After a nearly two-year investigation, a trial is under way in Guangdong Province in a fraud case involving a missing banker, a businessman with two surnames, and an estimated 9 billion yuan in illegal loans.

But a major suspect – Liu Changming, a former regional president for the Bank of Communications (BOCOM) – remains at large.

A three-level cart stuffed with case files was wheeled into the Yuexiu People's Intermediate Court in Guangzhou, Guangdong's capital, before the judge's opening gavel July 28 at the closed-door trial.

Prosecutors accused local businessmen Wang Sheng and Zhang Liwen with fraudulently borrowing massive amounts of money via the Guangzhou branch of BOCOM (SSE: 601328, HKSE: 03328). Also charged in connection with the scheme were former bank officials Zhang Li and Mai Tianliang.

So far, authorities have recovered only about half the estimated 9 billion yuan that police say disappeared. The financial hole was discovered during examinations of BOCOM's books.

Prior to the trial, the court froze all activities related to three real estate projects controlled by companies that allegedly received fraudulent loans. The net worth of these housing projects could be enough to cover BOCOM's losses; an assessment of the projects pegged the value at 5.8 billion yuan combined.

But filling the capital hole is just one of the challenges for authorities grappling with the huge swindle. They are also being forced to address broader issues, such as apparently lax internal controls at the bank and a risk assessment system that failed.

Missing Banker

The alleged scheme was unveiled during a routine financial review in spring 2007, when Ministry of Finance (MOF) officials discovered falsified financial statements from several local borrowers in BOCOM's files. Meanwhile, whistleblower letters had been stacking up on MOF desks accusing Liu, then-president of BOCOM's Guangzhou headquarters, with illegal loan-writing.
 
"At first glance, these files looked perfectly fine, complying with bank rules," said a source close to MOF. "But an on-site visit uncovered vast discrepancies. What was stated on their loan application forms about company work facilities, staff and dimensions didn't match their descriptions."

Before MOF started digging up facts about these problematic loans, prosecutors received letters charging an MOF inspector with taking bribes. The charges were quickly dismissed, and MOF officials determined that the letters were a ruse designed to stall their BOCOM probe.

After that incident, an inspector from another province with no ties to Guangdong financiers and entrepreneurs was shuttled to Guangzhou.

The MOF investigation also was hampered by rules that allowed inspectors to review bank fee and accounting records, but not financial reports for the bank's core businesses. Yet even with their limited access, investigators found evidence pointing to as much as 1.7 billion yuan in problematic loans. The loans were issued by two, BOCOM branches in Guangzhou to three Guangdong companies.

MOF wrapped up the probe in November, sent an explanatory note to BOCOM, and turned the case over to police. Later, investigators would revise their problematic lending figure, expanding the scope to 10 bank branches and raising the estimate to more than 9 billion yuan.

To this day, 4.6 billion yuan of that amount remains on BOCOM books as loans in default.
 
BOCOM reacted to the MOF findings by reshuffling its Guangdong managers, ordering Liu to move from the president's office to a new job at a bank-affiliated trust company in Hubei Province. The bank also sacked a number of executives.

But well-connected Liu was informed in advance about the coming legal storm and, before his relocation was even announced, fled overseas. Chinese police are now trying to track him down, posting an international fugitive notice through the Interpol network. So far Liu has evaded capture, and his whereabouts remain unknown.

Liu started working for banks in the 1980s after earning a degree in mathematics and mechanics at Zhongshan University in Guangdong. Over the years, he worked at a Central Bank branch, Shenzhen Cooperative Bank, Minsheng Bank and China Construction Bank. He rose to head BOCOM's Guangzhou office in 2004.

A picture of Mao Zedong typically decorated Liu's offices. But he was not a popular banker. Rather, Liu was known as a dictatorial boss with a track record for reckless lending. He also had a reputation for using fake papers to pump up loan reports while ignoring loan restrictions.

Wang and Wong

Under Liu's direction, authorities say, cash from many of BOCOM's fraudulent loans trickled into the coffers of a real estate company called Guangzhou Jin Yuan and an investment firm named Guangzhou Tian Yuan. These companies had a common chairman -- Wang Sheng.

Wang appeared in court July 28 for his alleged role in the BOCOM scam. Caijing has learned that his apparent modus operandi included a bogus name and a shell company listed on the London Stock Exchange.

Wang's enterprises are controlled by Canton Property, a company registered in the British Virgin Islands under the name of its chairman, Keng Wong. Canton Property went public in London in August 2007, issuing 5.5 million shares and raising US$ 50 million. Just four people, including Wong, held 90 percent of the stock.

But trading in Canton Property shares was extremely slow, signaling the company's status as a foreign front for capital maneuvers in China. Eventually, in October 2008, Canton Property delisted. The company announced that Wong, 44, had disappeared two months earlier.

Wong, however, apparently did not disappear because he and Wang are the same person, a source told Caijing.

An example of the close connection between Liu and Canton Property was a housing project named Duhui 168, which was mortgaged to Minsheng Bank to back a loan in 2005. The agreement was signed by Liu, who was then working as deputy governor at Minsheng's Guangzhou branch.

After Liu jumped ship and joined BOCOM, Canton Property repaid the Minsheng loan and borrowed the same amount from BOCOM, using the same project as collateral.

A 2007 assessment found that Canton Property's housing projects frozen by court order may be worth as much as 5.7 billion yuan, a calculation based on assumptions that the projects would be completed on time. But so far, two of the sites are nothing more than empty lots.

It remains to be seen whether BOCOM is willing – or even able -- to take over these real estate projects and inject the additional billions of yuan needed for completion.