment by foreign banks in China. For example, the Royal Bank of Scotland Group spent US$1.6 billion for 8.5 % of Bank of China, seeking to expand its credit card business.¹ “The opportunities are very large,” Fred Goodwin, head of the group, told reporters in February 2007. According to many commentators, so are the risks, if China does not clean up its banks. However, despite the frequent warnings to those investing in China,² it is clear that many foreign investors have chosen to ignore the pitfalls and concentrate on the earning potential.

 

1.2 After the Communist Party came to power in China in 1949, it turned the country’s commercial banks into credit agencies for the government and state-owned companies. Until the free-market policy changes of the 1990s, local party committees approved the appointment of branch managers, loans were frequently not expected to be repaid, regulatory oversight was lax and the frequency of fraud grew. Chinese banks and cooperatives reportedly had a combined US$476 billion of non-performing loans (“NPLs”), or loans that may go bad – an amount representing 21% of the nation’s economy in 2006.³

1.3 China’s banking system appears to be operating in a deepening zone of risk. Given the volume of bad loans and insufficient capital base, collapse of the state banks could cause a serious economic challenge for the nation. China pledged to open up the banking sector in 2006 as part of its commitment to the World Trade Organization (“WTO”).⁴ However, that is not to say that all is now well. NPL statistics for state-owned banks appear to be on a downward trend.⁵ However, these statistics do not take account of one-off disposals of bad loans or a rise in overall lending. These factors have a significant bearing on the ratios that appear to signal a change for the better.
1.4 The problem of risk management in the banking sector in China was given recognition by the deputy chairman of the China Banking Regulatory Commission (“CBRC”), Shi Jiliang, at an OECD Forum on Asian Insolvency Reform in 2004, when he stated:
“Even though Chinese commercial banks have notably improved their risk management capacity over recent years, they are still lagging far behind the internationally active banks in this regard. To further strengthen the risk management of China’s banking sector, it is necessary to, along with the deepening of banking reforms, have in place supportive regulations and sound institutional systems for risk management.”
1.5 A number of high profile scandals have rocked China’s banking sector in the past year.⁶ These scandals reflect the achievements of banking reforms, as banking supervision is enhanced and banks become more transparent. The CBRC has urged banks to rectify their inadequate rules and ineffective inspection procedures, which otherwise may lead to huge losses. Meanwhile, the CBRC has also demanded better computer systems for automatically detecting wrongdoing and risks.⁷
2.0 The Main Problem.
2.1 The biggest single problem with the banking system that most critics point to is NPLs, that is loans that are not being repaid and have little prospect of being repaid. The Chinese banking industry has had a history of being politically-directed rather than profit-driven. Local bureaucrats have been able to use their influence to channel loans towards state-owned or politically connected businesses.⁸ Some of these loans are state-directed to prop up thousands of economically challenged state-owned companies.⁹ Some of these loans are the result of nepotism. Some would appear to bear the trappings or badges of fraud.¹⁰
2.2 Last year, the accounting firm of Ernst & Young released a report concluding that the “nonperforming” loans of China’s banks totaled US$911 billion (40% of China’s GDP) – a figure that far exceeds the Chinese Government’s own estimate of US$164 billion. Beijing’s response was direct: “The report not only seriously distorts the actual asset quality of the Chinese banking sector,” but “its conclusions are absurd and incomprehensible.” Ernst & Young withdrew the report the next day, citing fundamental errors in the analysis.¹¹

