Ching Fu Shipbuilding Company

Since October 2017, Taiwan witnessed a media frenzy over a scandal involving domestic Ching Fu Shipbuilding Company. A consortium of Taiwan's largest private shipbuilder Ching Fu Shipbuilding Co Ltd, U.S. defense firm Lockheed Martin Corp and Italian firm Intermarine SpA won a contract 30 October 2014 to supply six mine countermeasure vessels for Taiwan's navy for an undisclosed amount. The first minesweeper was built by Italian shipbuilder Intermarine S.p.A. Construction was expected to be complete in the fourth quarter of 2020, and the ship would thereafter be delivered to Taiwan. Lockheed would install and test the combat management systems for the ships.

Qingfu / Ching Fu Shipbuilding, one of Taiwan’s largest private shipbuilders, in October 2014 won a 35.8 billion NTD [US$1.19 billion] Ministry of National Defense contract to build six minesweepers [Thunder Huntin Ships] as part of the nation’s indigenous ship building and upgrade program. The first of the vessels to be built according to the contract was a 700 tonne ship, which is being constructed by Italy’s Intermarine SpA, with US firm Lockheed Martin providing support for the mine detection hardware and weapon systems. Ching Fu Shipbuilding was to build the remaining vessels.

Ching Fu was thought to have not had the construction ability to construct minesweepers, leading to questions about why Ching Fu was allowed to bid on the minesweeper contract to begin with. Qingfu Shipbuilding Co., Ltd. was contracted to build a fleet of 28 100-ton patrol boats by the Marine Commission’s fleet of the Marine Commission. Ching Fu delivered four patrol boats to the coast guard in 2001 but at least 338 issues were found with these patrol boats. Due to the overdue delivery of the 14th patrol boat under construction, the patrol-boat procurement contract was cancelled and another tender was filed. In January 2018, civil damages were filed with Qingfu.

The Ministry of Defense stood accused of failing to ascertain whether Ching Fu had the financial resources to construct the minesweepers. The Ma administration and Ministry of Defense was further accused of substantially lowering the minimum asset requirement needed for building the minesweepers from 3.53 billion NTD [ie, one tenth the value of the contract] to 176.47 million. Observers questioned why such a small company succeeded in winning such a major contract.

In December 2015, Chen Qingnan, chairman of Qingfu Shipbuilding Group, entered the presidential palace several times to "participate in the banquet". On December 8th, he finished his first meal. On December 9, he went to the former presidential deputy secretary-general Xiong Guanghua to ask for help. Secretary-General of the Executive Yuan found a representative from the Ministry of Finance and the public stock bank to help Chen Qingnan hold a loan meeting. With a bid of 35 billion yuan for the Navy's six mine-hunting ships, in 2016, in order to raise funds, Qingfu signed a contract with nine financial institutions for a loan of 20.5 billion yuan through false financial statements. This is because political power is involved in putting pressure on these banks.

The firm faced financial difficulties because the ministry had not paid initial installments outlined in the contract. The situation meant the company was unable to gain US approval to import weapons systems. After securing the contract, Ching Fu Shipbuilding allegedly colluded with a South Korean firm in 2015 and 2016 to set up three overseas shell companies to launder money.

Allegations of fraud and illegal transfers of funds were raised when investigators found that Ching Fu Group had boosted its listed capital to NT$5 billion, partly from bank loans, and was in talks over a series of joint ventures with Chinese companies. Ching Fu owner and president Chen Ching-nan and his son, company vice chairman Chen Wei-chih were in Shanghai in June 2017 to meet with China MCC20 Group’s Zhang Jinxian regarding a joint venture to build luxury resorts and an amusement park on Dongshan Island in China’s Fujian Province.

The Financial Supervisory Commission 10 August 2017 said that despite loan irregularities involving false documents, Ching Fu Shipbuilding had not lapsed in servicing its debt and no domestic banks had filed a complaint about the company. The commission confirmed that First Commercial Bank had arranged the syndicated loan, of which the shipbuilder had received about NT$15 billion.

It was announced in November 2017 that Ching Fu had defaulted upon its loan and that Ching Fu would be unable to complete the minesweeper contract. The losses incurred by these banks could reach up to 12.5 billion NTD.

Former president Ma Ying-Jeou is among those to come under scrutiny, in addition to senior Ministry of Defense officials and First Commercial Bank president Tsai Ching-nain. The loan from the First Commercial Bank was over 15 billion NTD and the First Commercial Bank belongs to the category of banks in Taiwan which were formerly state-owned, have ostensibly privatized, but still retain strong ties to the state. State-owned Land Bank of Taiwan is also among the creditor banks, having made a 950 million NTD loan to Ching Fu. The other seven banks are similar, straddling the unclear boundary between state-run and private banks in Taiwan which often come under public scrutiny.

Three chairmen of state-run banks were sacked 22 November 2017 over the Qing-fu minesweeper scandal. Finance Minister Xu Yu-zhe said that the decision to replace the heads of the Taiwan Business Bank, First Financial Holding, and Taiwan Cooperative Financial Holding was based on considerations of the bankers' age and connection with the scandal. Xu said that although they did not organize the consolidated loan, they did provide significant funds to it and their dismissal is partly punishment for that.

On 12 February 2018, the chairman of the Ching Fu shipbuilding company, along with two associates and two family members, were charged with loan fraud for falsifying documents. Prosecutors sought a 30 year sentence. Chen Qingnan, the chairman of Qingfu Shipbuilding Group, was detained in June 2018 for 9 months. Due to the expiration of the custody, he was released on the 25 February 2019 but re-arrested on other charges. Kaohsiung City, which was under the control of the Democratic Progressive Party, turned a blind eye to the ill-conceived case of Qingfu. Chen Weizhi, vice chairman of Qingfu Shipbuilding Co., Ltd., decided to restrict residence by the Kaohsiung District Court in Taiwan, but did not report to the police station on the day, and escaped May 22, 2018 without a trace.

On 22 November 2017, President Tsai personally issued a statement devoted to Ching Fu’s criminal case. Tsai focused on her responsibility to share the military’s “burden” in this controversy, saying that “as commander-in-chief, I expect the armed forces to meet the problem head-on, and rectify errors. That’s the significance of military reform. Anything less is unworthy of the armed forces of the Republic of China.”

CSBC Corporation filed an appeal to the Defense Ministry in N0vember 2016, accusing the Ching Fu shipbuilding of violating Government Procurement Act to win the contract. Premier William Lai suggested in October 2017 that the contract may be dissolved. Premier Lai testified to the Legislative Yuan (LY) that Taiwan’s Executive Yuan (EY, Taiwan’s cabinet) would investigate the contract and “cut its wrists” by ending it if necessary to prevent more losses. It was possible that the contract will be taken over by CSBC Corporation, which many viewed as more qualified to have constructed the minesweepers to begin with, and which was Ching Fu’s primary competitor in the bidding process for the contract.