A businessman allegedly used bank credit, offshore companies and copper imports in a bogus financing scheme that soaked traders.
By Ma Jingying and Chenzhong Xiaolu 08 October 2009
(Caijing Magazine) Since the early days of the Silk Road, importers and exporters in China have relied on structured trade finance via collateralized goods to bankroll deals.
It’s a financing technique which, without proper supervision, can be easily abused. Indeed, several high-profile scams in China involved private business operators who swindled huge amounts of money by using bank letters of credit (LCs) obtained under the guise of foreign trade.
In these cases, money intended for trade was often diverted into other industry investments. But swindlers were exposed when the global economy soured last year, and their financing chains snapped.
Shi Ming, a 50-year-old plastics and steel tycoon in the city of Ningbo, was merely the latest to get caught.
Shi fled China in October 2008 and is currently at large, but his story has continued to unfold in a Zhejiang Province court, exposing some of the key tricks used by crooks who misuse structured trade finance.
Copper Connection
Over the past five years, banks provided Shi with LCs worth more than US$ 200 million against the 2,834 tons of copper he purchased from his own offshore companies. The copper was worth up to US$ 26 million.
Shi re-invested most of the borrowed money in real estate projects as well as his steel and plastics businesses. But after copper prices plummeted last year, leaving no way to repay, Shi abandoned his small business empire, as well as clients and creditors.
Underlying Shi’s case is a twisted chain of financing that involved his private companies and their search for “alternative” funding. Other players included the government’s State Bureau of Material Reserve (SBMR), at least six foreign trade agencies, and 14 domestic and overseas banks including ICBC, Bank of China and China Merchants Bank.
Courts in Shanghai, Ningbo, Yuyao, Hangzhou and Hefei have taken up more than 80 lawsuits from parties victimized by Shi’s deals.
Hearings for seven civil lawsuits filed by banks in Ningbo Intermediate Court were scheduled to begin Sept. 10. They were cancelled due to the Shi’s absence.
But at an eight-hour hearing Aug. 28 in the Ningbo court, the roots of Shi’s financing strategies came to light.
Shi has been targeted in lawsuits by a company called China-Base Ningbo Foreign Trade Co. Ltd., which sued his U.S.-registered Forever Link Trading Ltd., his mainland company Ningbo Free Trade Zone Shengtong International Trade Co. Ltd. (Shengtong), and the Shanghai branch of the Australia and New Zealand Banking Group Ltd. (ANZ) for fraud. ANZ alone faces about a dozen lawsuits.
Also brought to court was the Ningbo branch of the Agricultural Bank of China (ABC), which was cited as a third party in the scheme with significant interest in the case.
The story began in 2004, when a close associate told Shi about a structured trade finance proposal floated by ANZ in Shanghai. The plan called for registering offshore companies and raising money through LCs.
Shi liked the idea, and subsequently registered several offshore companies in the United States, Britain and Hong Kong, using the names of several elderly farmers in his hometown, Yuyao. Later, these companies opened accounts with ANZ in Shanghai.
Shi’s next step was to have his companies – including Shengtong and Ningbo Jinhu Import and Export Co. Ltd. -- import electrolyte copper from his offshore companies either directly or through foreign trade agencies. The metal was already on the move while the companies were applying for 90-day LCs from banks.
Speaking in court, ANZ Shanghai’s attorneys explained how the LCs were used for client financing.
“In step one,” the attorneys said, “Shi’s Shengtong signed up China-Base as its agent to import electrolyte copper Aug. 15, 2008. Step two, China-Base subsequently signed an import business contract with Shi’s Forever Link and applied for an LC from ABC Ningbo. Three, ABC issued an LC of (about) US$ 3.43 million and sent a copy to ANZ, which notified its client Forever Link” that a payment was available.
“Fourth,” the attorneys continued, “Forever Link submitted warehousing warrants to ANZ Shanghai, which upon confirmation of the warrants made the payment and submitted them to ABC for acceptance.”
If the deal had gone through, there would have been a fifth step: When the LC matured, ABC would pay ANZ and release to China-Base a bill of lading, which is a receipt acknowledging a shipment of goods, the attorney said. “China-Base would pay ABC and charge Shengtong.”
Shengtong’s lawyers said all parties involved in an LC can profit. The foreign trade agent that applies for an LC in behalf of an importer can charge a 1 percent commission and a 20 percent guarantee deposit based on the face value of the LC. An issuing bank levies commission charges on the trade agent, and the advising bank demands a 90 day discount interest and commission charges equal to 1 percent of an LC.