2.3 Ernst & Young’s position as auditor for the state-owned Industrial and Commercial Bank of China, the country’s largest bank, provides insight into China’s banking problems. The timing of the impugned Ernst & Young report was unfortunate, as several Chinese banks were at that time gearing up for initial public offerings on the Hong Kong exchange, offerings that were expected to and did bring in tens of billions of dollars in new capital.
2.4 China’s problem with NPLs is far from a new phenomenon. In 1999, according to “official” estimates, NPLs accounted for 25% of the total amount of money loaned – a huge amount by international banking standards.¹²
2.5 Performing a risk/return analysis in the Chinese business environment is not often easy, given the nature of the market. Risks are often very difficult to ascertain or measure; indeed it appears that the only thing capable of ready ascertainment is the possibility for earning a return. 
2.6 Many western economies adhere to business operations and corporate governance built upon stringent audit and accounting requirements and certain legal disclosures. However, Chinese business has, for centuries, been built upon connections (Guanxi) and verbal confirmations. It is due to these differences and lack of corporate transparency that business crime is one inevitable consequence of doing business in China.
2.7 A review of news accounts reveals reports of a startling array and volume of fraud in China.¹³ Customs valuation fraud, chip fraud and evolution fraud are just a few that spring to mind. This paper, however, will concentrate on bank fraud, a problem that affects all countries, and that arguably is on the increase as a direct result of the substantial growth in transnational business, assisted in no small part by the proliferation of the use of the Internet in banking transactions.
3.0 Bank Fraud.
3.1 Perhaps the best known or rather most publicized example of bank fraud in China was that involving China Construction Bank. Preceding China Construction Bank’s successful US$10 billion initial public offering (“IPO”) in 2004, four bank employees were reportedly given death sentences for defrauding the bank of US$15 million,¹⁴ a relatively small amount of money in the scheme of bank fraud globally. However, it was the punishment meted out that made the world sit up and take notice.
3.2 The Bank of China has not avoided the public spotlight, or indeed the fraudsters’ attention, in the wake of the Bank of China’s decision to launch an IPO – two officials at the bank were indicted in the United States for embezzling US$485 million.¹⁵
3.2 The Bank of China has also been forced to defend its ability to control internal risks as it recently acknowledged car salesmen used fake documents to amass loans about five years ago. Bank spokesman Wang Zhaowen has been reported as saying that salesmen operating in the northeastern city of Shenyang had forged insurance and collateral-related documents to secure funding from their local Bank of China branch in 2002.¹⁶
3.3 In one instance, one company defrauded the Bank of China of 160 million yuan (US$21 million) in loans. However, Mr. Zhaowen has been reported as saying that the case “…would have no impact on the overall financial situation of [the] Bank of China.”¹⁷
3.4 Last year, the Chinese Government disclosed US$1.1 billion worth of fraud at one of the country’s largest state-owned banks, the Agricultural Bank of China, underscoring the risks confronting foreign investors as they seek big stakes in China’s precarious banking system.¹⁸
3.5 China’s National Audit Office announced that an examination of records at the Agricultural Bank of China, one of four state-owned giants, uncovered 51 cases of criminal wrongdoing involving 157 people in 2004. The state audit also found evidence of US$1.8 billion in improperly handled deposits and US$3.5 billion in illegal loans.¹⁹
3.6 In early 2007, a Hong Kong-based businessman, Hui Yat-sing, and his wife, Wong Suet-mui, were found guilty of money laundering and sentenced to 6½ years imprisonment. The money laundering scheme was conducted between September 1995 and October 2001 and laundered approximately HK$6.4 billion using the couple’s two trading companies. The funds had been embezzled from China’s largest state-owned bank from a decade-long fraud run by three former Bank of China branch managers. The convicted money launderer was a cousin of the one of the former branch managers indicted for the bank fraud, Xu Chaofan. The Bank of China has not yet confirmed a precise figure on its losses from the fraud, but the court heard that they were believed to be several billion Hong Kong dollars. The convicted couple received at least HK$27 million in salaries and bonuses for managing the two firms – Ever Joint Properties and its trading arm, Yau Hip Trading. Of the three former Bank of China branch managers, Xu Chaofan and Xu Guojun were indicted in the United States of America (“US” or “USA”) on charges of stealing more than US$485 million and laundering the money through Las Vegas casinos in 2005. The third manager, Yu Zhendong, was extradited to China from the US to serve a 12-year prison sentence after pleading guilty to charges related to the bank fraud.²⁰
4.0 The Language of Bank Fraud.
4.1 ‘Bank fraud’ or ‘banking fraud’ are global terms used to describe a plethora of mechanisms for misappropriating wealth through national and international banking systems. It would not be possible to explore each and every aspect thereof within the confines of this paper; indeed it is well possible that by the time I have finished delivering this paper another new bank fraud mechanism will have been created or devised. I propose to deal in summary fashion with a series of the more well known examples of bank or banking related frauds.
4.2 In general terms, bank fraud encompasses planning to obtain property or money from any federally insured financial institution. It is a criminal offence in most countries; while in a few places it is punishable by death. In the US, bank fraud is made an offence and defined at 18 USC § 1344. That section states as follows:
“Bank Fraud. Whoever knowingly executes, or attempts to execute, a scheme or artifice — (1) to defraud a financial institution; or (2) to obtain any of the monies, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises; shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.”

