A single forged corporate seal helped mask a nested interbank loan that culminated in the disappearance of Rmb3.5 billion from a provincial branch of a Chinese commercial bank. What began as a commodity trader’s attempt to refinance gambling losses became an elaborate cross‑institutional passage of funds through two banks, a broker, an asset manager and a fund company, and ended in criminal convictions, civil litigation and a landmark supreme‑court ruling that left the originating bank to shoulder the loss.
The scheme was hatched when a Jilin grain trader, facing crippling futures losses, sought a Rmb3.5bn loan and recruited the assistance of a branch deputy manager at GD Bank’s Changchun unit. The manager introduced intermediaries at other banks and investment firms to construct a multi‑layered transaction: GD would make what was styled as an interbank deposit with ZH Bank’s Wuxi branch; ZH would, under an ostensibly entrusted directional investment agreement and an investment instruction, channel funds via a securities firm’s asset‑management plan and ultimately arrange disbursement from a different branch back to Changchun.
On the day the funds moved, the money travelled from Changchun to Wuxi to Shenzhen and finally returned to Changchun. Kickbacks followed: the trader paid about Rmb20m to the GD branch official and roughly Rmb8.5m to an intermediary. The trader used some proceeds to pay down loans and interest and diverted the rest to cover his speculation losses. Within months, irregularities surfaced when a Wuxi official reported the deal and the so‑called “luobo zhang” — literally a “carrot” seal, a crude forged corporate chop — was exposed.
Investigations found that officials had skipped required face‑to‑face verification and had substituted forged seals for official chops. The branch manager and the trader were arrested and later convicted — the manager received a six‑year jail term for fraud, the trader was given a life sentence for contract fraud and ordered to return assets. Criminal justice, however, only recovered a sliver of the money: civil suits, interbank blame, and years of litigation followed.
GD Bank’s Changchun branch sued multiple counterparties, arguing that the transaction was a genuine interbank deposit and that ZH must return the funds because the entrusted investment agreement used to justify the disbursement was forged. ZH countered that once the entrusted investment had been executed, the interbank deposit relationship had ceased and that it was owed fees. The legal hinge was whether the branch official at GD had apparent authority to bind his bank (the doctrine of “apparent agency”).
A first‑instance court rejected the claim that the assistant branch manager had ostensible authority simply because he was called “branch manager” in communications; it held the entrusted investment agreement invalid and ordered ZH to return the funds. The Supreme People’s Court affirmed that the assistant’s apparent authority did not validate the agreement, but reached a surprising further conclusion: the interbank deposit itself was part of a collusive scheme with the trader to embezzle funds and therefore illegal in purpose, so the deposit agreement was void too. The result left GD Bank without recourse to recover the Rmb3.5bn.
Nearly a decade after the scheme, GD has reopened litigation and expanded defendants to five entities — two banks, a securities firm, an asset manager and a fund company — seeking the Rmb3.5bn principal plus about Rmb139m in funding‑use fees. The bank argues that these institutions provided “channel” services that enabled regulatory arbitrage and were negligent in internal controls; it cites the 2018 asset‑management rules that ban multi‑layered nesting and prohibit financial institutions from acting as regulatory‑circumvention conduits. So far the recovery has been meagre: roughly Rmb24.85m has been clawed back, insufficient to cover even the total of the kickbacks paid to conspirators.
The case exposes a fault line in the Chinese banking system: sophisticated, nested channels can be crafted to obscure the purpose of funds and exploit weak inter‑institutional controls, while legal doctrines and criminal prosecutions do not necessarily translate into civil recovery. Regulators have tightened rules since 2018, and banks have an incentive to strengthen compliance and signature‑verification procedures, but the Supreme Court precedent that voided the deposit on public‑order grounds makes future civil recovery an uphill battle. Expect protracted litigation, limited asset recovery and renewed regulatory scrutiny of passthrough services among banks and asset managers.