Risk Warning of the Negotiable Instrument Business of the Shanghai-based Foreign-Funded Banks
· Document Number：No. 91  of the General Office of the Shanghai Office of the China Banking Regulatory Commission
· Area of Law： Negotiable Instruments
· Level of Authority： Local Regulatory Documents
· Date issued：04-28-2016
· Effective Date：04-28-2016
· Issuing Authority： China Banking Regulatory Commission, Shanghai Bureau
· Status： Effective
Notice of the General Office of the Shanghai Office of the China Banking Regulatory Commission on the Risk Warning of the Negotiable Instrument Business of the Shanghai-based Foreign-Funded Banks
(No. 91  of the General Office of the Shanghai Office of the China Banking Regulatory Commission)
All foreign-funded corporate banks, all branches of banks from foreign countries and Hong Kong, Macao and Taiwan regions, and all branches of foreign-funded corporate banks in different locations in Shanghai:
Since the beginning of this year, cases of negotiable instrument risks have occurred quite frequently. Recently, there happened a case of negotiable instrument risks at the Bank of Tianjin. For purposes of effectively regulating the distribution of the negotiable instrument business of the Shanghai-based banking financial institutions in the jurisdiction, and effectively preventing risks, relevant requirements are hereby restated as followed:
I. Prohibiting institutions and employees from engaging in any form of negotiable instrument intermediary activities. All banks shall, in strict accordance with the requirement of the Notice of the General Office of the China Banking Regulatory Commission on the Risk Warning of Negotiable Instrument Business (No. 203  of the General Office of the China Banking Regulatory Commission), strengthen the development of the internal control and enhance the management and control of employees' behaviors. Institutions and employees shall be prohibited from engaging in any form of negotiable instrument intermediary and funds brokerage activities. Handling negotiable instrument by bringing vouchers and seals to any different location is prohibited. No discount for enterprises with the characteristics of negotiable instrument intermediary shall be provided, no business introduced by any negotiable instrument intermediary shall be conducted, and no negotiable instrument intermediary shall be entrusted for business handling. The negotiable instrument funds of the banks shall be strictly prevented form being fraudulently obtained and misappropriated, as well as engaging in private lending or illegal fund-raising, or even becoming the fund source of illegal private financial activities.
Strictly implementing relevant provisions on the transfer of negotiable instrument funds and account management. All banks shall strictly observe the requirement of the Notice of the General Office of the China Banking Regulatory Commission on Strengthening the Supervision of the Bank Acceptance Bill Business (No. 286  of the General Office of the China Banking Regulatory Commission), and the funds from inter-bank discount, reverse repurchase, or repurchase of negotiable instruments shall be transferred by negotiable instrument transferees into the deposit reserve accounts opened by negotiable instrument transferors in the People's Bank of China or the general deposit accounts opened in negotiable instrument transferors, but may not be transferred into accounts opened by negotiable instrument transferors in any other bank. Meanwhile, all banks shall also, in strict accordance with the requirement of the document No. 203  of the the General Office of the China Banking Regulatory Commission, strictly regulate the management of the opening and use of accounts, especially those in different locations, shall not lease or lend accounts and shall prohibit the act of "reserve payment."
III. Attaching great importance to the risks of counterparties. All banks shall, in strict accordance with the document No. 286  of the the General Office of the China Banking Regulatory Commission, strict control the client access, strengthen the investigation into client credit, and strictly examine the qualification of negotiable instrument applicants, the truthfulness of trade background and the rationality of endorsement circulation process. Attention shall be paid to the match of business volume of the counterparties and the size of their assets and debts so as to ensure the truthfulness and regulatory compliance of trade background and transaction purposes. No "bridge bank" shall be made use of to avoid credit management and control, and no role as "bridge bank" shall be played for other banks. Business with unlicensed distribution institutions and small-scaled stationed institution from different locations shall be prohibited. An effective mechanism shall be established to identify the truthful status of the counterparties and their employees, and effectively identify "inter-bank accounts" in violation of regulations.
IV. Strengthening the management of negotiable instrument endorsement delivery. All banks shall, in strictly accordance with the requirement of the Negotiable Instruments Law, endorse and deliver the negotiable instruments when transferring the right on negotiable instrument or granting certain right on negotiable instrument to others to exercise, and the endorsement shall have consecutive effect. Trade without the sight of the negotiable instruments shall be prohibited, and no negotiable instrument list shall replace of the delivery of physical negotiable instruments. Meanwhile, a negotiable instrument shall be acquired against a corresponding price.
