Security & Fraud

China’s $7.6B Ponzi Scam Exposes Online Finance Risks

In the latest Ponzi scheme of size and of headlines, the news of a $7.6 billion fraud emanating out of China exposes the risks of plunging into online finance, Reuters reported Wednesday (Feb. 3).

As the newswire noted, Ezubao gathered up that staggering sum in short order — less than two years — impacting more than 900,000 investors utilizing its peer-to-peer lending platform within the country. The company, said Reuters, grabbed attention by way of marketing efforts and the lure of “big returns.” Yet, said some executives, as much as 95 percent of projects pushed by the company were, in fact, fake.

Citing the state-owned Xinhua News Agency, the promise of returns as great as 14 percent, especially in a slowing economy and low savings rates, took in the multitudes of investors. The funds went to gilded lifestyles for company executives of parent company Yucheng Group. Among the more eye-popping gifts that changed hands: Chairman Ding Ning bought President Zhang Ming a $20 million Singapore property, a $1.8 million pink diamond ring and cash bestowments of as much as $83 million.

Such activities show that the minimally regulated wealth management industry in China has its sizable pitfalls. Most of these financial offerings are done through the Internet, making tracking difficult. In addition, the P2P industries serve a real purpose, including lending to legitimate small and midsized businesses. By the end of last year, there were more than 3,600 P2P firms operating in China, and taken as a whole, the segment has raised 400 billion yuan. But of those 3,600 firms, the China Banking Regulatory Commission said 1,000 are “problematic.” The commission published draft rules to regulate the P2P players, which banned pools created by commingled investor funds.

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