The National Audit Office has reported to the Standing Committee of the National People's Congress on the audit of the execution of the central budget and other fiscal revenues and expenditures for the 2025 fiscal year. In this highly anticipated audit report, Bank of China (HKG: 3988) was singled out and exposed. From April 2023 to August 2025, the bank arranged for two of its affiliated financial institutions to act as conduits. By including a large number of its own employees with nominal investments ranging from just 1 to 100 yuan—essentially padding the numbers—it packaged 11 private funds as public funds. This scheme exploited the preferential policy exempting public funds from income tax, resulting in tax evasion amounting to 2.367 billion yuan. This staggering figure exposes serious loopholes in tax compliance at a major state-owned financial institution.
Context of the Audit Findings
This audit was one of the prominent issues uncovered by the National Audit Office following a focused examination of several financial enterprises. According to the audit report, the financial institutions audited included three entities: Agricultural Bank of China, China Everbright Group, and Bank of China. The problems identified primarily fall into two categories: first, failing to fully leverage their unique advantages, and second, improperly utilizing financial preferential policies for profit.
In the case of Bank of China, the characterization of "improperly profiting from financial preferential policies" is particularly severe. The policy exempting public funds from income tax was originally a systemic arrangement introduced by the state to encourage public investment and promote the healthy development of the capital market. The fact that Bank of China systematically abused this policy through fraudulent means is shocking in its nature.
The Original Intent of the Public Fund Tax Exemption
There is a fundamental difference in tax treatment between public funds and private funds. Public securities investment funds are temporarily exempt from enterprise income tax on gains from trading financial products like stocks and bonds. The design intent of this policy was to consider that public funds raise capital from the general public, have low investment thresholds, and a large number of investors, embodying the attributes of inclusive finance. Therefore, tax incentives were granted to reduce investment costs and attract more residents to participate in the capital market.
In contrast, private funds raise capital non-publicly from qualified investors, have high investment thresholds, and a limited number of investors, lacking the public nature of public funds. Consequently, they do not enjoy the same income tax exemption. As clearly stated in relevant fiscal and tax regulations, the application of the exemption clause is strictly limited to public securities investment funds and does not extend to private securities funds.
Bank of China exploited this "gap" in tax treatment between public and private funds, artificially disguising private funds that should have paid income tax as public funds, thereby seizing tax benefits to which it was not entitled.
Analysis of the "Number-Padding" Operation
According to the National Audit Office's report, Bank of China's operational method can be summarized in several key steps.
First, arranging conduits. The bank arranged for two of its affiliated financial institutions to act as "conduits." These institutions did not substantively participate in the fund's investment management or risk-bearing. They merely served as the formal issuance vehicle or manager to superficially meet the compliance requirements for public funds.
Second, "padding the numbers." This was the most core and deceptive part of the fraudulent chain. The bank included a large number of its own employees as investors, with these employees making extremely low capital contributions, ranging from just 1 to 100 yuan. In the legal definition of a public fund, the number of investors is a key indicator—public funds raise capital from unspecified members of the public, typically involving over 200 investors. Bank of China exploited this systemic feature, using its employees to pad the numbers and create the false appearance of a "public offering." These employees did not actually participate in investment decisions or bear investment risks; they were merely used as "tools" to satisfy formal requirements.
Third, product packaging. Through the above operations, 11 fund products that were originally private in nature were successfully "packaged" as public funds. Once they obtained the "identity" of public funds, these products could legitimately enjoy the preferential policy of income tax exemption for public funds.
Fourth, evading taxes. Over the more than two-year period from April 2023 to August 2025, through this systematic fraudulent behavior, Bank of China cumulatively evaded taxes amounting to 2.367 billion yuan. On average, each disguised private fund evaded over 200 million yuan in taxes.
Legal Nature and Consequences of the Actions
From a legal perspective, this behavior by Bank of China constitutes tax evasion. China's Criminal Law clearly stipulates that if a taxpayer, by means of deception or concealment, makes a false tax declaration or fails to make a declaration, evading a relatively large amount of tax payable and accounting for over ten percent of the total tax payable, it constitutes the crime of tax evasion. The evaded amount of 2.367 billion yuan, whether viewed in absolute terms or relative proportion, far exceeds the threshold for criminal prosecution.
In terms of harmful consequences, this action caused at least threefold damage.
First, it eroded national tax revenue. The loss of 2.367 billion yuan in tax revenue directly reduced fiscal resources available for public services and social welfare. This audit by the National Audit Office found that 4,976 enterprises evaded 10.935 billion yuan in taxes through means such as improperly issuing invoices for deduction. The tax evasion by Bank of China alone accounted for nearly a quarter of that amount.
Second, it undermined fair market competition. The difference in tax treatment between public and private funds is a systemic arrangement based on their different attributes under the law. By fraudulently disguising private products as public products, Bank of China essentially allowed products that should bear a higher tax burden to enjoy tax benefits they did not deserve, creating unfair competition against financial institutions operating in compliance.
Third, it damaged the reputation of a major state-owned bank. As one of China's oldest and largest state-owned commercial banks, Bank of China should have played an exemplary role in abiding by laws and regulations and operating compliantly. However, the issues exposed in this audit report indicate serious deficiencies in its internal control mechanisms, with compliance management being nominal. Operations such as arranging affiliated financial institutions as conduits and mobilizing its own employees to pad numbers could not have been completed without high-level authorization or acquiescence, exposing deep-seated problems in its corporate governance and internal controls.
Regulatory Lessons and Systemic Reflection
The exposure of Bank of China's tax evasion case through number-padding provides important warnings for financial regulation and tax governance.
First, systemic loopholes urgently need to be addressed. The criteria for defining public and private funds rely too heavily on formal requirements (such as the number of investors), leaving room for exploitation by bad actors. Regulatory authorities should further refine substantive judgment standards for fund classification and strengthen consolidated supervision to penetrate fraudulent behaviors like number-padding.
Second, internal controls at financial institutions must be strengthened. This incident shows that even systemically important financial institutions like Bank of China have major flaws in their internal control mechanisms. Financial regulators should increase inspections of financial institutions' compliance management, particularly cracking down on arbitrage behaviors that exploit policy preferences.
Third, tax collection and administration need upgrading. The National Audit Office also found issues such as the collection of "excessive taxes and fees" and lax tax collection by tax and customs authorities. Against the backdrop of increasingly abundant tax preferential policies, tax authorities need to establish more precise monitoring mechanisms to prevent policy benefits from being misappropriated.
From April 2023 to August 2025, for a period of 29 months, this systematic fraudulent operation continued, with 11 private funds disguised as public funds. The National Audit Office's report has brought this case to public attention, serving as both a warning to the involved institution and an admonition to the entire industry. Financial innovation must not cross legal boundaries, and policy preferences cannot be abused as profit-making tools. On the journey to building a strong financial nation, compliant operation and honest tax payment remain the unshakable foundation for financial institutions.
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