V. Strengthening the attention to the negotiable instrument business with the prior endorsers of transactions including rural cooperative institutions. The Notice of the Cooperation Department of the China Banking Regulatory Commission on the Risk Warning of Negotiable Instrument, Wealth Management and Trust Products (No. 63  of the Cooperation Department of the China Banking Regulatory Commission) provides that the rural cooperative institutions shall only conduct negotiable instrument acceptance and discount with the enterprises with physical financing demand within their jurisdiction and shall not conduct negotiable instrument acceptance and discount business at different locations. Rural cooperative institutions shall interact with other financial institutions based on truthful and legal demand for transactions, shall not take over the negotiable instrument assets of other financial institutions, and shall not discount by reversing procedures or perform inter-bank discount. Meanwhile, the funds of the negotiable instrument transactions of the rural cooperative institutions shall be transferred through the reserves account of the People's Bank of China so as to prevent the disintermediation of funds.
VI. Strictly implementing the requirement for the internal control of the commercial banks. All banks shall, in strict accordance with the Notice of the China Banking Regulatory Commission on Issuing the Guidelines on the Internal Control of the Commercial Banks (No. 40  of the China Banking Regulatory Commission), thoroughly and systematically sort out the process of negotiable instrument business and incompatible offices involved in management, implement corresponding separation measures, and form the office arrangement with mutual checks and balance. The separation between the front, middle and back offices shall be strictly implemented and the accounting office shall be prohibited from embedding itself in the department of negotiable instrument business. Where existing personnel assignment and professional ability are inadequate to satisfy the requirement for internal control, newly-conducted negotiable instrument business shall be immediately stopped. Meanwhile, no fax, email or other forms shall be used as the routine process to sign contracts, and the business contract shall be signed at the official business premises of the two parties and come into effect upon the seal affixation by the valid signatories of the two parties.
VII. Strengthening the management of the physical negotiable instruments. All banks shall, in strict accordance with the requirement of the Notice of the General Office of the China Banking Regulatory Commission on Strengthening the Supervision of the Bank Acceptance Bill Business (No. 286  of the China Banking Regulatory Commission), strictly implement the monitoring and inventory system, and strengthen the centralized custody of negotiable instruments, and no sub-branch or front-line business entity shall conduct the custody on its own. The formalities for custody shall be prudent and that the account books are consistent with the actual negotiable instruments shall be ensured. Meanwhile, the transfer and takeover of negotiable instruments and storage management shall be effectively conducted, the basic requirement for the transfer and takeover of negotiable instruments, unpacking for negotiable instrument inspection, packing for storage and identity verification, among others, shall be implemented, and sending and fetching negotiable instruments through intermediaries and other non-counterparties shall be prohibited.
All banks shall fully recognize the serious negative impact caused by the highly frequent cases of current negotiable instrument risks, thoroughly clear the cooperative business relationship with any intermediary in violation of laws or regulations, and immediately conduct strict and thorough self-inspection of existing negotiable instrument business. Especially, all negotiable instruments shall be unpacked for examination to verify and ascertain the situation for proper handling. The self-inspection report shall be issued by the top leader and submitted in the form of official document to the Shanghai Office of the China Banking Regulatory Commission prior to the end of the office hour on April 28, 2016 (any foreign-funded bank which has not conducted the negotiable instrument business shall not be required to submit the report). In respect of problems found, accountability shall be seriously held, the accountability of the management personnel at all levels shall be especially and strictly held, and any act suspected of any crime discovered shall be immediately reported. The Shanghai Office of the China Banking Regulatory Commission shall also further strengthen the supervision and inspection of negotiable instrument business, and punish harshly according to relevant provisions the personnel at all levels, including the personnel directly handling the business, management personnel and bank leaders, once discovering the engagement of institutions and employees in intermediary and all types of other acts in violations of laws and regulations, or those committing violations repeatedly upon repeated investigation. Whoever is suspected of committing a crime shall be transferred in a timely manner to the judicial authority for punishment. As the case may be, temporary suspension of market access, temporary suspension of negotiable instrument business and other supervision measures shall be adopted.
General Office of the Shanghai Office of the China Banking Regulatory Commission
April 28, 2016