5.0 Bank and Banking Related Fraud – The Methods of Taking.

5.1 It is an often overlooked fact that the term ‘bank fraud’ is also used to denote fraud carried out by a bank itself. While bank fraud is not typically associated with reputable lenders, some larger banks have been accused of bank fraud. For example, Washington Mutual and Bank of America (among others) have been accused of fraudulent activities.²¹ Many bank frauds are committed by employees – rogue traders Nick Leeson (US$1.2 billion lost in 1995 which crushed Barings Bank plc); and John Rusnak (sentenced in 2003 after a US$691 million loss by a US subsidiary of Allied Irish Bank), are two well known examples. But occasionally major frauds take place as a part of bank practices. Bank fraud may be committed through bank policies using hidden fees in mortgages and other lending, for example. The following examples however focus on situations where the bank or merchant is defrauded.

6.0 Cheque Fraud.
6.1 Cheque fraud represents a global and serious problem. In the US alone, it reportedly accounts for yearly losses of at least US$815 million, more than twelve times the estimated US$65 million taken in bank robberies annually.²² Cheque fraud encompasses not only cheque forgery but also cheque kiting.
6.2 Cheque kiting is when in-transit or non-existent cash is recorded in more than one bank account. The crime usually occurs when a bank pays on an uncollected cheque.  For example, a cheque is deposited into an account; the bank fails to place a hold on the value represented by the cheque; and before the cash is collected by the bank, a cheque is written against the same account and deposited into a second account, or cashed. The increased use of wire transfers allows this type of scheme to be perpetrated very quickly. And then there are circular cheque kites. These schemes are particularly harmful.
7.0 Stolen cheques.
7.1 Some fraudsters obtain access to facilities handling large amounts of cheques, such as a mailroom or post office or the offices of a tax authority or a corporate payroll. A few cheques go missing; accounts are then opened under assumed names and the cheques (often tampered with or altered in some way) are then deposited so that the money can subsequently be withdrawn by thieves. Stolen blank cheque books are also of value to forgers who then sign as if they were the depositor.
8.0 Credit Card Theft and Fraud.
8.1 Credit card fraud is a fraud where a merchant (business, service provider, seller, etc.) provides goods or services in the mistaken belief that a credit card account will provide payment for such goods or services. This can occur via simple theft of a credit card, credit card cloning or indeed simply use of credit card details that may have been gleaned from a discarded receipt or bill.
8.2 Typically, the fraudster causes a credit card of another person to be charged for a purchase. Ultimately the merchant either receives no payment out or the payment received is reclaimed by the card’s issuing bank.
8.3 Today, the majority of credit card fraud is conducted online.