According to common practice, an applicant should deposit 10 to 15 percent of an LC’s face value to an issuing bank as a guarantee, while cashing the rest. The entire procedure, from LC issuance to payment for the goods, normally runs three months.
Shi used the time gap to his advantage, said a senior executive at a foreign trade agency who applied for LCs for Shi’s Zhejiang Baocheng Stainless Steel Co. Ltd. The executive told Caijing that Shi tried to guarantee a constant flow of funds by opening numerous LCs.
“The trick is to pay off all LC payments as they come due,” the executive said. “He could keep the rest for himself.”
But Shi went beyond betting against the clock; he also fabricated trade deals.
According to a police investigation, Shi deposited all copper imports in a warehouse owned by SBMR’s Shanghai division. The facility was rented to a Dutch company, C. Steinweg Warehousing Pte. Ltd.
Shi didn’t need copper for his plastics and steel companies. But by simply depositing the metal in a state warehouse, he fooled foreign trade agents and banks who trusted SBMR. For that reason, the executive said, neither agents nor bankers performed on-site inspections of the goods.
Shi took advantage of their negligence. Investigators say he bribed warehouse official Zhang Liping and changed the original housing warrant issued by the warehouser.
“Zhang stole the warrant from the safe box and took it to Baocheng, which then asked C. Steinweg to divide it,” the executive said. “For example, a 100 ton warrant was split into two warrants -- a 20 tonner and an 80 tonner. And Baocheng used the new warrants to open new LCs through other foreign trade agencies.”
After more than 140 of these divisions, Shi’s 2,834 tons of electrolyte copper in storage was exaggerated on the warrants by more than 10-fold.
Yu Zhipeng, a close Shi associate and Shengtong’s legal representative, told the court that a key factor was to maintain ownership of the goods.
“We must control it to have a constant supply of LCs,” Yu said. “It doesn’t work if the goods are controlled by banks or foreign trade agencies.”
After Shi fled, Zhang turned herself in to the police. Meanwhile, Yu as well as Shi’s wife, Yang Qiong – who emerged after a few months -- are now awaiting trial.
Sources close to Shi said he enjoyed handsome profits by investing most of the money raised through LCs and other financing methods in his steel, plastics and real estate ventures. But his success ended when the copper market crashed.
International prices of copper traded on the London Metal Exchange fell more than 11 percent between Sept. 29 and Oct. 3, 2008. The decline continued through October, with prices sinking more than 35 percent by the end of the month.
That was bad news for Shi’s bottom line. His companies had agreed to increase their deposits with foreign trade agencies by 5 percent for each 5 percent decrease in international copper prices. These deposits – designed to hedge against risk -- were in addition to the 20 percent base deposits.
Caijing learned from judicial sources close to the case that Shi’s stainless steel business was hit hard by shrinking demand after the global economic crisis broke out last year. At the same time, Chinese banks tightened their credit. Shi was caught in a bind and couldn’t pay debts. So the foreign trade agencies started to chase him.
Meanwhile, ANZ refused to provide discounting or bill purchases to Shi’s offshore companies, dealing a decisive blow to his financial chain. That’s when Shi fled China.
Local governments got involved after Shi disappeared. Baocheng was forced to suspend its steel production after he left the country.
But operations resumed seven months later after the government intervened. The Ningbo and Yuyao municipal governments formed an asset restructuring group to deal with overdue debt payments to banks and foreign trade agencies.
Caijing learned that 70 percent of the money owed banks and foreign trade agencies is expected to be repaid by auctioning Baocheng’s non-production subsidiaries and real estate.
Yet lawsuits filed by foreign trade agencies against Baocheng and its associated companies are still on the docket. The agencies hope to recoup their losses by suing Shi’s companies.
It’s unclear how successful they will be. After the local governments intervened to in Shi’s companies, court officials announced that “no hearings will be held in the future because involved parties reached an agreement about restructuring.”
Ningbo court records indicate fraud played a role in 17 LCs worth about US$ 300 million. All LC payments have been halted.
Cheated companies also want SBMR to return their goods. But the court has frozen tens of millions of dollars in bank assets and a tract of land controlled by SBMR’s Shanghai division.
