Ezubao Ponzi Scheme Brings P2P Lending to the Forefront

By Nicole Encalada,
International Business Writer

A successful Chinese peer-to-peer lending company, Ezubao, was shut down after being exposed of defrauding investors of $7.6 Billion. The International Business Times reported that the investigation led to 21 arrests last Sunday by Chinese officials of all associates involved in the operation which scammed the nearly 900,000 investors.

Peer-to-peer lending platforms, typically abbreviated as P2P, serve the purpose of matching investors with borrowers online. Without financial institutions in the equation, there are lower interest rates for borrowers and investors can expect higher returns which is exactly what Ezubao promised its customers. In fact, Ezubao claimed to its lenders that they would receive above-market returns of up to 14 percent.

The company was established in July 2014 by the Yucheng Group and became China’s largest P2P platform within 18 months of its launch. Suspicions of criminal activity amongst investors emerged back in early December when Ezubao’s executives were detained and offices in Beijing and Shenzhen were closed down by police. Shortly after, investors realized that their assets were frozen when they were unable to withdraw cash.
Investors were not the only ones duped in the Ponzi scheme. The company spared no benevolence for its subordinates either. Of the 100,000 employees, considered wealth managers, many invested their savings into the company.

It was revealed that an appalling 95 percent of investment projects listed on the website were completely fabricated. Police reported that only a single company received its investments from Ezubao out of the 207. On Monday, The New York Times reported that the executives responsible buried revealing documents 20 feet underground in an unsuccessful attempt to hide the evidence. With excavators at hand, it took police 20 hours to find the information.

The chairman of the Yucheng Group, Ding Ning, who was amongst the 21 arrested, certainly put the embezzled funds to good use. It was reported that some of the investor’s money was spent on extravagant gifts, amongst them being a $1.8 million pink diamond and a $20 million villa in Singapore. Ning and other executives were using the P2P company as a way to support their luxurious lifestyle, not to mention the financing of their hefty paychecks and bonuses.

Much of the illegal earnings also went to creating a positive and high-profile image for Ezubao. They mentioned that Ezubao grew as quickly as it did because of the high returns they offered, until assets were ultimately frozen.

It is no surprise that those at Ezuabo were able to pull off the scheme for as long as they did considering how loosely China’s $26 trillion wealth management industry is regulated. Because these platforms allow for higher return on investments than traditional banks, the industry has drawn mass attention from China’s booming middle class.

Of course, there is now more concern of the risks involved in investing through P2P lending platforms.

A version of this article appeared in the Tuesday, February 9th print edition.

Contact Nicole at
nicole.encalada@student.shu.edu

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