(Yicai Global) June 24 -- Police are probing Henan New Wealth Group after depositors at a number of rural banks in China’s Henan province, in which the firm is a shareholder, found they could not take out cash. Later, they also found that their digital health codes had turned red, preventing them from leaving home or entering public spaces.

Henan New Wealth’s headquarters in Zhengzhou, the provincial capital, was empty and the entrance had been sealed by the police when Yicai Global visited this week.

“Proof of Henan New Wealth Group’s crimes of manipulating and exploiting the online transaction systems of Yuzhou Xinminsheng Village Bank and other rural lenders has been preliminarily ascertained,” Henan’s financial supervisory bureau said in a notice on June 18.

Besides village banks, Yicai Global discovered that Henan New Wealth also infiltrated some urban and rural commercial banks. Lv Yi, its de-facto controller, exploited the banks’ stakes in various financial institutions to secure funds from them.

Lv controls hundreds of companies and their shareholdings cross over, a person who worked at an affiliate of Henan New Wealth told Yicai Global, adding that Lv’s name never appears on the documents of these firms.

Henan New Wealth even interfered in key decisions at some banks, such as the appointment of executives and board members, as the number of banks involved in the scheme increased.

Stakes Pledged to Banks

So, how did Lv cash out what he invested in these banks? He would use his equity in Bank A as collateral to borrow money from Bank B, in which he was also a shareholder. He would then lend the money to other firms at excessive rates, the insider noted.

For example, Boaosen Electrical Appliances and Bojue Commerce and Trade, of which Lv was the ‘invisible controller,’ own 1.8 percent and 3.6 percent, respectively, of Henan Runan Rural Commercial Bank. The two firms used their stakes in the bank as collateral for loans from two other lenders in which Lv had invested, according to information on corporate information platform Tianyancha.

Among the bank’s 188 shareholders, Boaosen Electrical and Bojue Commerce are not the only ‘shadow firms’ linked to Lv and Henan New Wealth. Henan Fengjia Trade Development, another shareholder of the bank, has two owners, Chen Shouyong, a stakeholder or executive of 16 companies, and Yuan Tianzhen, a stakeholder or executive of 17 firms.

Lv admitted to Zhengzhou Intermediate People's Court that he actually controls and runs these companies.

Stakes Pledged to Trusts

Lv also borrowed money from Bank of Zhengzhou through the companies he invisibly controls from 2007 to 2013, according to a judgment issued by Zhengzhou Intermediate People's Court.

“Each company borrowed tens of millions from the bank,” Lv said. All of the loans were approved by Vice President Qiao Jun’an, former vice president of Bank of Zhengzhou, he added, noting that he offered Qiao tens of millions in kickbacks to get the loans sanctioned. Qiao was sentenced to 14 years in prison for bribery.

All of the loans Lv’s companies took out from Bank of Zhengzhou have been repaid, a bank employee told Yicai Global.

To raise funds, Henan New Wealth also pledged equity in banks to trust companies. Kaifeng Hengya Building Materials, affiliated with its subsidiaries, pledged 20.2 million shares of Xuchang Rural Commercial Bank to Founder Bea Trust in 2016 and another 63.1 million shares in the bank to China Fortune International Trust in 2018. The pledges are still valid.

Editors: Chen Juan, Futura Costaglione