Is Citi now the victim of fraud in China?

|By:, SA News Editor

Citigroup (C -0.9%) and a number of other large Western banks active in commodity financing deals in China are frantically trying to assess if they've fallen victim to suspected commodities fraud emanating from the giant Qingdao port, reports the NYT. At issue are whether loans the banks made actually have the collateral they're supposed to have at the port.

A typical deal in this murky world of finance: Copper (or another metal) is imported using a letter of credit, then warehoused in duty-free zones and pledged as collateral for cheap bank loans, the money from which is then used to speculate. After a few months, the importer either sells the copper or the speculation. Goldman estimates up to $160B has flowed into China since 2010 through these types of loans.

The investigation centers around one importer who may have pledged the same stocks of metals as collateral for multiple loans, amassing a debt of more than $160M.

Citigroup is focusing on loans to Mercuria Group, and late last month Mercuria informed Citi improprieties may have taken place at metals warehouses. Citi is already dealing with the fallout from the Mexican fraud, and this could raise further issues about controls at the bank.