9.0 Prime Bank Fraud.

9.1 Prime bank fraud refers to the offering of investment programmes by fraudsters to potential investors, lured by the promise of high returns. Such programmes often claim investors’ funds will be used to purchase and trade “prime bank” financial instruments on clandestine overseas markets in order to generate huge returns. In the majority of cases, neither the instruments nor the markets on which they allegedly trade exist. These schemes are clothed with an air of legitimacy via the use of professional looking marketing material and sometimes endorsements from well known figures who may or may not have invested and who are not yet aware that all is not well. In some case, the initial investors will receive a seemingly unbelievable return; they in turn encourage other investors to participate on the strength of their apparent earnings.

9.2 Individuals and entities are targeted, often through high profile media campaigns, including advertising in national newspapers such as USA Today and the Wall Street Journal. Ultimately, the investors not only receive no return on their investment, they receive no return of their investment.
10.0 Rogue traders.
10.1 A rogue trader is a highly placed insider nominally authorised to invest sizeable funds on behalf of the bank. This trader secretly makes progressively more aggressive and risky investments using the bank’s money as, when one investment goes bad, the rogue trader engages in further market speculation in the hope of a quick profit which would hide or cover the loss.
10.2 Unfortunately, when one investment loss is piled onto another, the costs to the bank can reach into the hundreds of millions of dollars; there have even been cases in which a bank goes out of business due to market investment losses.
11.0 Fraudulent Loans.
11.1 One way to remove money from a bank is to take out a loan without having any genuine intention of repayment – a practice bankers are more than willing to encourage in the current economic climate. A fraudulent loan, however, can take place where the borrower is a business entity controlled by a dishonest bank officer or an accomplice. The “borrower” then declares bankruptcy or vanishes along with the money. The borrower may even be a non-existent entity and the loan merely an artifice to conceal a theft of a large sum of money from the bank. Linked financial transactions or false appraisals of collateral pledged to all banks are frequently used.
12.0 Mortgage Fraud
12.1 Equity skimming; property flipping; straw buyers; inflated appraisal – these are some of the fraud schemes criminals are using to take advantage of a US$2.37 trillion mortgage market in the US.²³ It appears that mortgage fraud is also a significant problem in China. Following the disclosure of the fraud at Agricultural Bank, the State auditors said that among the biggest areas of fraud in the cases it discovered were car loans and home mortgages.
12.2 There are, in effect, two kinds of mortgage fraud: fraud for property and fraud for profit. In general, fraud for property is when a home buyer lies about income, debt, or other information in order to buy a home. This type of fraud accounts for about 20% of mortgage fraud cases.²⁴
12.3 Fraud for profit crimes involve industry insiders, and generally include multiple loan transactions with several financial institutions. There are numerous kinds of for-profit mortgage fraud:

• 
  Property flipping: The property is bought, falsely appraised at a higher value and quickly sold, sometimes several times in rapid succession. Eventually, the mortgage goes into default. The profits, of course, disappear with the criminal.
  

• 
  Nominee loans/straw buyers: The identity of the borrower is concealed by using the name and credit history of a willing accomplice.
  

• 
  Fake/stolen identity: Stolen identities—along with credit histories—are used on a loan application.
  

• 
  Inflated appraisals: An appraiser agrees to inflate the value of the house.
  

• 
  Equity skimming: One of the more complicated schemes, an investor uses a straw buyer to get a mortgage. Prior to closing, the straw buyer signs the property over to the investor, who in turn rents the property out without making any mortgage payments.
  

