According to authorities in China, a peer-to-peer lending company Ezubao defrauded investors of more than $7.6 billion, using the funds on gifts and salaries. The executives at the company are accused of destroying evidence in a business now determined to be a Ponzi scheme.
The charges come as China’s stock market faces steep declines. Authorities there have said in recent years increasing numbers of fraud and bankruptcy has placed doubt over China’s online financial industry. Ezubao, according to authorities, offered clients fraudulent investment products. Over one million investors put their money in financial products that did not exist.
In Anhui, in eastern China, authorities arrested 21 people. “Ezubao is a Ponzi scheme,” said Xinhua quoted Zhang Min, a former executive at the company.
Many of these new companies focus on smartphone technologies, helping people buy groceries and transfer money through the handheld devices. New finance companies are also lending to small businesses who cannot receive loans from traditional banks. Ezubao, which claims to be a peer-to-peer lender, matches investors with those looking to borrow over the Internet.
Morgan Stanley estimated the total volume of peer to peer lending in China at $33.2 billion, larger than the US. Morgan Stanley posits there are over 1,500 peer-to-peer lending platforms in China.
Illegal fund-raising in China has grown in China in the past two years. Ezubao has come under the eye of law enforcement in recent weeks. Xinhua said the firm was under investigation last December. The company apparently spent nearly 800 million renminbi on payroll last November. The firm also buried 1,200 documents six meters underground. Police spent 20 hours with two excavators to unearth the documents, which were underground near Hefei, the capital of Anhui Province.
Peer-to-peer lending became a hot topic in fintech in 2015 not only in China, but, also, in the United States. In the US alone, billions of dollars poured into p2p financing. In the wake of the financial crisis in 2008, the Dodd-Frank Wall Street Reform and Consumer Protection Act tightened consumer lending policies in the US. This led to a proliferation of p2p lenders.
In 2016, it appears likely banks will get into the business of peer to peer lending. Goldman Sachs has already entered into the space, and this appears like a trend that could last.
The fall of Ezubao trumps the largest Bitcoin fraud of $10 million at Mt. Gox by many magnitudes.
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