Recently, the China Securities Regulatory Commission (CSRC) issued an administrative penalty pre-notice against Yuancheng Environment Co., Ltd. (hereinafter referred to as "*ST Yuancheng" or "the Company"), a company listed on the main board of the Shanghai Stock Exchange, for suspected false records in periodic reports and other financial data.
According to the investigation, *ST Yuancheng artificially inflated revenue and profits for three consecutive years, violating securities laws and regulations. The CSRC proposes to fine the company 37.4546 million yuan, impose penalties totaling 42 million yuan on five responsible individuals, and impose a 10-year securities market ban on the actual controller. In total, the combined penalties amount to 79.4546 million yuan.
The CSRC stated that *ST Yuancheng is suspected of triggering circumstances for mandatory delisting due to major violations, and the Shanghai Stock Exchange will initiate delisting procedures in accordance with the law. For potentially criminal clues involved, the CSRC will adhere to the working principle of transferring all cases that should be transferred, strictly following the provisions of the Criminal Law of the People's Republic of China and relevant regulations to transfer cases to public security authorities.
According to available information, as of October 10, 2024, 13 companies have substantially triggered mandatory delisting indicators due to financial fraud this year, setting a new historical high.
**Financial Fraud + Fraudulent Issuance** **Regulatory Authorities Propose Penalties of Nearly 80 Million Yuan**
At the end of April this year, *ST Yuancheng disclosed its 2024 annual report, showing operating revenue of 146 million yuan. After excluding income unrelated to main business and income lacking commercial substance, operating revenue was 143 million yuan, with adjusted net profit of -323 million yuan. This was the first time since the delisting system reform that the company triggered the main board's "operating revenue below 300 million yuan + negative net profit" financial mandatory delisting indicator, resulting in delisting risk warning by the exchange. On May 6, the company's stock abbreviation changed from "ST Yuancheng" to "*ST Yuancheng." Additionally, due to three consecutive years of losses, the company continued to be subject to other risk warnings.
On July 1 this year, *ST Yuancheng announced that the company, its controlling shareholder, and actual controller received "Case Filing Notice" from the CSRC. Due to the company's suspected false disclosure of financial data in annual reports and other periodic reports, the CSRC decided to file cases against the company and its actual controller.
At that time, the company warned in its announcement that if subsequent facts determined by CSRC administrative penalties trigger the mandatory delisting circumstances for major violations stipulated in the Shanghai Stock Exchange Stock Listing Rules, the company's stock would be subject to mandatory delisting for major violations. Subsequently, the company's stock price declined continuously. According to Wind data, as of the close on October 10, the company's stock price has fallen 52.99% since July 1, exceeding fifty percent.
On October 10, *ST Yuancheng announced that the company received an administrative penalty pre-notice from the Zhejiang Securities Regulatory Bureau. According to the notice, *ST Yuancheng and the company's actual controller engaged in illegal activities including financial fraud and fraudulent issuance.
First, *ST Yuancheng's annual reports from 2020 to 2022 contained false records. During 2020-2022, under the organization and direction of the actual controller, *ST Yuancheng artificially inflated operating costs by 158 million yuan, operating revenue by 209 million yuan, and total profit by 50.4602 million yuan through methods including inflating labor and machinery costs for the Yuelongshan International Tourism Resort project and inflating corresponding project output values. On January 31, 2024, the company disclosed an announcement on prior period accounting error corrections and retrospective adjustments, adjusting the Yuelongshan project's operating costs, operating revenue, and total profit, but the disclosed amounts for inflated operating revenue and total profit were inaccurate.
Additionally, around September 2022, the company successively received settlement audit determination documents for road infrastructure projects in Zhangmian, Xuliu, Sanling, Nanchenji, and Yugou Industrial Park in Huaiyin District, confirmed with the company's official seal, but failed to timely adjust financial accounting amounts based on audit results. This resulted in the company's 2022 annual report inflating operating revenue by 14.1614 million yuan and total profit by 13.4533 million yuan, representing 4.33% and 24.60% of the disclosed absolute amounts respectively.
Second, *ST Yuancheng's 2022 private placement constituted fraudulent issuance. In 2022, the company raised 285 million yuan through private placement. The private placement documents referenced financial data including the Yuelongshan project's 2020 and 2021 operating revenue, causing the company's 2022 private placement documents to contain fabricated major false content, constituting fraudulent issuance.
Ultimately, combining the above two violations, Zhejiang Securities Regulatory Bureau proposes to fine *ST Yuancheng 37.4546 million yuan, impose penalties totaling 42 million yuan on five responsible individuals, for combined penalties of 79.4546 million yuan, approaching 80 million yuan, and proposes a 10-year securities market ban for the actual controller.
**13 Companies Trigger Major Violation Mandatory Delisting Indicators**
In April last year, a new round of delisting system reforms was implemented. For companies with financial fraud for three consecutive years or more since 2020, the CSRC strictly applies new delisting rules for delisting. *ST Yuancheng triggered mandatory delisting indicators for major violations under the new delisting rules due to financial fraud for three consecutive years from 2020 to 2022.
According to public information, *ST Yuancheng is the 13th company this year to substantially trigger major violation mandatory delisting indicators due to CSRC administrative penalties (including pre-notices) for financial fraud.
