China imposes record fine on Guangfa Bank over guarantees for defaulted bonds

BEIJING (Reuters) - China’s banking regulator has confiscated illegal income and imposed fines on China Guangfa Bank Co totalling 722 million yuan (£81.2 million) for providing illegal guarantees for defaulted corporate bonds sold through an Alibaba-backed online finance platform, it said on Friday.

The fine, the biggest penalty ever handed down by China’s banking regulator, was equivalent to about 8 percent of Guangfa Bank’s 2016 profit, according to Reuters calculations based on the bank’s annual report.

The high-yielding bonds were issued privately by southern Chinese phone maker Cosun Group and sold through “Zhao Cai Bao”, an online platform run by Ant Financial Services Group, the finance affiliate of e-commerce giant Alibaba Group Holding Ltd.

When the bonds defaulted in December last year, Ant Financial asked Zheshang Property and Casualty Insurance Co, which wrote insurance policies on the bonds, to repay investors.

But the insurer released documents carrying Guangfa Bank’s official seals and said that the bank’s Huizhou branch had promised to guarantee its insurance policies for the bonds.

Guangfa Bank said at the time that the guarantee documents, official seals and personal seals presented by the insurer of the bonds were “all fake” and that the bank had reported the matter to the police.

The dispute highlighted risks in China’s loosely regulated asset management industry, where retail investors buy high-yielding bonds and other risk assets but expect them to be “risk-free” due to guarantees provided by various parties.

In Friday’s statement, the China Banking Regulatory Commission (CBRC) said the fraud, involving 12 billion yuan and more than 10 financial institutions, was a “collusion” between employees at Guangfa Bank’s Huizhou branch and Cosun to conceal the bank’s huge amount of non-performing assets and operational losses.

Guangfa Bank’s weak internal controls and unsuitable performance incentive system “provided opportunities for offenders to commit crimes”, the CBRC said.

“The bank ignored the authorities’ repeated bans and red lines on interbank and wealth management business and provided illegal guarantee of investment return. The practice has seriously violated the law and regulation, disrupted order in the interbank market, and severely damaged the financial eco-system,” the banking regulator said.

Guangfa Bank’s illicit practice caused risks to grow and spread to other financial institutions, the CBRC said.

The banking regulator has also removed five senior executives, including the head of Guangfa’s Huizhou branch, from their positions and issued lifelong bans on six employees involved in the fraud, it said.

The regulator said the bank has recognised it had “serious problems” in internal controls and business operation and would rectify those issues.

Reuters couldn’t immediately reach Guangfa Bank for comment outside of business hours.

Ant Financial said in a statement: “We will continue to put investors’ interests in first place, protect market openness, transparency and fairness.”

Cosun and Zheshang Property and Casualty Insurance Co could not be immediately reached for comment.

Reporting By Shu Zhang and Ryan Woo; Editing by Adrian Croft