13.0 Wire fraud.
13.1 Wire transfer networks, such as the international SWIFT inter-bank fund transfer system, are tempting as targets because a transfer, once made, is difficult or impossible to reverse. As these networks are used by banks to settle accounts with each other, rapid or overnight wire transfers of large amounts of money are commonplace. While banks have put checks and balances in place, there is the risk that insiders may attempt to use fraudulent or forged documents which claim to request a bank depositor’s money be wired to another bank, often an offshore account in some distant foreign country.
14.0 Uninsured deposits.
14.1 There are a number of cases each year where the bank itself turns out to be uninsured or not licensed to operate at all. The objective is usually to solicit for deposits to this uninsured “bank,” although some may also sell stock representing ownership of the “bank.” Sometimes the names appear very official or very similar to those of legitimate banks. For example, the “Chase Trust Bank” of Washington DC appeared in 2002 with no license and no affiliation to its seemingly apparent namesake.²⁵ The real Chase Manhattan Bank is based in New York.
14.2 The risk of fraud when dealing with unknown or uninsured institutions is greatest when dealing with offshore or Internet banks (as this allows selection of countries with lax banking regulations), but is not by any means limited to these institutions. There is an annual list of unlicensed banks on the US Treasury Department site which is currently fifteen pages in length.


15.0 Phishing and Internet Fraud.
15.1 I would hazard a guess that everyone reading this paper will have received an e-mail apparently from a bank asking them to confirm their details online. The process known as ‘Phishing’ operates by sending forged e-mail, and by impersonating an online bank, auction or payment site. The e-mail directs the user to a forged website which is designed to look like the login to the legitimate site but which claims that the user must update personal info. The information thus stolen is then used in other frauds, such as theft of identity or online auction fraud.
16.0 Online Banking Fraud
16.1 Phishing is not the only way criminals gain access to online bank accounts, according to industry experts. Computer criminals are becoming increasingly proficient at writing Trojan horse programs and keyloggers that steal passwords and account information. Such secret malicious programs could be the cause of up to half the account withdrawals. Such programs can be installed on home users’ computers through virus-laden e-mails. People who do their online banking at public computers, such as at Internet cafés, are also at risk from this kind of password swiping.
16.2 Online banking, including online bill paying, has spiked in popularity in recent years, particularly as more financial institutions offer the service for free. However the opportunities for criminals to take advantage of this new banking mechanism are endless.
16.3 When online banking was introduced it meant that for the first time, bank fraud, on an industrial scale, could be perpetrated from outside without having to rely on bank employees. These frauds result mainly as a result of banks failing to check the identities of people requesting transfers from existing accounts into new online accounts.
16.4 Six Californian men accused of breaking into online bank accounts and funneling out the proceeds were recently indicted for bank and wire fraud and money laundering.
16.5 Two of the men, according to the indictment “acquired a software program from a free online source which allowed them to scan/surf the Internet for shared resources on other computers and which allowed the defendants to access those computers for its program backup files.”
16.6 The defendants were then able to glean login credentials for online banks by rummaging through backup files related to Quicken, Quickbooks and Microsoft Money on the machines they illegally accessed. With this important information, the defendants then transferred money out of victims’ online accounts. In addition to funneling money into an account established under a sham company called West Coast Data Systems, the defendants also used a service called Qchex, which allows the secure sending of printable cheques over the ‘net.
17.0 Advance Fee Fraud.
17.1 Advance fee fraud is a confidence trick in which the target is persuaded to advance relatively small sums of money in the hope of realizing a much larger gain.
17.2 Currently the most visible form of the fraud is the Nigerian Letter or 419 fraud named after the section of the Nigerian Criminal Code that it violates. While not strictly speaking a bank fraud, I have included a summary under this section on the basis that these scams invariably request the target to provide bank account details for the ostensible purpose of receiving a payment in. The Nigerian Letter is now sent almost exclusively by e-mail. Again, I expect every reader will have been targeted by this particular scam, or a variant of it. The typical Nigerian Letter claims to come from a person needing to transfer large sums of money, usually several million US Dollars, out of the country. Another common variation involves purported unclaimed winnings in foreign lotteries.
17.3 As the Nigerian Letter variation of the fraud has become well known, the gangs operating the scams have developed numerous variations. The target is often told that they are the beneficiary of an inheritance or invited to impersonate a beneficiary of a large unclaimed estate.
17.4 In the variation of the fraud known as “The Spanish Prisoner,” the target is told that a wealthy individual is being held hostage and will reward those who help the transfer of the ransom money.
17.5 In a recent development of the scheme, the perpetrators use a counterfeit cashier’s cheque to buy an expensive item such as a car or boat from people advertising goods in online classifieds.