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Lawsuit Barrage Exposes Credit Swindling Secrets
A businessman allegedly used bank credit, offshore companies and copper imports in a bogus financing scheme that soaked traders.
By Ma Jingying and Chenzhong Xiaolu
08 October 2009
(Caijing Magazine) Since the early days of the Silk Road, importers and exporters in China have relied on structured trade finance via collateralized goods to bankroll deals.
It’s a financing technique which, without proper supervision, can be easily abused. Indeed, several high-profile scams in China involved private business operators who swindled huge amounts of money by using bank letters of credit (LCs) obtained under the guise of foreign trade.
In these cases, money intended for trade was often diverted into other industry investments. But swindlers were exposed when the global economy soured last year, and their financing chains snapped.
Shi Ming, a 50-year-old plastics and steel tycoon in the city of Ningbo, was merely the latest to get caught.
Shi fled China in October 2008 and is currently at large, but his story has continued to unfold in a Zhejiang Province court, exposing some of the key tricks used by crooks who misuse structured trade finance.
Copper Connection
Over the past five years, banks provided Shi with LCs worth more than US$ 200 million against the 2,834 tons of copper he purchased from his own offshore companies. The copper was worth up to US$ 26 million.
Shi re-invested most of the borrowed money in real estate projects as well as his steel and plastics businesses. But after copper prices plummeted last year, leaving no way to repay, Shi abandoned his small business empire, as well as clients and creditors.
Underlying Shi’s case is a twisted chain of financing that involved his private companies and their search for “alternative” funding. Other players included the government’s State Bureau of Material Reserve (SBMR), at least six foreign trade agencies, and 14 domestic and overseas banks including ICBC, Bank of China and China Merchants Bank.
Courts in Shanghai, Ningbo, Yuyao, Hangzhou and Hefei have taken up more than 80 lawsuits from parties victimized by Shi’s deals.
Hearings for seven civil lawsuits filed by banks in Ningbo Intermediate Court were scheduled to begin Sept. 10. They were cancelled due to the Shi’s absence.
But at an eight-hour hearing Aug. 28 in the Ningbo court, the roots of Shi’s financing strategies came to light.
Shi has been targeted in lawsuits by a company called China-Base Ningbo Foreign Trade Co. Ltd., which sued his U.S.-registered Forever Link Trading Ltd., his mainland company Ningbo Free Trade Zone Shengtong International Trade Co. Ltd. (Shengtong), and the Shanghai branch of the Australia and New Zealand Banking Group Ltd. (ANZ) for fraud. ANZ alone faces about a dozen lawsuits.
Also brought to court was the Ningbo branch of the Agricultural Bank of China (ABC), which was cited as a third party in the scheme with significant interest in the case.
Roots of Deception
The story began in 2004, when a close associate told Shi about a structured trade finance proposal floated by ANZ in Shanghai. The plan called for registering offshore companies and raising money through LCs.
Shi liked the idea, and subsequently registered several offshore companies in the United States, Britain and Hong Kong, using the names of several elderly farmers in his hometown, Yuyao. Later, these companies opened accounts with ANZ in Shanghai.
Shi’s next step was to have his companies – including Shengtong and Ningbo Jinhu Import and Export Co. Ltd. -- import electrolyte copper from his offshore companies either directly or through foreign trade agencies. The metal was already on the move while the companies were applying for 90-day LCs from banks.
Speaking in court, ANZ Shanghai’s attorneys explained how the LCs were used for client financing.
“In step one,” the attorneys said, “Shi’s Shengtong signed up China-Base as its agent to import electrolyte copper Aug. 15, 2008. Step two, China-Base subsequently signed an import business contract with Shi’s Forever Link and applied for an LC from ABC Ningbo. Three, ABC issued an LC of (about) US$ 3.43 million and sent a copy to ANZ, which notified its client Forever Link” that a payment was available.
“Fourth,” the attorneys continued, “Forever Link submitted warehousing warrants to ANZ Shanghai, which upon confirmation of the warrants made the payment and submitted them to ABC for acceptance.”
If the deal had gone through, there would have been a fifth step: When the LC matured, ABC would pay ANZ and release to China-Base a bill of lading, which is a receipt acknowledging a shipment of goods, the attorney said. “China-Base would pay ABC and charge Shengtong.”
