The Rebar Scandal
Financial Oversight: Swords against Guns
When Rebar Group CEO Wang You-theng embezzled billions from his own conglomerate, sparking a bank run, the response of government supervisors was tardy and passive. What lies at the root of the problem?
Financial Oversight: Swords against GunsBy Man-Peng Tiao, Sherry Lee and Scott Wang
From CommonWealth Magazine (vol. 364 )
Just as 2007 appeared to be getting off to a good start, two companies belonging to the Rebar Asia-Pacific Group – China Rebar Co. and Chia Hsin Food and Synthetic Fiber Co. – filed for insolvency protection with the courts. This set off a chain of events that sent shock waves through the stock market, sparked a run on The Chinese Bank, and ignited a political firestorm that has already led to the resignation of Financial Supervisory Commission chairperson Jun-ji Shih. Leaders of the Democratic Progressive Party (DPP), as well as Chinese Nationalist Party (KMT) chairman Ma Ying-jeou all went on television to let fly with their criticism, showing that the financial scandal had evoked ire from across the political spectrum.
Nonetheless, there remain suspicions among the public as to why the government, when faced with a business conglomerate that had long been in a state of decay, has only now responded, and in a passive manner, and why it appears to have been caught off guard.
The cruel reality is that the government did not fail as a result of the actions of others, but of its own.
Ties to Old and New Administrations
Industry insiders divulge that the financial and management situation at Rebar Group had unquestionably grown malignant, like a cancerous tumor. The reason that this cancer could continue to spread for ten years without being excised is the decidedly parasitic relationships the Wang family had cultivated over the last fifty years with opportunistic politicians in both the KMT and DPP governments.
Wang You-theng's son, Gary Wang, was elected to the Legislative Yuan in 1989, while Wang himself was elected to the Central Standing Committee of the Chinese Nationalist Party in 1994. Members of the Wang family occupy the chairperson seats on the boards of over thirty business associations in Taiwan.
When power switched from the KMT to the DPP in 2000, the Wang family's influence remained as strong as ever. Wang You-theng continued to work hard at maintaining his relationships with officials at the highest levels of government. The Rebar CEO has accompanied President Chen Shui-bian on seven of the ten overseas visits the president has made while in office.
When the SARS scare struck Taiwan in 2003, Gary Wang, as chairperson of the General Chamber of Commerce, called on the government to provide support to the nation's traditional industries. Sources claim that some Wang family members visited the home of the president in order to personally request government assistance as well. Later, in February 2004, the rapidly expanding Eastern Multimedia Co. obtained joint financing totaling NT$13.8 billion from First Commercial Bank and other domestic or international banks.
""Anytime we went to make a move on Rebar,” reveals one frustrated official, in reference to efforts to end the extension of loans to the business group, “we would get a call from an important person expressing his concern.""
Government Financial Data for Sale
Rebar did not simply exploit its personal connections for financial gain, it used these connections to obtain official information from the government's financial regulators.
The Wang family maintains very close personal ties with former Financial Supervisory Commission chairperson Kong Jaw-sheng and former commission spokesperson Lin Chung-cheng. When Kong worked at an international investment bank, Gary Wang was one of his clients. One former Eastern Multimedia Group employee becomes irate when discussing the Rebar scandal, saying, ""Every employee at Eastern Multimedia knew that Gary Wang and Lin Chung-cheng would regularly drink together at night.""
Prior to serving as FSC spokesperson, Lin, who is currently in police custody, once agreed to take a seat on the board of directors of Eastern Broadcasting Co. at the request of Gary Wang. Soochow University Department of Law assistant professor Brian Hsieh, a specialist in financial law, observes that, ""Government financial supervision information was sold just like a product. As soon as the government made a move, the information would be leaked immediately. This is why the FSC and government investigators have to this day been unable to gain the initiative.""
FSC Performance Unproven
In the past, lower-level financial investigators have uncovered problems at Taiwan's financial institutions quite early on and promptly reported them to higher authorities. Unfortunately, once notified, the higher-level officials would deal with the reported problems only passively. Behind all of this could be seen the highly entangled personal relationships between finance officials, elected representatives, and business groups. ""The key problem is people. No matter how good the financial-supervision system is, once the people in government and business develop close connections, everything comes to naught,"" says Taipei District Court Judge Liang Yao-bin, who specializes in reviewing financial crimes.
Established in July 2004, the FSC is charged with targeting large business conglomerates run by influential families that have formed political connections with Taiwan's financial authorities. These business groups are often made up of powerful financial institutions and numerous subsidiaries. To carry out this mission, the commission was supposed to integrate the originally separate investigation systems for the banking, insurance, and securities sectors in order to develop the capability to supervise Taiwan's entire financial market across sectors.
