Potential $1 Billion Ponzi Scheme Uncovered in China

Forbes reports that a potential $1 billion Ponzi scheme may have been uncovered in China.   Police investigating the kidnapping of the wife of the chief of the Inner Mongolia branch of the Bank of China discovered that the scheme was carried out by several bank clerks who had been previously terminated for suspected embezzlement of client funds.  According to authorities, three bank clerks at the Bank of China branch stole at least $312 million from the bank in order for the mastermind, Tuya, to make speculative investments in property and mines or to make loans at high interest rates.  

The scheme was discovered in June, when a routine audit discovered the absence of deposits from over forty accounts at the branch.  The initial amount believed stolen was approximately $300 million, and it is believed that Tuya may have employed similar operations at the Inner Mongolia branches of Agricultural Bank of China and Baoshang Bank.  Authorities estimated that the total amount stolen could reach $1 billion.

When the wife of the chief of the Inner Mongolia branch was kidnapped, the kidnappers made ransom demands for approximately $30 million, and additionally demanded the reinstatement of the three fired bank clerks.  Authorities were alerted to the connection between the embezzlement and the kidnapping, and arrested eight individuals.   The scheme remains under investigation.

The strength of the Chinese economy in the past decade, spurred by loose lending standards and fiscal stimulus, has caused many to wonder whether the wave of Ponzi schemes recently unraveling in the United States could possibly occur in China.  As Ponzi schemes are generally a lagging indicator of unfavorable economic conditions, could the Ponzi scheme described above be a sign of things to come?