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Passengers walk past an advertisement for Sino-Canadian joint-venture insurer Manulife-Sinochem Life Insurance Co. Ltd. at a metro station in Shanghai.www.alamy.com

In late July, 2017, the first in a series of bank transactions moved money out of the personal accounts of several insurance executives to an account belonging to Manulife-Sinochem Life Insurance Co. Ltd.

A string of similar transfers continued over the course of almost two months, many for ¥49,000 – just under the daily limit for such transactions at bank machines in China.

In total, money was transferred from and between the accounts of 14 individuals.

But some of the executives had no involvement in the movement of money. In fact, many did not know the considerable sums of cash were sitting in those accounts. They had neither bank cards nor PINs for those accounts.

That’s because the bank accounts had been opened in their names by their employer, Manulife-Sinochem, or MSL, the Chinese joint venture of Canadian insurance and financial services giant Manulife Financial. MSL held the bank cards in a safe at its Shanghai headquarters and had dispatched two employees to ATMs at a nearby China Construction Bank to move the cash.

The money came from a local government program designed to help build the Chinese city into a financial hub by attracting top talent, offering large annual tax refunds to executives to offset the high local taxation rates.

But MSL has been accused of multiple missteps with the program, including taking some of the money intended to go directly to its executives and funnelling it into corporate coffers.

By 2017, MSL had secured ¥11-million, more than $2-million today, in refunds. Just more than 40 per cent ended up in the company’s own account.

This report is based on internal MSL documents obtained by The Globe and Mail and interviews with eight people with direct knowledge of what took place. The Globe is not identifying the individuals because they were not authorized to speak publicly about the matter.

Neither MSL nor Manulife has become the subject of a legal or regulatory investigation over the matter.

But the company’s actions prompted several executives to file internal whistle-blower complaints in the past two years. Manulife formally agreed to indemnify at least one executive for what the company called, in an e-mail, the “refund scheme.”

Earlier this year, MSL issued a disclosure document to China’s banking and insurance regulator in which it said it had discovered and resolved an issue related to taxation.

“We hold ourselves to the highest ethical and professional standards,” said Sean Pasternak, Manulife’s assistant vice-president of global communications, in a brief e-mailed response to detailed questions. “We self-identified and corrected this issue and self-reported to the relevant authorities,” he wrote.

“We consider this matter to be resolved.”

But in interviews and internal documents, executives expressed concern that the company’s handling of the money could expose it to scrutiny by China’s powerful regulatory authorities. Legal experts agree.

What took place at MSL “is exactly the sort of thing that you would expect a regulator to investigate – anywhere,” said Douglas Arner, a legal scholar at the University of Hong Kong who specializes in regulatory and compliance law.

The China Banking and Insurance Regulatory Commission wields considerable power over financial institutions in the country, with the ability to order changes to management or even a suspension of operations.

Last month, for example, regulators took control for at least a year of nine Chinese financial institutions, including four insurers. Authorities said they had acted to protect the broader financial system, saying the insurers had failed to maintain proper solvency ratios. None of those companies had any relationship with MSL, but the move demonstrated the considerable action Chinese regulators can take in serious matters.

For MSL, the refund issue came to light amid a sharp rise in tensions between Ottawa and Beijing after the arrest in Vancouver of Huawei executive Meng Wanzhou, which was followed by a series of Chinese measures against Canada, including the incarceration of Canadians Michael Kovrig and Michael Spavor, and the imposition of obstacles to trade and travel.

MSL is 51-per-cent owned by Manulife (International) Ltd., with the remainder owned by Sinochem Finance Co., Ltd., which is part of the vast, state-owned Sinochem Group.

It is the first foreign joint venture insurance company in China and has long been politically important for both countries. Its launch in 1996 was attended by then-prime minister Jean Chrétien and Chinese premier Li Peng. In 2016, Prime Minister Justin Trudeau, on his first official visit to China, attended the inauguration of a new MSL consumer program.

Growth in the Chinese market has made MSL an important asset for Manulife, whose code of business conduct and ethics says it “enjoys a reputation of unquestioned integrity and honesty. This reputation is among our most valuable assets and we must protect it.”

But MSL’s involvement in the refund scheme saw its own executives questioning its conduct.

Attracting talent

In mid-2009, in the midst of an effort to turn Shanghai into an international financial centre, local authorities introduced a new incentive to attract high-level talent.