18.0 The Future of Bank Fraud.

18.1 As with all forms of fraud, as one mechanism is detected and effectively eradicated or at least rendered less profitable, the fraudster’s ability to exploit new avenues or loop holes means that the fight against fraud will continue for years to come. For example, phishing, although a relatively new phenomenon, is starting to wane in those areas in which it first found expression. Criminals have focused their attention on jurisdictions where the phenomenon and its effects have not yet been widely publicised. Though the scheme continues to receive headlines, the banking industry is adopting strategies and techniques to defend against the practice, including consumer education and new payment card security.

18.2 Many perpetrators involved in phishing scams have moved on to defrauding third-party payment providers, which, despite pressure from several banking groups, currently are not regulated.
18.3 Cheque fraud, despite its place as one of the older or more out-dated forms of fraud, continues to be one of the biggest fraud problems the banking industry faces. The first line of defence against most of these scams, particularly the older fraud methods, is customer education. If a bank can alert customers quickly to fraud schemes the potential for loss is greatly reduced. Emergency response plans should involve the establishment of a strategy and risk-minimization plan that comes into operation as soon as new fraud trends are detected. Such plans involve not only customer education but perhaps more importantly employee education and awareness.
18.4 One area in which employee awareness and education is key is in the detection of mortgage fraud and other loan fraud, as noted above, as an increasing problem in the Chinese banking industry. Since discovering irregularities in connection with a fraud where car salesmen used fake documents to amass loans following an inspection of retail lending practices at Bank of China in Liaoning province, the lender has recovered 120 million yuan from the company and “severely punished” 21 bank executives. A spokesperson for the Bank said the bank had started training executives on a broad range of risks associated with retail lending and had strengthened related procedures in 2005. ²⁶
18.5 Mortgage fraud in particular is experiencing a resurgence worldwide, a feature or by-product of inflation in property prices across the globe. However, new products and increasingly sophisticated software providing lenders with, inter alia, sales history information for the subject property and sales comparables for surrounding properties, for example, can help cut down on the potential for loss inherent in unwise lending or lacking due diligence. Some software can also measure the collateral risk inherent in individual residential properties in varying market conditions. Multiple sales of one property in a short time span, though not necessarily fraudulent, constitute a ‘red flag’ in such investigations.
18.6 As online banking fraud has increased banks have been forced to implement new procedures for verification and adopt policies designed to restrict the attraction of the fraud for the perpetrators including, for example, reducing the amount that can be transferred in any one transaction. The proliferation of phishing scams and other online fraud schemes has spawned a host of new products designed to alert staff to potential scams and to identify attempts to access confidential data. ²⁷
18.7 However, all the software in China is helpless in the face of employee involvement or lack of attention; again while ‘knowing your customer’ or “KYC” is considered an integral feature of fraud prevention programmes in banking circles, too little attention has been paid to ‘knowing your employees.’ As the examples referred to above illustrate, the biggest bank frauds in history have been perpetrated from within the four walls of the bank itself.
19.0 Conclusion.
19.1 At both the placement and layering stages of the money laundering process,²⁸ the traditional banking sector appears to remain the primary repository for criminal proceeds. Accounts used for receiving and transferring dirty money are frequently held in fictitious names or aliases, in the names of nominees who operate on behalf of other beneficiaries, or in the names of companies in order to conceal financial transactions made by natural persons. Additionally, in some venues, representative offices of foreign banks can accept deposits in their home country and then transfer the funds into a master (or ‘correspondent’) account held with a bank in a second country. Under this arrangement, the identity of the depositors in the home country, and the beneficiaries in the second country, are not disclosed to the bank where the funds have been ultimately deposited.
19.2 The importance of the banking industry to the white collar criminal, both as a means to obtain wealth and to obscure it, cannot be overemphasised. Bank fraud is an all-encompassing term; the problems presented by such frauds are likewise; and the opportunities for fraud are endless. The only effective way to deal with such fraud, as with many others, is education, both of staff and customers. Early detection is key in any risk minimisation scheme. Prevention is nigh impossible; however, prevention of wide scale loss can be achieved through early detection and shut-down operations. Punishment, while a deterrent for some, is to others merely an annoying possibility that is quickly obscured by the potential for massive gain as the execution of the ‘Construction Bank Four’ bears testament to.²⁹
19.3 In the face of an economic crime where risk of execution does not even act as a sufficient deterrent to address the problem, prevention, detection and the recovery of stolen assets are the only reliable weapons. Effective due diligence, involving not only investigation of account holders where apparently suspicious transactions take place, but also of bank employees along the entire chain of command, must be an integral component of a fraud management programme. Cultural factors should and must be taken into account. A system that relies heavily on personal contacts and verbal confirmations is simply not viable in an economy that aims to secure and continue its expansion and attract continuing foreign investment. The future of the banking industry and the future of emerging economies are inextricably linked; it therefore makes sense that the regulation of the banking industry and its fraud proofing are of the utmost priority.

