Supercrooks Or Sitting Ducks?

A Chinese fraud case snags two bankers statesidewho claim they're scapegoats for bank safety

Xu Chaofan was a rising star. After nearly two decades at the Bank of China, Xu had become business development chief at a branch in the southern province of Guangdong. By 2001, he was managing millions of dollars of investments and taking regular trips to Hong Kong to oversee BOC properties such as a 297-room hotel and a $60 million financial center.

Then, two years ago, U.S. federal agents arrested Xu at an Oklahoma strip mall, where he was working as a cook in a Chinese restaurant and his wife was waiting tables. Today, the 41-year-old Xu sits in jail in Las Vegas, accused of one of the biggest bank scams in history. In January, Xu, fellow branch manager Xu Guojun (no relation to Xu Chaofan), and their wives were indicted by the Justice Dept. on charges of stealing at least $485 million through sham transactions with bogus Hong Kong companies, money laundering at Las Vegas casinos, and illegally entering the U.S.

When the case goes before a jury early next year, the verdict may affect China's financial system as much as it does the defendants. As China privatizes big banks such as the Industrial & Commercial Bank of China, which raised $21 billion in October, Beijing is eager to eliminate lingering concerns over fraud that could hurt its ability to attract money from foreigners. Through their attorneys, the four deny the charges, saying they are being made scapegoats in Beijing's efforts to convince the world that China's banks are safe investments. "We're not even sure any money was actually stolen," says Mitchell Posin, Xu Chaofan's attorney.

The Justice Dept. paints a picture of massive fraud. The two men are accused of sending millions of dollars in illegal wire transfers to a dozen or so sham companies they controlled. Although the Justice Dept. declined to comment, the indictment accuses the pair of funneling that money into their personal accounts or those of relatives, including, in one case, $6.6 million to the girlfriend of Xu Chaofan's brother-in-law. When the four were arrested, government agents recovered more than $162,000 in cash and confiscated a Lexus SUV and three homes in British Columbia. "If they had so much money, why would they be working as cooks?" questions Bret Whipple, Xu Guojun's attorney. "We'll show that this is a political case."

The U.S. government's account of where all the money went is not clear. But the two men, on Bank of China salaries of just $4,000 a year, appeared to live the high life, according to a deposition by Yu Zhen Dong, another manager at the same branch who pled guilty to conspiracy and is cooperating with prosecutors. The men and their wives made frequent trips from Hong Kong to Las Vegas, dropping as much as $400,000 apiece each time, Yu testified. They even were once flown to Vegas by a casino on a private jet, Yu said--a perk reserved for the highest rollers.

In 2001, BOC officials spotted the alleged fraud. That's when the feds say Xu and Xu plotted their escape from China, assuming aliases and securing visas through the manager of a textile factory they did business with. To get U.S. citizenship, the bank says, the men and their wives arranged fake divorces and married Chinese-born U.S. citizens--in the coffee shop of the Los Angeles International Airport.

By Ronald Grover

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