One FSC research report recommends that the commission study Britain's Financial Service Authority. According to the ""major group"" concept of financial supervision, the individual major business groups that influence market order should be supervised as separate groups so as to better organize information regarding the business practices of each subsidiary within the groups.
Despite the recommendations of the report, the organizational structure and operational regulations of the FSC remain as they were more than two years ago, with banking, insurance, and securities operations conducted separately. The commission is still unable to achieve the integration of either its information or operations across financial sectors.
The FSC Financial Examination Bureau, formerly the sole government unit with the power to conduct financial investigations, has lost its ability to function, due to the involvement of its former director general in the ""Stock Vultures"" insider-trading scandal. Furthermore, the decision-making power of the FSC lies in its Board of Commissioners, which may have great authority, but is composed for the most part of academic types and lacks people with battlefield experience in the real world of financial supervision. A top finance official who has been through numerous financial bailouts likens this situation to that of a medical student who has never been an intern entering an operating room to perform surgery. How will he be able to make the crucial incision and remove the chronic disease?
After assuming the chairmanship of the FSC in August 2006, Jun-ji Shih set out to rebuild its authority and prestige. He entrusted greater responsibility to the commission's existing operational unit directors, but due to the high level of specialization and complexity in financial markets, Shih was unable to demonstrate his talents within the five short months before he resigned.
Besides the obstacles presented by the connections between government and business and the unproven performance of the FSC, the commission's inability to cooperate closely with other governmental investigative agencies provides further opportunities for business conglomerates determined to commit embezzlement.
The Ministry of Justice has permanently assigned prosecutors to the FSC. However, this has become a mere formality, as the commission has been unable to either establish direct lines of communication with the MOJ or make good use of the judicial capabilities of its personnel. This goes far in explaining why the last straw that set off the run on The Chinese Bank – the announcement on January 4 that China Rebar Co. and Chia Hsin Food and Synthetic Fiber Co. had filed for insolvency protection with the courts – appears to have caught the Securities and Futures Commission and Taiwan Stock Exchange unaware, allowing Rebar executives to casually flee abroad.
The Taipei District Prosecutor's Office has also assigned some of its prosecutors to the FSC. Though the prosecutors participate in the investigations of financial crimes carried out by the commission's task force, this collaboration is a mere courtesy, and the two organizations have failed to achieve a higher degree of cooperation. Moreover, ever since the conviction in June 2006 of Lee Chin-cheng, former director general of the FSC Financial Examination Bureau, for his involvement in the ""Stock Vultures"" scandal, the state of cooperation between the two governmental bodies has become further clouded.
With the FSC having employed officials of such dubious integrity as former spokesperson Lin Chung-cheng and Lee Chin-cheng, the reputation and capabilities of the FSC have suffered even more. Prosecutor Eric Chen of the Taiwan High Prosecutor's Office Investigation Task Force for Criminal Profiteering Crimes does not mince words when he asserts, ""There are still stock vultures that have yet to be caught. I'm afraid similar insider-trading scandals will arise in the future.""
One senior prosecutor notes that in Taiwan, ""There are far too few prosecutors that truly comprehend financial crimes."" The FSC Financial Examination Bureau employs no more than three hundred personnel, and these personnel must keep track of the more than 5,000 branches of banks and credit cooperatives in Taiwan. It is therefore no wonder an exasperated FSC acting chairperson Susan Chang says, ""We were fooled too!""
The FSC is further stifled by limited resources. Units within its organization presently employ around 800 personnel. Forty-four percent hold undergraduate degrees, while forty-six percent hold masters or doctorate degrees. This means that, among government bodies, the FSC has the highest percentage of people with university degrees or higher, even higher than that found among Ministry of Foreign Affairs personnel that are dispatched overseas. Nonetheless, a person with a PhD that has been newly hired by the commission as an associate researcher will receive a monthly salary of less than NT$62,000. That this is a lower pay rate than that of a secretary to the general manager of an international securities firm means that the FSC faces a great challenge in attracting and keeping talented personnel.
When government officials go up against shrewd business conglomerates, they are always at a disadvantage, as if they were wielding swords to do battle against enemies armed with guns. In this situation, how can financial supervisory bodies, investigative units, and government agencies work to turn crisis into opportunity?
A look at more developed countries shows that in the end the reestablishment of the professionalism of financial supervision hinges on the political climate and the determination of political leaders. Will the financial sector be exploited as a private weapon of the powerful, or will it be maintained as a tool for strengthening the nation's global competitiveness?
A positive correlation has always existed between the professionalism and independence of financial supervision and the effectiveness of government. Taiwan's custom of having government officials step down to take the blame as scapegoats means simply that history will continue to repeat itself.
Translated from the Chinese by Stan Blewett