Regulators struggle to detect crime when banks use preferential credit card lines to bribe government bureaucrats. | Illustration by Tricia Seibold and iStock / youngID

Corruption does not necessarily involve suitcases of cash, all expense paid vacations, or secret gifts of jewelry. For people who don’t want to get caught, the subtlety can be more convenient.

In a remarkable study on statistical sleuths, co-authored by Amit Seru, professor of finance at the Stanford Graduate School of Business, researchers documented how Chinese banks used generous credit card lines as “disguised bribery” to influence local bureaucrats.

Relying on detailed historical customer data provided by a major Chinese bank, researchers found that local officials got significantly higher credit limits on their credit cards than non-bureaucrats with incomes and backgrounds of comparable credit. The higher the official, the greater the favoritism.

The higher credit lines had nothing to do with the lower credit risk of an official. On average, in fact, local bureaucrats were After likely to become delinquents. They were also more likely to have their debts canceled and their credit cards reinstated.

What did the banks get in return? Perhaps the biggest benefit was regulatory help. Opening a new bank branch in China requires the approval of several local government agencies, which allows a bank’s expansion plans to have a wide range of sympathetic bureaucrats. Indeed, the researchers found that the cities in which local bureaucrats received the most preferential treatment tend to be those with the most bank branches.

A second likely benefit came in the form of higher deposits from government agencies, the researchers found. And because municipal and provincial authorities have sway over a range of financial arrangements, they were also able to delegate other government affairs to banks.

A global problem

“It’s not just a problem for China,” Seru said. “In emerging economies, like India and Brazil, most credit is moderated by state-controlled banks and corruption is rampant by banks. “

The United States and other advanced industrial economies are also vulnerable, Seru notes. New York prosecutors are preferential treatment investigation that Deutsche Bank may have extended to President Trump’s businesses before he became president. And Goldman Sachs recently paid $ 4 billion to settle claims resulting from massive embezzlement at one of its clients, the Malaysian state investment fund.

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“The whole claim that Western economies operate with governance that makes them immune to such practices is ludicrous.”

“The whole claim that Western economies operate with governance that makes them immune to such practices is ludicrous,” Seru said. “If you look at the political discourse in America over the past four years, you don’t need a forensic study or big data to say we should be concerned. Corruption and governance issues concern us daily.

The advantage of using preferential credit card lines to bribe government officials is that this practice is extremely difficult to detect. A mid-level bureaucrat who uses money to buy a diamond necklace may attract attention, but whoever uses their own credit card to do the same won’t even be asked about it.

Without access to detailed data on tens of thousands of customers, it is difficult to detect whether some customers are receiving special treatment. Even where there are suspicious disparities, banks can usually rationalize their decisions by invoking their opaque credit policies.

Database detectives

To understand the truth, Seru and his colleagues – Agarwal Summit and Wenlan Qian at the National University of Singapore, and Jian zhang at the University of Hong Kong – analyzed data from a major Chinese bank on 185,000 credit card customers from 2003 to 2005.

Although the database did not reveal the names of clients, it did disclose each client’s occupation, income, age, gender, income, and credit history.

On average, the researchers found, civil servants received 16% higher lines of credit than non-civil servants with comparable incomes and demographics. On average, bureaucrats had credit limits of around $ 3,000, while the average limit for non-public servants was around $ 2,700. Civil servants with longer seniority received particularly generous credit limits: around 35% higher than non-civil servants with the same income.

Meanwhile, bureaucrats were 15% more likely than informal clients to be delinquent for at least three months. And when officials fell behind, they received more lenient treatment. On average, delinquent public servants were 5.5% more likely than non-public servants to have their accounts reinstated.

Coincidentally, due to political rhetoric, the Chinese federal authorities instituted a year of province-to-province crackdowns on corruption during the period the researchers were studying. Indeed, disparities in credit limits have disappeared – at least temporarily – in every province after it was cracked down.

The good news, Seru says, is that authorities have the ability to track down and stop disguised corruption. The bad news is that vigilance has to be constant.

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