Bank of China Indicted in Italy for Money Laundering; S&P Ratings Agency Sees No Effect Due to State Support

Italian prosecutors this week requested the indictment of four senior managers at the Milan branch of the Bank of China on charges of money laundering and tax evasion.  They accuse Bank of China of smuggling approximately $5 billion of illicit funds from Italy to China between 2006 and 2010.  As many as 297 individuals are also identified as being complicit in this illegal activity, which, they say, stems from organized crime involvement in counterfeiting and other illicit activities, including via the employment of Chinese migrants living illegally in the country.

These groups reportedly used a money transfer service called Money2Money, which operated under the supervision of Bank of China.  The alleged transfers covered by the indictment relate to the period from 2006 to 2010.  Bank of China reportedly received up to $795,000 in fees associated with the wire transfers.  The prosecutors have filed a 170-page document outlining the illicit activity, which is now being reviewed by a judge to determine next steps.  Bank of China has indicated it will cooperate fully with the investigation.

Ratings agency Standard and Poor’s subsequently responded to inquiries regarding this case, indicating that it would not likely impact the company’s rating due to the sizable asset base of the bank (at $2.6 trillion) and the ‘‘‘very high likelihood of extraordinary support from the Chinese government.‘  An outstanding question, however, is the exposure that Bank of China could have to similar accusations in other countries and whether its association with Chinese organized crime is more pervasive than simply the Tuscan region of Italy (as specified in this example).

It is also significant to note the important role played by the market’s perception that the Chinese government will simply step in to bail its state-owned enterprises out of any financial, legal or other difficulties.  In this case — as in others — market scrutiny and risk-related diligence is not adequately performed on individual state-controlled entities, making them more prone to risky, abusive behavior (including with regard to global security issues).