Shengtong’s lawyers said all parties involved in an LC can profit. The foreign trade agent that applies for an LC in behalf of an importer can charge a 1 percent commission and a 20 percent guarantee deposit based on the face value of the LC. An issuing bank levies commission charges on the trade agent, and the advising bank demands a 90 day discount interest and commission charges equal to 1 percent of an LC.
According to common practice, an applicant should deposit 10 to 15 percent of an LC’s face value to an issuing bank as a guarantee, while cashing the rest. The entire procedure, from LC issuance to payment for the goods, normally runs three months.
Shi used the time gap to his advantage, said a senior executive at a foreign trade agency who applied for LCs for Shi’s Zhejiang Baocheng Stainless Steel Co. Ltd. The executive told Caijing that Shi tried to guarantee a constant flow of funds by opening numerous LCs.
“The trick is to pay off all LC payments as they come due,” the executive said. “He could keep the rest for himself.”
But Shi went beyond betting against the clock; he also fabricated trade deals.
Warehouse Loophole
According to a police investigation, Shi deposited all copper imports in a warehouse owned by SBMR’s Shanghai division. The facility was rented to a Dutch company, C. Steinweg Warehousing Pte. Ltd.
Shi didn’t need copper for his plastics and steel companies. But by simply depositing the metal in a state warehouse, he fooled foreign trade agents and banks who trusted SBMR. For that reason, the executive said, neither agents nor bankers performed on-site inspections of the goods.
Shi took advantage of their negligence. Investigators say he bribed warehouse official Zhang Liping and changed the original housing warrant issued by the warehouser.
“Zhang stole the warrant from the safe box and took it to Baocheng, which then asked C. Steinweg to divide it,” the executive said. “For example, a 100 ton warrant was split into two warrants -- a 20 tonner and an 80 tonner. And Baocheng used the new warrants to open new LCs through other foreign trade agencies.”
After more than 140 of these divisions, Shi’s 2,834 tons of electrolyte copper in storage was exaggerated on the warrants by more than 10-fold.
Yu Zhipeng, a close Shi associate and Shengtong’s legal representative, told the court that a key factor was to maintain ownership of the goods.
“We must control it to have a constant supply of LCs,” Yu said. “It doesn’t work if the goods are controlled by banks or foreign trade agencies.”
After Shi fled, Zhang turned herself in to the police. Meanwhile, Yu as well as Shi’s wife, Yang Qiong – who emerged after a few months -- are now awaiting trial.
Last Straw
Sources close to Shi said he enjoyed handsome profits by investing most of the money raised through LCs and other financing methods in his steel, plastics and real estate ventures. But his success ended when the copper market crashed.
International prices of copper traded on the London Metal Exchange fell more than 11 percent between Sept. 29 and Oct. 3, 2008. The decline continued through October, with prices sinking more than 35 percent by the end of the month.
That was bad news for Shi’s bottom line. His companies had agreed to increase their deposits with foreign trade agencies by 5 percent for each 5 percent decrease in international copper prices. These deposits – designed to hedge against risk -- were in addition to the 20 percent base deposits.
Caijing learned from judicial sources close to the case that Shi’s stainless steel business was hit hard by shrinking demand after the global economic crisis broke out last year. At the same time, Chinese banks tightened their credit. Shi was caught in a bind and couldn’t pay debts. So the foreign trade agencies started to chase him.
Meanwhile, ANZ refused to provide discounting or bill purchases to Shi’s offshore companies, dealing a decisive blow to his financial chain. That’s when Shi fled China.
Local governments got involved after Shi disappeared. Baocheng was forced to suspend its steel production after he left the country.
But operations resumed seven months later after the government intervened. The Ningbo and Yuyao municipal governments formed an asset restructuring group to deal with overdue debt payments to banks and foreign trade agencies.
Caijing learned that 70 percent of the money owed banks and foreign trade agencies is expected to be repaid by auctioning Baocheng’s non-production subsidiaries and real estate.
Yet lawsuits filed by foreign trade agencies against Baocheng and its associated companies are still on the docket. The agencies hope to recoup their losses by suing Shi’s companies.
It’s unclear how successful they will be. After the local governments intervened to in Shi’s companies, court officials announced that “no hearings will be held in the future because involved parties reached an agreement about restructuring.”
Ningbo court records indicate fraud played a role in 17 LCs worth about US$ 300 million. All LC payments have been halted.
Cheated companies also want SBMR to return their goods. But the court has frozen tens of millions of dollars in bank assets and a tract of land controlled by SBMR’s Shanghai division.
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