Fang Xinghai, then director of the Shanghai Municipal Finance Bureau, said at the time that the city’s income tax rates of as much as 45 per cent were a disincentive for top-tier executives, particularly when compared with rates closer to 15 per cent in Hong Kong. The Shanghai program would refund income tax collected above a rate of 25 per cent “to individuals,” according to a 2009 report in China Times, a financial newspaper.

The Shanghai Municipal Finance Bureau said it was “not convenient” to respond to questions about the program. The China Banking and Insurance Regulatory Commission did not respond to a request for comment.

The program offered a lucrative new form of compensation for top executives, and in the summer of 2010, MSL employees asked the company’s top management about applying for it. But the chairman and chief compliance officer denied the request, citing a raft of potential problems with a financial incentive that would generate significant new income for a small group of people.

Under the program, the Shanghai government provided refunds of as much as ¥500,000, or just more than $95,000, a year. That exceeded the gross income of some MSL executives who had been sent to the joint venture from Sinochem. MSL also had agreements in place to compensate other executives for the additional tax burden of living in China.

But in 2013, with a different set of local managers in place, MSL applied for the refunds. Though it would create new compensation for executives, the full board of directors was not consulted, four people said.

Shanghai authorities allowed MSL to submit the names and bank account information of eight of the company’s top executives and managers. The tax refunds were then to be deposited directly into those personal accounts.

MSL, however, did not submit the details of its executives’ existing bank accounts. Instead, it opened new accounts in their names at a nearby branch of China Construction Bank. Five of those people told The Globe they did not know the company was opening an account in their names. Executives were given application forms to sign indicating their enrolment in a Shanghai “talent award” that contained no description of the award. Some believed it was a form of industry recognition, the sort of thing MSL receives on a regular basis.

Debit cards and PINs for the bank accounts were held by MSL, which continued to apply for the money each year without executives knowing that an increasingly large sum was accruing in accounts that bore their names.

According to internal e-mails viewed by The Globe, Manulife corporate counsel said it was common in China for companies to open bank accounts for their employees, as doing so can help smooth the opening of a new account, often for payroll purposes.

But such an action is unusual for Western firms, Prof. Arner said. “Something very objectionable that a financial institution could do is open an account without permission for a customer and do transactions in that account. That’s why you have licences for financial institutions, to prevent them from doing that.”

It was not until 2017 that MSL decided to give some of the money to its executives through a plan to spread the cash among a larger number of people than had been submitted to the government.

To do so required redistributing funds from the bank accounts the company had created, so MSL sent a “letter of waiver” to executives. Those who signed it agreed to “give my non-revocable waiver to any rights and claims to any reward or price (the ‘Reward’) that may be awarded to me by the Shanghai Municipal Government in recognizing me as a Talent. I also hereby relinquish any such Reward to the Company.”

The letter made no reference to a tax refund, nor did it specify the amount of money involved. After signing it, some executives were handed bank cards and given instructions for transferring money to other executives.

Some executives were not in China or had already left the company. The company transferred the money in their accounts itself, dispatching two employees to the China Construction Bank. A total of 106 transfers took place between July 25 and Sept. 22, 2017, with the equivalent of roughly $900,000 sent to a corporate account.

MSL used the funds for training and professional development, as well as to run workshops with the China Europe International Business School.

It was not until 2019 that an MSL board compensation committee saw details of the plan.

Last year, Manulife conducted an investigation into the handling of the money. In an internal document seen by The Globe, Manulife global compliance chief Kevin Cloherty said he was examining “regulatory risk,” particularly in connection with the company’s use of executive bank accounts.

The company punished three senior executives, including Kai Zhang, president and chief executive at Manulife-Sinochem, whose 2019 bonus pay was cut by 10 per cent. Ms. Zhang became president in December, 2015, and was a key decision-maker in allocating the money. A former executive with Citi in China, she joined MSL shortly after another former Citi executive, Roy Gori, became president of Manulife Asia. Mr. Gori is now president and chief executive of the company.

MSL also offered its own account of what took place in a compliance filing with the China Banking and Insurance Regulatory Commission in April. It acknowledged that it had “opened bank accounts in the names of the relevant individuals” and that “the reallocation of financial awards was inadequate.”

It said that in redistributing the money, it had “changed the nature of the award into personal taxable income” and that it “voluntarily reported this matter to the tax authority in Shanghai.”

It said the issues had been rectified and the company had “completed the payment of relevant individual tax income.”

MSL has continued to apply for the refunds each year, but no longer operates the redistribution scheme. Instead, according to a plan devised by the human resources department last year, “the nominee may obtain the full amount received via his or her individual bank account as declared.”

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