(Bloomberg) – Lai Xiaomin, former chairman of China Huarong Asset Management Co., found guilty of accepting $ 277 million in bribes and bigamy consequences – are rare in any country. In China, however, a more humble but still overt mismanagement is common in the $ 54 trillion financial industry. In 2020 alone, the country’s top banking regulator imposed nearly 3,200 violations against institutions and 4,554 against individuals, from senior executives to ordinary employees. Fines totaled 2.3 billion yuan ($ 352.2 million). In the US, which has a much longer history of banking regulation, the Federal Reserve has taken a total of 58 enforcement actions. Among the violations, Chinese investigators found fabricated degrees, nannies and executive chauffeurs as controlling shareholders, and cheap interest rates and sweetheart deals for investors and relatives. The state has also bailed out three poorly run small lenders and amalgamating dozens more since it was first cracked down three years ago. Nevertheless, 12.4% of the 4,400 financial institutions are exposed to high default risk by the central bank. Now the government is rewriting the law on commercial banks and will have “zero tolerance” for violations. “Bad governance is obviously a risk to financial stability,” said Alicia Garcia Herrero, chief economist for Asia at Natixis SA. When it is contained in the smallest institutions in the country, the potential for harm is minimal, she added, “The problem is that we don’t really know if governance issues are actually included, and that is the big risk.” Last week provided a broader picture of the costs of mismanagement and uncontrolled corruption. Huarong, who has around $ 42 billion in outstanding debt domestically and internationally, postponed its earnings report in early April, starting a spiral in which its bonds fell to a record low of around 52 cents against the dollar. Stocks are down 67% since debuting in 2015 and are currently on hold. A spokesman for China Huarong said Thursday that the company has “learned the lesson from the case of Lai Xiaomin, firmly implemented central government policies, further eliminated toxic influence, restored our corporate governance and accelerated corporate transformation and management reform, and improved corporate governance to a.” to achieve stable and better development. “It is the second time in two years that creditors have been exposed to bad actors. In 2019, China rocked global markets with a surprise seizure of Baoshang Bank Co., once considered a model for funding regional economies. Triggered by the embezzlement of funds by the controlling shareholder, the acquisition and eventual bankruptcy of Baoshang also challenged long-standing assumptions of an ongoing government backstop financial system for bank directors, shareholders and executives, in a December statement that “ineffective corporate governance affected the The main cause is “. In one example, a rural bank lent its shareholders and affiliates the equivalent of 95% of its net capital to CBIRC, which the bank did not name. Most of these loans are defaulted or bad. The largest shareholder in a bank has increased revenue by 80 million yuan to make the institute look profitable. Elsewhere, one person and 22 of the people designated by the supervisory authority as “shadow partners” were involved in 17 banks that went well beyond the limits of bank ownership. The regulator has also identified bad behavior within its own ranks, blaming its officials for supervision. Social media has also enabled employees to spread complaints and reports of misconduct. Earlier this year, a whistleblower at China Life Insurance Co. on the Sina Weibo social network alleged that the store manager had created customer signatures and pocketed millions of dollars in non-existent marketing costs. Following a CBIRC investigation, the company said in a statement that it fined 510,000 yuan for inadequate internal controls and committed to improving compliance awareness. In response to the increasing risks, the central bank is revising its commercial banking law. The proposed changes include a new chapter on corporate governance, which for the first time defines the responsibilities of shareholders and the key role of the board of directors. It also prohibits corporations from using borrowed money to invest in banks and prohibits directors from holding positions with more than one affiliate. Unlike in the US and Europe, where misconduct and mismanagement often lead to public outcry, government investigations and even high-profile layoffs, top executives in China have so far been isolated. Executives are rarely blamed for industry-level violations, and the financial penalties pale compared to the 1.9 trillion yuan in profit the industry generated last year. “This is a work in progress,” said James Stent, author of China’s Banking Transformation and a former banker who served more than a decade on the boards of two Chinese lenders. “Governance is generally good at major senior banks, but lower tier financial institutions still have problems. They will take time to be addressed and governance will always be imperfect. “You can find more articles like this at bloomberg.com. Sign up now to stay up to date with the most trusted business news source. © 2021 Bloomberg L.P.