Scandals related to Vietnam Construction Bank (VNCB) and Saigon Joint-stock Commercial Bank (SCB) could be seen as the most devastating ones in Vietnam’s banking history in terms of the loss of money. There are similarities in both cases that point to loopholes in the country’s mechanism to deal with ailing banks.

Measures to restructure ailing banks stem from the Law on Credit Organizations, the schemes to periodically restructure the banking industry approved by the Prime Minister, and policies to restructure banks in each specific case. Restructuring can be performed under the following measures: 1/ The State Bank of Vietnam (SBV) directs self-restructuring plans via capital injection, bad debt settlement, with the collaboration of another healthy credit organization alongside other support measures; 2/ Seeking external resources via mergers and acquisitions, transfers of all shares and stakes; and 3/ Compulsory transfer of the ailing bank to another bank or another legal entity. Both VNCB and SCB have been restructured in accordance with the second measure. VNCB was associated with the restructuring of TrustBank via the transfer of stakes from Phu My Group of investors (represented by late banking executive Hua Thi Phan) to another group of investors headed by Pham Cong Danh in 2012. At the time, the financial health of TrustBank was catastrophic, with its equities at a negative VND2,854.8 billion and its cumulative losses recorded at VND6,061.7 billion. TrustBank’s problems resulted from embezzlement by Hua Thi Phan as the ultimate owner of the bank with direct and indirect stakes amounting to 84.92%. It is worth noting that Pham Cong Danh as well as his corporation Thien Thanh Group did not have the financial capacity nor the banking governance expertise, and thus was not capable of restructuring an ailing bank. All the money used to take over the bank did not come from his own equities. Consequently, after two years with Pham Cong Danh at the helm, multiple irregularities were conducted, and over VND18 trillion was embezzled from the bank, leading to its total insolvency and prompting the SBV to take over the bank at zero dong. Meanwhile, the formation of SCB could be seen as the beginning of a stage of banking and economic restructuring in 2011-2015. On January 1, 2012, three banks agreed on their own on a merger to establish SCB. It should have been normal business for the three banks to merge together for synergy if they had been healthy financial institutions with specific advantages. However, the three banks had been struggling ones in many aspects: (i) All the three had faced financial problems, with two having been put under special control; (ii) Their financial situations before merging were similar: liquidity problem, high bad debts, and being subject to restructuring; (iii) All the three were involved in cross ownership under the control of a single owner: Truong My Lan. Still, similar financial woes of three banks and the issue of this problematic cross ownership were not given due diligence in the process of restructuring these three banks. Therefore, the issue of cross ownership remained unaddressed. According to investigators, SCB had been turned into a vehicle to mobilize public funds for an individual in the 2016-2022 period. Both VNCB and SCB were rife with irregularities and the damages all took place during the process of restructuring the ailing banks. First, conditions for the party that transferred stakes as well as parties involved in the merging process were not specified in the law. Prior to 2017, regulations on special control and restructuring of banks had been scant. After numerous scandals broke out, the amended Law on Credit Organizations in 2017 supplemented new provisions related to these issues. However, such new provisions have not been brought into real life. Such inadequacies create a grey zone in the search for investors to engage in restructuring, and could be the reason behind cross ownership, or merely allow for the continued cross ownership in a more sophisticated fashion. Take VNCB for example. The restructuring simply transferred the bank from one interest group to another, both with the similar motive of abusing the bank for embezzlement. Or in the case of SCB, the restructuring of the three banks did not turn the coat as there were no real changes in operations, from the ownership structure and the controlling party to the operational targets. Even regarding the compulsory transfer, apart from credit organizations, any legal entity can take over an ailing bank if it meets two conditions: (i) gaining a profit in two consecutive years as manifested in an independently-audited financial statement before making the takeover proposal; and (ii) showing a feasible scheme for taking over the ailing bank, proving that the receiver is financially strong to make contributions as per the scheme. Regulations and reality show that legal provisions on restructuring ailing banks have failed to ensure a plural ownership or a public nature required of a commercial bank. Both prevailing regulations and practices have imperceptibly allowed for cross ownership, or have even afforded legality for cross ownership in case of compulsory transfers. Therefore, if the process of restructuring ailing banks requires a compromise of plurality, then the receiver in a compulsory transfer or merger should be a credit organization with a high public status or a legal entity being a public company. Second, the process of evaluating ailing banks and the formulation of policies and mechanisms to restructure such banks have seemingly not taken into account all possible efficiency and consequences. In the case of SCB, before the three banks were merged, cross ownerships and fishy financing activities between the three banks and Truong My Lan and other related individuals and entities, though not formally reported, had been alarmed by experts in independent studies that had been released. Therefore, it is illogical to say that cross ownerships were complicated and difficult to uncover in the process of preparing the proposal to restructure these three banks. Third, irregularities at VNCB and SCB occurred during the process of restructuring that involved the strict inspection and supervision by competent agencies. Apart from stringent oversight regulations applicable to banks, both VNCB and SCB were also put under an inspection team’s surveillance, and enhanced inspections by the SBV. In addition, during 2015-2019, the SBV ordered its Inspectorate to set up three inspection teams to look into SCB as part of the post-merger restructuring scheme. However, multiple crimes still occurred during a long period of time due to the collusion on the part of many inspectors. In the court case involving VNCB, apart from harsh penalties against Pham Cong Danh and Hua Thi Phan, the jury had warned against loopholes and inadequacies in inspecting and supervising ailing banks in the process of restructuring. However, such irregularities still repeated themselves in the case of SCB.