1 http://www.secinfo.com/dsVQx.uVm.htm

2


^ See e.g. <www.chinabusinessreview.com/public/0609/yong.html>, <www.clearharmony.net/articles/200308/14724.html>, and <www.time.com/time/magazine/article/0,9171,591272,00.html?iid=chix-sphere>

3


^ Fitch Ratings.

4


^ ww.atimes.com/atimes/China/FA13Ad02.html

5


^ <www.aeaweb.org/annual_mtg_papers/2005/0108_1015_1301.pdf>, <http://www.econ.ucdavis.edu/faculty/woo/Woo.JCEBS.31Dec05.pdf>, and <www.finance.wharton.upenn.edu/~allenf/download/Vita/AQQ_BookChapter_328_2007.pdf>.

6


^ They include fraud at a branch of Agricultural Bank of China at Baotou in Inner Mongolia Autonomous Region, which amounted to 115 million yuan (US$13.9 million) and a typist at the Bank of China fraudulently obtaining US$6 million from the State bank.

7 <www.china.org.cn/english/BAT/126264.htm>

8 <www.uscc.gov/hearings/2007hearings/written_testimonies/07_05_24_25wrts/07_05_24_25_haley_statement.pdf>, <www.planningcommission.nic.in/reports/wrkpapers/wp_pc6china.doc>

9


^ <www.guardian.co.uk/china/story/01348339,00.html>, <www.hcs.harvard.edu/~hapr/summer05_envi/8.1-P33-38.pdf>, <xtra.emeraldinsight.com/.../viewContentItem.do?contentType=Article&hdAction=lnkhtml&contentId=855026>, <www.fas.harvard.edu/~asiactr/publications/pdfs/Huang%20et%20al.pdf>.

10


^ <www.fas.harvard.edu/~asiactr/publications/pdfs/Huang%20et%20al.pdf>

11


^ China Daily: “Ernst & Young: Sorry for NPL Report” <http://www.chinadaily.com.cn/china/2006 05/15/content_590282.htm>.

