Commercial Banks' Related Party Transactions

On April 6 2004, the China Banking Regulatory Commission (CBRC) issued the Administration of Affiliated Transactions Between Commercial Banks and Internal Related Parties or Shareholders Thereof Procedures (the Procedures, effective as of May 1 2004). The Procedures, with other related regulations, are expected to further tighten supervision and improve the risk control systems of Chinese commercial banks.

Defining Related Parties

The Procedures, for the first time, define related parties of commercial banks and divide them into three groups. Namely, "definitive" related parties, "potential" related parties and "construed" related parties.

Definitive related parties include: 1) insiders of commercial banks, such as directors, senior management officials and employees who have authority to decide or to participate in lending and assets transfer transactions); 2) primary shareholders directly or indirectly holding or controlling more than 5% in equity interests; 3) corporations or other economic organizations under the same control, directly or indirectly; 4) the close relatives of the primary individual shareholders and the insiders, and those entities owned, controlled or materially influenced by the primary individual shareholders, the insiders and their close relatives; 5) the controlling individual shareholders, directors and key management of those entities who constitute a related party of a commercial bank; and 6) any other natural person who has material influence on, or any other entities who can, directly or indirectly, individually or collectively, control or influence the commercial banks. It is noteworthy that commercial banks and management companies of state-owned assets are not considered related parties.

Potential related parties refer to those natural persons or entities that may become related parties after the effectiveness of any agreements or commercial arrangements with commercial banks.

Construed related parties include those natural persons or entities who cannot be included in the above two definitions, but have influence on a commercial bank and may benefit from unethical or unfair transactions with a commercial bank. The Procedures grant the CBRC a right to determine who could be a related party by the nature of their activities.

Related Party Transactions

According to the Procedures, related party transactions refer to the transfer of valuable resources or obligations between commercial banks and their related parties, which include lending (including loans, guarantees, L/Cs, purchase of securities, etc.), transfer of assets (including real estate transfers, transfer of loan interests, transfer of mortgaged assets, etc.), providing services (including appraisal, auditing and legal services, etc.), and other CBRC regulated related party transactions. Furthermore, the Procedures divide related party transactions into two categories in terms of transaction-related value, namely, normal related party transactions and material related party transactions. Any single transaction with a single related party involving more than 1% of the capital of a commercial bank, or the unperformed value of all transactions with a single related party involving more than 5% of the capital of a commercial bank, shall be deemed as a material related party transaction. When a natural person related party is concerned, the transaction related value shall include all transactions between a commercial bank and his/her close relatives. If the related party is an entity, the transaction related value shall include all transactions between its affiliates and a commercial bank.

Supervision of Related Party Transactions

The Procedures require commercial banks to set up an administrative system of related party transactions, which shall be filed with the CBRC for the record. The administrative system includes supervision of decision-making bodies, a related party transactions' control committee, collection and administration of related parties' information, etc. The related party transactions' control committee will preliminarily examine and approve material related party transactions, in addition to reviewing or approving normal related party transactions. The material related party transactions shall be finally approved by the board of directors or competent decision-making bodies and reported to the supervision committee of a commercial bank and to the CBRC simultaneously. Furthermore, the independent directors shall provide a written opinion on the fairness and the compliance with internal approval procedures for each material related party transaction.

For the purpose of limiting risks of related party transactions, the Procedures prohibit commercial banks from granting unsecured loans, accepting share pledges over its own shares, or providing bank guarantees to any related party. For material related party transactions, the Procedures cap the amount at 10% of a commercial bank's capital for any single related party transaction, 15% for all transactions of all affiliated parties under the same control, and 50% for all related party transactions of a commercial bank.