Worlds Apart: Yinren And The Antwerp Diamond Bank

The self-proclaimed Yinren Group, which is trying to purchase the Antwerp Diamond Bank (ADB) from KBC, gives curiously conflicting signals on its activities in the United States.

On the one hand, it tries to project itself as a major real-estate developer, with properties in Texas, and considers its U.S. real-estate arm a major pillar of the group. On the other hand, it was quick to ensure the closure of the ADB’s banking business in the United States just before the announcement of the ADB acquisition. This is despite the fact that the U.S. branch in New York was probably the best part of ADB, with excellent clients and prospects. If Yinren was serious about its U.S. pillar, why dump the bank?

If, indeed, Yinren’s main reason for acquiring ADB is to sell to diamond people real estate in the (yet to be developed) Shanghai Diamond Complex in China, there would have been many potential interested parties among the ADB clients in New York. Why write these off?

Abandoning New York
Let’s recall the assurances given by KBC’s CEO Johan Thijs, who is “convinced that the Yinren Group will develop Antwerp Diamond Bank’s business going forward, securing the future of its staff and ensuring that quality service will continue to be provided to its customers.” Why was New York’s ADB un-ceremonially dumped on the eve of the bank’s sale? ADB’s CEO Pierre De Bosscher, at the time, told Belgian newspapers that this was done in consultation with the future buyer, i.e. Yinren.

But, again, if the group wanted to be in America, why get rid of what may well be the best part of ADB?

The answer is gradually emerging. Yinren knew full well that the chances that the U.S. regulatory authorities would approve its acquisition of a bank would be slim. Too many U.S. companies with an involvement in China have found themselves at great risk of tripping over the Foreign Corrupt Practices Act and Chinese anti-corruption laws.

“Tales of U.S. corporations ensnared in bribery scandals are increasingly frequent front-page news in both countries, with headlines like ‘Former Bank Executive in China Faces Bribe Accusations’ and ‘Rattled by investigations, foreign firms in China beef up compliance’,” writes Erin R. Schrantz, a corporate counsel and litigator at Jenner & Block’s commercial litigation practice. “U.S. entities operating in China need robust compliance measures to address the growing dual regulatory pressures,” she adds.

The compliance thresholds for banks exceed those of commercial companies. ADB, if it was still operating in New York, would fall squarely under U.S. banking and compliance laws. The irony is that both U.S. and Chinese criminal law squarely prohibit offering bribes to state functionaries – the two legal regimes on these subjects are rather similar. Even the Communist Party of China (CPC) has issued very specific prohibitions regarding bribery and corrupt conduct. The issue is one of enforcement. And in this respect, China’s record is not very convincing.

Belgian and European Regulators' Dilemma
The regulators that need to approve the KBC/Yinren deal face a double whammy: beyond the challenges associated with China, the purchaser of ADB is not a bank. It is not a regulated entity falling under the banking supervision laws of China. Yinren is a real-estate developer – and for its projects, it is very dependent on the goodwill of various government entities. It participates in tenders issued by state bodies.

If the European and Belgian banking authorities give the green light to the transaction, they must take into account that they accept “invisible risks.” Yinren, as a commercial company, maintains a continuous relationship with Chinese government officials for seeking regulatory approvals, building licenses, negotiating tax matters, and getting a host of other different permits and approvals. One assumes that all these interactions will always be above board. It is self-evident that Yinren’s leaders have the “guanxi,” or connections, with the officials whom they need.

I believe that the Yinren people may have the best of intentions. However, their total lack of understanding of the need to reach out to concerned diamond-industry stakeholders, to also provide explanations to the Belgian and diamond trade press, to assure politicians and – above all – to provide comfort to clients is alarming. Surely, this can be attributed to a deep cultural divide.

Erin R. Schrantz, in her excellent commentary on compliance issues, observes that the cultural differences run deep. “Chinese and U.S. partners assess corruption risks in profoundly different ways. For example, is it a corruption warning sign if a third-party vendor has close personal ties to a [Communist] Party official?”

Something that may warrant further due diligence from one legal perspective may just be commonplace and normal from a Chinese viewpoint.

ADB’s De Bosscher has enthusiastically proclaimed that the “Yinren Group fully supports our customer-oriented model and strategy and has a valuable long-term strategic outlook.” While this is what De Bosscher says, we haven’t heard the Yinren side. There is a huge gulf between compliance perceptions in China and the United States.

I believe that the Yinren traders fully comprehend the unbridgeable challenges the company would have faced in New York had the ADB branch remained open there. That’s aside from the fact that it would also have stepped into the footsteps of the bank, which is litigating a RICO fraud lawsuit in the U.S. courts. Yinren seems to want to stay out of America. (The property it currently has there cannot be viewed as one of its group pillars having a presence in America.) At the end of the day, Yinren is a local Chinese real-estate developer or trader that has engineered a virtual “global diamond and real-estate presence” to add credentials that will allow it to buy a globally active diamond bank. Let’s hope for them that the regulators will also buy it.

Naomi Avenue in Houston
What does the Yinren Group's presence in America consist of? The company states that “Yinren Real Estate (U.S) Company was founded in Gallaria in September 2006, which was located in the downtown area of Houston. The company bought land near the Houston Medical Center for real estate development.” DIB went to Texas to locate records for these purchases. Indeed, near the city’s hospital are a few residential streets – with many empty lots – mainly occupied by Chinese families and (based on the names) Mexican-American immigrants. One of these streets is Naomi Avenue. Bingo!

Yinren Real Estate (USA) Inc. owns nine lots on Naomi Avenue for the building of nine single residential units. The value of each of these lots, as assessed for tax purposes (2009 tax year), runs between $7,199 (six lots) and $7,472 (three lots). To be precise: the total value of the real-estate investments we could locate comes to $65,610. No, we are not missing any zeros. The land size of each lot is about 1,655 square feet. After erecting a house, the market value of each developed lot would be in the range of $160,000-$170,000. By any standard, these are marginal investments.

There are plenty of houses for sale in the neighborhood making one wonder why the Shanghai company would pick this area out of the whole United States. It also seems odd that a group that wants to own and operate a diamond bank that will provide the diamond industry with a few billion dollars of credit would make such efforts to demonstrate its U.S. real-estate involvement by having a few empty $7,000 lots in downtown Houston. 

And let’s not forget: it is companies like Yinren Real Estate (USA) Inc. that supposedly makes the Yinren company a “group” – just as Yinren’s Brazil diamond concession mainly served to add prominence to KBC’s impressive press release. The group's global activities are as marginal as they are virtual: a project for wealthy Chinese to make “investments” in return for U.S. “green card” residence visas, a marketing joint venture with Sakha Diamonds, and its joint venture with the Basal Diamond Company.

The deafening silence from Yinren’s top leaders, president Shen Xiaoan and his deputy Simon Lu, have become a real concern. And if, by any chance, they have in the meantime purchased more lots anywhere in America, they should upload that information to their website – so the world will know… Otherwise, the U.S. real-estate pillar is a non-story.

Have a great weekend.