Is Citi now the victim of fraud in China?

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.

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Comments (5)
  • TCG,llc
    , contributor
    Comments (470) | Send Message
    Wow! If these allegations are true, then they should serve notice to investors of the 'hazards' of doing business in China as the nation remains an 'immature' economy. China is still very much evolving as one of the world's top economies and the rate of growth has OUTPACED the evolution of its regulatory and lending policies....
    11 Jun 2014, 10:32 AM Reply Like
  • qian
    , contributor
    Comments (13) | Send Message
    When you are trying to do business in China, you have to assume that every deal has a potential being a fraud. If you are not careful, you will be a victim for sure. This is what most businessmen from west are not prepared for.
    11 Jun 2014, 11:09 AM Reply Like
  • pmiller100
    , contributor
    Comments (358) | Send Message
    qian - any opinion on why dishonest business practices seem to be so much more prevalent in China than some other places? It seems odd in a society that purportedly places such cultural importance on honor, though as an outsider I'm not sure the word has the same connotations there as elsewhere.
    11 Jun 2014, 11:32 AM Reply Like
  • qian
    , contributor
    Comments (13) | Send Message
    Unfortunately, honor and trust are the least valuable characters in Chinese business dealings right now. Money is number one. That is why corruption and fraud are very common and that is why I don't buy any Chinese stock because you don't know what you are getting.
    11 Jun 2014, 12:02 PM Reply Like
    , contributor
    Comment (1) | Send Message
    There is fraud in every country (what was the GFC, enron, etc all about)? Let us not get into lazy generalities and avoid critisizing countries and cultures. The need of the hour is for share holders of all countries to demand companies in which they invest to institute a strong culture of compliance and internal controls
    12 Jun 2014, 08:31 PM Reply Like
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