"Since the beginning of this year, the connection between administrative penalty intensity for financial fraud and market exit mechanisms has become more closely aligned. For companies that use financial fraud to embellish performance and evade delisting standards, it's no longer just about fines, but firmly removing them from the market according to law and regulations, strengthening the rigid constraints of the delisting system," said Tian Xuan, Dean of the National Institute of Financial Research at Tsinghua University.
Tian Lihui, Dean of the Financial Development Research Institute at Nankai University, stated: "Since the beginning of this year, 13 companies have triggered major violation mandatory delisting standards due to financial fraud, demonstrating regulatory authorities' firm determination of 'zero tolerance.' This is not only severe punishment for fraudsters, but also purification of the market ecosystem, effectively conveying the regulatory signal that 'fraud delisting is serious business.'"
Additionally, regarding potential criminal clues in the *ST Yuancheng financial fraud case, the CSRC stated it will adhere to the working principle of transferring all cases that should be transferred, strictly transferring cases to public security authorities according to relevant regulations.
Tian Lihui stated that the "combination punch" of "administrative penalties + market bans + criminal transfers + delisting execution" systematically reshapes the regulatory ecosystem's "combination hammer," forming a full-chain closed loop of "immediate punishment upon discovery, delisting after penalties, accountability to individuals, and administrative-criminal coordination."
**Continuous Improvement of Financial Fraud Prevention and Punishment System**
In recent years, financial fraud prevention and punishment mechanisms have been continuously improved. From post-incident punishment perspective, administrative, criminal, and civil three-dimensional accountability has been continuously strengthened. Since the beginning of this year, the CSRC has imposed administrative penalties on more than 40 financial fraud cases. Civil accountability has become normalized, such as in September, when the securities false statement liability dispute case of delisted company Shanghai Longyu Data Co., Ltd. received a first-instance judgment with the court ruling in favor of investors. Criminal accountability cases have significantly increased, with 32 responsible persons from 8 financial fraud cases facing criminal charges this year.
Furthermore, for behaviors cooperating with financial fraud, the CSRC works with local governments to crack down severely, breaking the fraud "ecosystem." Since the beginning of this year, in financial fraud cases involving Nanjing Yuebo Power System Co., Ltd. and Datang Gaohong Network Co., Ltd., regulatory authorities propose to severely hold third parties that cooperated in fraud equally accountable.
"Intermediary institutions, related parties, and even professional technical companies that provide assistance for fraud have been included in the severe crackdown scope, strengthening systematic attacks on the financial fraud industrial chain," Tian Xuan stated.
Currently, regulatory authorities are gradually shifting financial fraud supervision from "post-incident punishment" to "pre-incident prevention + mid-incident control + post-incident accountability" full-process supervision, improving the financial fraud prevention and punishment system.
On September 30, the Supreme People's Court publicly solicited opinions on the "Supreme People's Court Interpretation on Several Issues Concerning the Application of the Company Law of the People's Republic of China (Draft for Comments)" (hereinafter referred to as "Company Law Interpretation"). Among special provisions for listed companies is "illegal compensation clawback," stating: "Where listed companies' financial accounting reports contain false records or conceal important facts, and companies request directors and senior management to return compensation or equity and options that exceed reasonable standards and are mismatched with their performance, people's courts shall support this according to law."
Tian Lihui stated that the "illegal compensation clawback" clause in the "Company Law Interpretation" is a key breakthrough in the financial fraud prevention and punishment system. This clause fills legal gaps, granting listed companies the right to pursue improper compensation obtained by relevant responsible personnel during financial fraud periods through judicial procedures, greatly reducing the benefits that executives can obtain from creating false performance violations, making executives more cautiously evaluate fraud risks when making decisions and fulfill prudent verification obligations for company performance authenticity. This clause helps listed companies improve internal governance structures and strengthen audit and supervision of financial reports, thereby reducing the possibility of financial fraud from the source.
On September 30, the CSRC, together with the Ministry of Finance, revised and improved the "Interim Provisions on Reporting Securities and Futures Violations and Irregularities" to form the "Provisions on Whistleblower Rewards for Securities and Futures Violations (Draft for Comments)" (hereinafter referred to as "Whistleblower Reward Provisions"), publicly soliciting opinions from society. The "Whistleblower Reward Provisions" encourage internal insiders to report, with case clues provided having major national impact, or involving particularly large amounts, or whistleblowers being internal insiders, with maximum rewards per case uniformly increased from 300,000 yuan and 600,000 yuan to 1 million yuan.
Market participants believe that regulatory authorities' optimization of reporting reward mechanisms to incentivize internal insiders to actively expose financial fraud helps curb the occurrence of financial fraud from the source.
Regarding future improvement of the financial fraud prevention and punishment system, Tian Lihui believes efforts are needed in three areas: First, strengthen "source governance" by promoting the application of electronic voucher accounting data standards to technically improve financial information authenticity; second, deepen "full-chain crackdowns" by further strengthening administrative-criminal coordination and including third parties cooperating in fraud in the accountability system; third, compress intermediary institution responsibilities by establishing intermediary institution blacklists and promoting industry self-discipline. Through comprehensive measures, constructing long-term mechanisms of "not daring to commit fraud, not being able to commit fraud, not wanting to commit fraud" is key to maintaining healthy capital market ecosystems.