China's National Audit Office's has reported that Chinese bullion companies using falsified gold transactions have defrauded the government of US$15 billion (CNY94 billion).

It said the widespread fraud involved 25 bullion processing companies across China that also made an illegal profit of US$145 million.

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Western analysts, however, believe the extent of the scam is much larger. Goldman Sachs estimated that over US$80 billion was advanced in gold backed loans alone.

Government auditors said the bullion companies used the loans to profit from the difference between offshore and onshore interest rates. The companies also used the loans to take advantage of the appreciation of the Chinese renminbi or yuan.

Financial analysts said the scammers were also aided by relatively lax government regulations governing the registration of gold processing firms.

Auditors discovered evidence of the fake gold deals during spot checks on bullion processing companies. They did not identify the 25 bullion processing firms involved in the scam, however.

The scammers took advantage of government regulations that allow jewelers, gold miners and other firms involved in the gold trade to lease gold from banks. This deal reduces the firms' inventory cost and is quite profitable when gold prices drop.

Gold bullion processors, however, began to use the leased gold as collateral against bank loans, which they lent to other firms at higher interest rates thereby making illegal profits.

Western analysts said this practice surged when government credit restrictions caused grey market interest rates to soar. They also believe the long term the effect of the scam on the world gold market might be minimal.

Much damage will be done to China's credibility, they said. Analysts noted the full extent of the fraud in which scammers defrauded Chinese banks by repeatedly pledging the same gold collateral over and over again has not yet been determined.

They said the scam highlights China's poor oversight and lax auditing, both of which led to the creation of a "false market."

A manager at one Chinese state-owned bank said his bank only checks if firms are licensed to lease gold but don't know what these firms do with the gold.

TagsFraud, Gold Bullion, Chinese Firms