Fraud on a Chinese Scale: 900,000 Investors Deprived of $7.6 billion

Chinese authorities have busted a major fraud scheme targeting a number of investors. Almost 900,000 clients of online peer-to-peer lending platform Ezubao (E Rent Treasure) have turned out to be the victims of a scam. The pyramid scheme has been operating across 31 provinces and has managed to illegally collect over $7.6 billion (¥50 billion).

The owner of Ezubao is former chairman of Yungcheng International Group, Ding Ning. He and twenty of his associates have been arrested by the Beijing prosecuting department. The average amount lost by investors in the scheme comes to over $8,400, which is about the average yearly income in China according to statistical data from 2014.

Ezubao was started in February 2014, when Yungcheng International Group purchased a network and technology company which was later renamed. The corporation was registered abroad and as such managed to escape the vigilant eye of local regulators for some time.

For the purposes of fund collection the company opened 8 business operation centers across the country and was promising investors returns totaling between 9 and 14 per cent.

According to Beijing’s police the scheme was advertised to investors as “high-interest returns”. Meanwhile the management of the company was spending the funds on their lavish lifestyles while also committing substantial funds to operating costs and advertising.

At the end of 2015, the Chinese authorities in Beijing, Shanghai and Anhui started their investigations, which later revealed that the company may be involved in unregulated and illegal collection of funds from investors.

The parent company, Yungcheng International Group has been accused by authorities of destroying evidence, as some senior executives managed to flee the investigation and are at present on the run from authorities.

Police sources have shared with Chinese media that employees of Ezubao attempted to bury 1,200 books of evidence 6 feet underground in a suburban area in the Anhui province. The evidence has been discovered by police and excavated in a 20 hour operation involving heavy machinery.

Effects on the industry?

Beyond Ezubao and its investors, the Ponzi scheme could also have major implications for the overall Chinese P2P lending sector. The country has been the hottest region for P2P lending with borrowers taking advantage of the available liquidity of loans compared to banks. As a result, many of the larger players in China recorded in lending transactions in 2015.

However, as the sector has grown, looming in the background has been the belief that the Chinese government will implement guidelines to regulate marketplace lending. The sentiment has been initiated by two major factors: fraudulent activity and the use of loans to speculate in equities. In terms of the latter, the government warned several firms to limit loans to traders following steep declines in stock prices. The current developments can be expected to further intensify government scrutiny in the sector which could limit the hot P2P market over the near future.

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