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Food & Beverage

China says it will penalize Luckin Coffee for accounting fraud

Company had inflated sales as well as costs

Luckin Coffee directly competes with Starbucks.   © Reuters

BEIJING (Reuters) -- Chinese regulators said they would penalise Luckin Coffee after confirming accounting fraud that has already forced the company to delist from the U.S. Nasdaq exchange.

The Ministry of Finance, which began an investigation into Luckin Coffee (China) and Luckin Coffee (Beijing) in early May, found Luckin booked 2.25 billion yuan ($322.60 million) of sales through fake coupons from April 2019 to the end of last year, it said in a statement on its website on Friday.

It also found Luckin inflated sales by 2.12 billion yuan during the period, while costs were inflated by 1.2 billion yuan and profits by 908 million yuan.

The ministry said that it would now impose administrative penalties on Luckin, without giving further details.

The State Administration for Market Regulation said in a separate statement, again without giving details, that it too would take action against the two domestic entities of Luckin and related third party companies that helped Luckin with the false promotion.

Fortunes of Luckin, which directly competes with U.S. coffeehouse Starbucks, have nosedived since the probe was disclosed in April.

The delisting of its U.S. shares added to concerns about Chinese company governance after the U.S. Securities and Exchange Commission (SEC) warned in April of the dangers of investing in emerging market stocks, singling out China in particular.

The China Securities Regulatory Commission (CSRC) said in April that it had initiated talks to cooperate with the SEC on a possible investigation into Luckin.

Luckin wound up an internal probe earlier this month that found the company's revenue was inflated by around 2.12 billion yuan in 2019.

During the investigation, Luckin sacked its CEO and COO, executives who had previously held top positions at Chairman Charles Lu's other firms.

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