Cover, Issue 444, November 18, 2009
Translated by Tang Xiangyang
Original Article: [Chinese]

Chinese investors who took advantage of the country's qualified domestic institutional investors (QDII) scheme, a program that allows domestic institutions and residents to invest in offshore markets, suffered huge losses when the financial crisis hit international markets last year.

The losses sparked a huge number of complaints from investors who claimed that the banks had not informed them of the risks associated with the overseas investments. The banks involved, many of them the domestic branches of large multinationals, argued that they had done nothing wrong and that all investments are inherently risky.

However, according to an inside source at an investment bank, many of these losses might have had more to do with suspect products being sold by a corrupt banker inside the Standard Chartered Bank (China), than the market turmoil of the past year.

QDII Investment Losses

The QDII program was launched in 2006, it allows domestic lenders, fund houses, securities brokers and insurers to trade stocks and bonds overseas, however, each institution is first required to apply to the State Administration of Foreign Exchange (SAFE) for a quota.

Chinese commercial banks and funds are then able to offer stakes in these overseas products to their domestic clients.

The awarding of new quotas was suspended in May last year over concerns of global market volatility. Regulators only began to approve new QDII quotas again in late October, 2009.

At the time of the freeze, 56 financial institutions had been granted a total of 55.95 billion US dollars in QDII quotas.

The financial products that these institutions sold to local investors suffered huge losses in the second half of 2008.

Locally-registered foreign banks were in control of the vast majority of the financial products being offered to domestic investors under the QDII scheme.

Of these foreign banks, the China-registered branch of Standard Chartered Bank (SCB) sold the largest number of QDII products to Chinese investors and the bank also bore the brunt of much of the criticism from irate investors who claim that they suffered huge losses after being sold suspect financial products.

It's estimated that SCB (China) issued 68 financial products under the QDII scheme since December, 2006, more than any other foreign-invested bank. All of the 49 products that are currently still available are down, with 32 products losing over 30% and 10 products losing over 50% of their value.

Standard Chartered Bank (China) has continued to maintain that: "We haven't broken any laws and thus bear no responsibility to provide compensation."
Problems at Standard Chartered Bank

Despite the official bank line, a source working in financial product design at an investment bank told our reporter that aside from the oft-quoted global financial crisis explanation, the huge losses brought about by QDII products also involved an element of "human-error."

After a long period of investigation, which involved interviews with employees at many foreign and investment banks, the EO has learned that an employee surnamed Fan, of  the Wealth Management Department in the Personal Banking Service of the SCB's Shanghai branch, was investigated by SCB (China) in April and May this year on suspicion that he had accepted bribes from Merrill Lynch.

According to our source, "Fan accepted bribes from Merrill Lynch. That's why he bought so many futures such as index-linked notes, which are expensive and ineffective and have caused great loss to SCB (China)."

Among all the QDII products provided by SCB (China), investor complaints tended to focus on products that had been jointly promoted by the bank and Merrill Lynch.

Bribery Scandal

Fan, who was born in Shanghai in1980, started out  as a personal financial consultant when he first joined SCB (China), he was later promoted to principal of the bank's structural product team, responsible for designing overseas financial products.

"He wasn't in such high position, but he had quite a lot of power with an important say in deciding the target, length of investment and which investment bank to cooperate with in the process of designing and purchasing a product," a product design manager at a foreign-invested bank familiar with the situation told  EO.

SCB (China) began their investigation into Fan, who was assistant vice president of the Wealth Management Department, due to a financial product he had produced in cooperation with Merrill Lynch.

An internal Merrill Lynch investigation was also launched into the role that Zhang Xiaosong, one of its managers, played in the development of this particular product.

Currently the exact amount of bribes accepted by Fan are not known, but it is estimated to be in the vicinity of 800,000 Yuan per transaction. There are also rumors are that Fan owns four properties in Shanghai.

"I heard that after he was promoted, every time he went to Hong Kong, Hangzhou or where ever, a special car would be waiting to take him to high-end venues," a person who worked at Standard Chartered told the reporter.

After two months of investigation, both SCB (China) and Merrill Lynch have failed to release any information about the case and have refused to comment when asked.

Standard Chartered has also sent e-mails to them employees requiring them not to talk about the case unless they have the permission of the company's PR office. Despite the ban, many employees have admitted that the case exists to the EO.

Fan and his direct supervisor, have both since resigned their positions at SCB (China), with Fan reportedly taking up a position as a client manager for a Chinese securities company.

In addition, although the two financial institutions still cooperate with each other, SCB (China) no long buys any QDII products from Merrill Lynch.