BY Le Hong Hiep
Truong My Lan’s death sentence for gross embezzlement sends a chilling warning, but Vietnam needs to address the banking sector’s root problems of cross-ownership and corrupt lending practices, says an ISEAS – Yusof Ishak Institute senior fellow.
On Dec 3, 2024, an appeal court in Ho Chi Minh City upheld the first instance court’s death sentence for Truong My Lan, the majority owner of Saigon Commercial Bank and former chairwoman of property developer Van Thinh Phat Group.
Among the three main charges against her, it is her embezzlement of Saigon Commercial Bank’s assets that led to her death penalty. In fact, Lan is the first private businessperson in Vietnam to be sentenced to death on embezzlement charges.
For almost a decade, Lan treated Saigon Commercial Bank as her own “piggy bank”, often illegally withdrawing money from the bank to speculate in the real estate market. Court documents show that between October 2018 and October 2022, Lan masterminded the creation of 2,527 fake loan records to siphon 1.07 quadrillion dong (US$39 billion) off the bank.
By October 2022 when she was arrested, Lan and her accomplices still owed 677.28 trillion dong to the bank, all of which were classified as bad debts.
A court verdict in April 2024 stated that Lan’s actions caused a loss of over 677 trillion dong to Saigon Commercial Bank. The recent appeal court upheld the requirement for Lan to compensate Saigon Commercial Bank for 673.8 trillion dong.
It should be noted that to prevent the bank from collapsing and causing potential harm to the entire banking system, the State Bank of Vietnam had reportedly injected US$24 billion into Saigon Commercial Bank by April 2024.
From a legal standpoint, Lan’s death sentence is justified by the magnitude of her embezzlement. As per the 2015 Criminal Code, embezzling assets valued at 1 billion dong can result in a death sentence.
Lan’s death sentence also provides a strong motivation for Lan and her family to recover at least three-quarters of the embezzled assets for the bank. By law, if this effort is successful, Lan may be able to avoid the death penalty.
From a regulatory standpoint, Lan’s death sentence also sends a powerful message to private bank owners about the dire consequences they may face if they manipulate their banks for personal gain. This is particularly crucial as the State Bank of Vietnam’s efforts to reduce cross-ownership between local conglomerates and banks have not yielded the desired results.
A HANDFUL OF OWNERS
After Vietnam liberalised the banking sector in 1990, the number of private banks in the country increased dramatically.
In the late 1980s, the banking sector remained dominated by four state-owned banks, with no private banks in operation. However, by 1996, there were 52 joint-stock commercial banks involving private investors, many of whom had returned from the former Soviet Union and Eastern Europe to establish new banks or take over existing ones.
Their goal was to not only tap into a profitable industry, but also to obtain access to cheap loans from the banks they controlled to finance their other businesses. In some cases, these investors utilised nominees to obtain loans from the targeted banks, and then used the same funds to purchase shares and ultimately gain control of the banks.
Currently, a significant number of private banks in Vietnam are still under the control of a handful of owners who also own other businesses. Bank owners continue to direct funds from the banks they control to their related entities. This presents an inherent risk to Vietnam’s banking system.
In response, the National Assembly amended the Law on Credit Institutions in January 2024, introducing stricter regulations to mitigate these risks. The law limits individual shareholders to a 5 per cent ownership cap of a bank’s charter capital, while institutional shareholders are limited to 10 per cent.
At the same time, a shareholder and their related persons or entities are restricted to a combined ownership cap of 15 per cent. The law also mandates that shareholders owning 1 per cent or more of a bank’s charter capital disclose their personal information and the percentage of shares owned by their related parties.
Stricter regulations on lending practices also took effect from July 2024. By 2029, a customer’s total outstanding loan balance cannot exceed 10 per cent of the bank’s equity, and loans to a customer and related persons must not exceed 15 per cent of the bank’s equity.
LIMITED OPTIONS
However, enforcing the law proves challenging as bank owners can still use nominees and proxies – or even shell companies – to hold shares on their behalf, making it difficult for authorities to trace their true ownership. They can also use similar nominee structures to obtain loans from their banks, circumventing restrictions on lending to related parties.
The issue of cross-ownership and related-lending can be seen as a “chronic disease” in Vietnam’s banking system. The consequences, as evident in the Saigon Commercial Bank case, can be severe and costly, with the potential to rock the entire banking system.
The State Bank of Vietnam has limited options as bank owners are reluctant to relinquish control, and regulators may fear that harsh measures will backfire and destabilise the economy.
The best course of action for the State Bank of Vietnam at this point is to warn bank owners against crossing red lines. The proposed death sentence for Lan may therefore serve as a deterrent.
However, treating a patient’s chronic disease by merely relying on their willingness to listen to the doctor’s advice without addressing the root causes of their illness is hardly an effective, long-term solution.
The banking reforms of South Korea, which faced similar issues of cross-ownership between chaebols and banks, may offer useful lessons for State Bank of Vietnam regulators.
The emergence of another Saigon Commercial Bank-like scandal may be just a matter of time unless the State Bank of Vietnam has stronger political will and effective means to eliminate the cross-ownership issue and its pernicious ramifications.
Le Hong Hiep is a senior fellow and coordinator of the Vietnam Studies Programme at ISEAS – Yusof Ishak Institute. This commentary first appeared on ISEAS – Yusof Ishak Institute’s blog, Fulcrum.