SEC Reveals Itself on Financial Fraud of Chinese Listed Companies

Financial fraud, fraud and other malpractices of Chinese listed companies have been exposed. The China Securities Regulatory Commission (CSRC) recently announced that 59 cases of financial fraud by listed companies have been investigated and handled since 2020, and said that these cases have four main characteristics.

The Chinese Communist Party’s Xinhua News Agency reported on May 3 that the SFC recently released data showing that since 2020, it has investigated and handled financial fraud and other illegal acts of listed companies “strictly, quickly and seriously”, handling a total of 59 such cases, accounting for 23% of the disclosure cases, and transferring 21 suspected criminal cases to public security organs.

The person in charge of the relevant departments of the Securities and Futures Commission said that there are four main characteristics of financial fraud cases.

1, is a complex pattern of fraud. Mainly manifested as fictitious business to implement systematic financial fraud, abuse of accounting treatment to whitewash the performance.

2, is a covert means of fraud, both traditional and new techniques. In addition to traditional methods such as forging contracts, false invoicing, bank and logistics documents, new or complex financial instruments and cross-border business are also used to falsify.

  1. There are various motives for counterfeiting, and counterfeiting in the field of M&A and restructuring is relatively prominent. The motive of counterfeiting covers factors such as avoiding delisting, covering up capital appropriation, maintaining stock price, responding to performance commitment, etc.; 4 is the circumstances of counterfeiting and the serious consequences of harm, and some cases are suspected of criminal offences. Individual cases are accompanied by a variety of violations such as capital appropriation and illegal guarantees.

The report did not name the 59 companies punished for counterfeiting.

However, the Beijing Securities Regulatory Bureau announced in mid-April that LeTV was fined 240.6 million yuan for financial fraud, while Jia Yueting, LeTV’s de facto controller, was fined 241.2 million yuan and banned from the securities market for life, a fine that set a record for A-share fines for financial fraud.

The SFC also disclosed that Leshi had committed financial fraud for 10 consecutive years from 2007 to 2016.

On March 3, the Communist Party of China Securities Regulatory Commission issued a notice stating that CITIC Guoan Information Industry Company Limited (CITIC Guoan) had committed financial fraud from 2009 to 2015, involving profits of more than RMB 1 billion, and nine senior officials involved were fined.

On September 22, 2020, for financial fraud, Ruiying Coffee (China) Co. and 45 companies that helped it with the fraud were punished and fined a total of RMB 61 million.

On October 12 of the same year, the General Administration of Market Supervision of the Communist Party of China announced an administrative penalty decision stating that Ruixing Coffee and five companies, including Ruixing Beijing, were fined a total of RMB 10 million for price design falsification.

Some commentators said that the cost of counterfeiting is too low in China, so that counterfeiting is repeatedly prohibited. The root cause of counterfeiting is that these counterfeiting companies are backed by local officials who have financial interests in the counterfeiting factories, so these officials are just going through the motions for fighting counterfeiting.