On 25 April 2024, the Stock Exchange took disciplinary action against China Ecotourism Group Limited (Stock code: 1371) to curb problematic lending transactions.
The document reveals that between 2014 and 2018, the company's group extended a total of 13 loans, with a principal sum of HK$363 million ($46.4 million) and RMB91 million ($11.6 million), to nine borrowers. These loans were purportedly designated for the expansion of the company's lottery operations in multiple provinces within China and in the Philippines. Despite this, none of the borrowers managed to meet their repayment obligations, and the company lost contact with eight of them between 2017 and 2020. The loans were entered into without sufficient due diligence, risk analysis or credit assessment. The Stock Exchange consistently emphasized that the company lacked any evidence to substantiate the utilization of the loan funds for the intended business development purposes.
Despite the awareness among all directors regarding the company's practice of providing loans to acquire business opportunities, they neglected to ensure the establishment and maintenance of sufficient internal controls and risk management systems. Notably, lending transactions of significant importance have been a focal point in the Exchange's comprehensive reviews during the past three years. It is crucial for directors to exercise proper oversight and implement effective internal controls in order to protect the interests of shareholders in the company's lending operations.
In addition, Sinmax Limited, a subsidiary of the company, entered into a subscription agreement in 2018, intending to acquire a 37.5 percent stake in Pan Asia Blockchain Lottery for HK$35 million ($4.5 million). Subsequently, it was uncovered that the payment for the subscription funds was directed to a third party based on the owner's instructions. Additional evidence indicates that a part of the subscription money was transferred to the personal bank account of a family member of one of the executives, who has been uncontactable since 2019.
Action
For a listed company, it is recommended to undertake an internal control review of the following processes if it possesses a significant loan balance (or advances, prepayments, deposits):