12 <www.atimes.com/china/DF01Ad05.html>

13


^ , , <www.bizreport.com/2007/03/click_fraud_a_problem_for_chinas_top_search_engine.html>, <www.china.org.cn/english/China/205396.htm>, <www.chinaeconomicreview.com/it/2007/03/06/china-cracks-down-on-text-message-fraud>, , , <www.cbiz.cn/news/showarticle.asp?id=2173-27k>, <www.thestalwart.com/the_stalwart/2006/06/60_of_chinese_p.html>, , ,

14


^ <news.bbc.co.uk/2/hi/business/3657708.stm-32>

15


^ <www.asianpacificpost.com/portal2/ff808081094b55a90109502ca44c013a_Crooked_bankers_stash_loot_in_Richmond>

16


^ <www.chinadaily.com.cn/china/2007-05/14/content_872051.htm>

17


^ <www.boc.cn>

18


^ <www.bof.fi/NR/rdonlyres/71F726D0-264C-431D-8DFF-2685F39F9C05/0/BCR2006.pdf>, <www.fraudwatchonline.com/news.htm> - 584k

19


^ As reported in the Washington Post, Foreign Service, on 28^th June, 2006. It was authored by Peter S. Goodman and was styled “China Discloses $1.1 billion Bank Fraud.”.

20 <www.guardian.co.uk/china/story/0,7369,1193752,00.html>

21 <www.onlinelawyersource.com/consumer_fraud/bank_fraud.html>

22


^ <www.fraudwatchers.org/forums/view.php?pg=fw_welcome>

23 <www.federalcrimes.com/mortgagefraud.htm>

24


^ <www.fbi.gov/page2/dec05/chartsandgraphs.pdf>

25 chasebank.bestnetmarket.info/chase-bank-fraud.htm

26 <www.chinadaily.com.cn/china/2007-05/14/content_872051.htm>

27


^ One such example is Netcraft which has developed a service for banks and other financial organizations to track occurrences of their name, brands, trademarks and slogans on the Internet. The service helps companies identify sites which may be trying to construct frauds, identity theft and phishing attacks by pretending to be the bank, or are implying that the site has a relationship with the bank when in fact there is none. The key attributes of the service are daily monitoring of the DNS for registrations matching specific alert patterns; matching alert patterns against domains and hostnames discovered by the Web Server Survey; matching of text on site front pages; real time monitoring of phishing site reports from the Netcraft Toolbar community; matching SSL certificate Common Names found by the SSL Survey; identification of sites' hosting locations; reporting registration details of matching site domain names and ip addresses and manual reviewing to classify sites into 'owned by company', suspicious, benign [e.g. Mention on news or personal site], customer reference, partner reference, domain registration template, and no content present. Reviewers sign for each site with the review date stamped each with a recommended date for re-reviewing.

28 Placement involves the channelling of ill-gotten funds into the legitimate commercial sphere of the world’s financial systems. This process may be represented by (a) the carefully planned making of deposits of funds with financial institutions, (b) the acquisition or disposition of assets (frequently at a cost well over or under prevailing market values), or (c) the purchase of spurious enterprises that can hide the truth behind a multitude of dummy transactions (such as the manufacturing of false invoices and receipts).
Layering involves the further obfuscation of the money’s history by employing a series of complex, second-level transactions. These transactions are designed to further separate proceeds from their illicit origins. The aim is to place more challenging barriers along the paper trail that must necessarily be penetrated to link assets with their underlying illicit source.
Integration represents what is effectively the final stage of the money laundering process. It is the term used to describe the placement of funds in such a way as to make them available to the wrongdoer, free of suspicion. Thus, the so-called integrated funds can be spent with impunity because they have the appearance of having been acquired lawfully.

29 On September 14, 2004, Zhengzhou City and Zhuhai City executed four members of the local bank staff. They included Wang Liming, the former section chief of accounting for the Zhengzhou Jianshe Road sub-branch of the China Construction Bank, who was convicted of conspiring with Wang Xiang and Miao Ping to forge accounts to transfer cheques and bank notes. They stole more than US$3.43 million from the deposit money of the Zhengzhou sub-branch. According to estimates, China has sentenced more than 27,900 people for finance-related crimes. Among them, more than 4,200 people were sentenced to more than five years in prison, life imprisonment or death. Nevertheless, the rate of finance-related crimes in China continues to grow. www.chinadaily.com.cn/english/ doc/2004-09/15/content_374453.htm