A multibillion-dollar fraud scandal involving considered one of Vietnam’s most distinguished tycoons has exposed systemic weaknesses in the country’s banking sector, say analysts, who warn that more such cases could come to light.
Judges on Tuesday upheld the death sentence of real estate developer Truong My Lan, who was convicted this 12 months of embezzling huge sums from Saigon Commercial Bank (SCB), which she controlled, after taking out loans from tens of 1000’s of small investors.
Corruption is widespread in Vietnam, which ranks 83rd out of 180 in Transparency International’s latest Corruption Perceptions Index.
But the monumental scale of Lan’s crimes was unprecedented, and prosecutors said the losses she caused amounted to $27 billion, akin to Bosnia’s entire annual gross domestic product.
Banking experts fear that other damaging allegations lurk in hidden corners of the fast-growing economy’s financial sector, that are seen as a favourite amongst foreign investors searching for a substitute for China.
“SCB is not a single problem, it is a disease of the entire economy,” banking expert Bui Kien Thanh told AFP.
He said Vietnam’s financial system was “characterized by a lack of strict state management.”
“Similar problems are common in society, so (Vietnam) must investigate and solve the problem before others arise.”
Experts say a key systemic weakness is the regulation of the corporate bond market, where corporations borrow money from investors.
In most developed markets, bonds are issued by independently regulated brokers under a full prospectus, rated by credit standing agencies and traded on stock exchanges.
However, SCB fraudulently sold its bonds on to retail customers through its branches, and staff spent weeks training to falsely assure them that their money was protected and the investment was low risk.
Tens of 1000’s of individuals invested their savings in bonds and lost the whole lot when the bank collapsed and the authorities needed to bail it out, and a few of them considered suicide.
Most Vietnamese company debt has no credit standing in any respect, and native rankings agency FiinRatings says there have been no credit-rated corporate bonds in the country in the years before Lan’s arrest.
That compares with a median of about 50 percent in the 10-member Association of Southeast Asian Nations (ASEAN).
According to state media, the judge at Lana’s original trial asked police to research the role played by employees of the world’s three largest accounting firms that audited SCB’s books – Ernst & Young, Deloitte and KPMG.
None of the three people responded to AFP’s request for comment.
Thanh said there may be an absence of coaching on financial markets, their risks and regulatory responsibilities at every level of Vietnam’s financial sector – from on-the-ground employees to regulators.
On paper, Lan owned just five percent of SCB, but during her trial the court found that she actually controlled greater than 90 percent of the shares through family, friends and employees who were asked to carry shares on her behalf.
She then used her position to order SCB executives to withdraw money from the bank, over time trucking the equivalent of $4.4 billion in money to her home and the offices of her real estate company, Van Thinh Phat.
“They don’t question the documents… they just say, how do we do this? How quickly can we do this?” said Khuong Huu Loc, an economist based in the United States.
“The whole system is a game based on collusion,” he added. “The problem is it’s getting so bad (but) people are letting it continue because they don’t want to open a can of worms.”
In addition, there may be corruption deeply rooted in the system – one former chief inspector of the State Bank of Vietnam (SBV) was found guilty of accepting a $5 million bribe to overlook SCB’s financial problems.
Since the scandal broke, Vietnam has stepped up its anti-corruption efforts.
However, Carl Thayer, an emeritus professor at the University of New South Wales, warned that foreign investors feared that anti-graft efforts had “led to a chilling effect on state bureaucracies and slowed down procedures” and that officials feared that making any decision may result in questioning their motives.
Still, he said reports on the matter mean Vietnam “will have to take exceptional steps to effectively control the banking system.”
Even if there was nothing on SCB’s gigantic scale waiting to be discovered, Loc said “there may be a smaller version.”
“The question is: how much?”
