The
accusations throw a shadow over China’s online finance industry, a
lucrative area for many global leaders in the sector, but one that the
authorities say has also drawn a growing number of cases of fraud and
flameouts.
Chinese
officials say that the online company, Ezubao, once a dynamo of the
industry, offered mostly fake investment products to its nearly one
million investors, according to the state-run Xinhua news agency. The
authorities arrested 21 people in Anhui, the eastern Chinese province
where Ezubao is based, and closed some of the platform’s operations, the
agency reported on Sunday.
“Ezubao
is a Ponzi scheme,” Xinhua quoted Zhang Min, a former executive at the
company, as saying. Officials at the company could not be reached for
comment.
A
new category of Chinese companies has emerged in recent years to do for
customers what the country’s state-owned banks will not. Chinese
customers widely use their smartphones to buy groceries or transfer
money, and new types of finances companies are offering loans to small
businesses, students and others that state banks traditionally ignore.
Ezubao
claims to be a peer-to-peer lender, which matches investors with
potential borrowers over the Internet. China’s growth in peer-to-peer
lending has been strong, and Morgan Stanley estimated total volume in
the country last year at $33.2 billion, surpassing the United States.
The Chinese market is highly fragmented, Morgan Stanley says, with more
than 1,500 such lending platforms.
But
cases of illegal fund-raising related to peer-to-peer lending have
grown quickly in the past two years, according to the local authorities,
and officials pledged in December
to tighten regulation of the industry. Because of the enormous sums
involved and the large investor base, the collapse of a major
online-financing platform could raise concerns over confidence in the
security of such investments.
Ezubao
has been under official scrutiny for weeks. In December, Xinhua said
the company was under investigation for suspected illegal business
activities.
Xinhua
said an investigation by local authorities had found that most of the
investment products the company marketed were fake. Some offered
investors annual interest payments of as much as 15 percent.
In reality, the platform, which was set up by the Yucheng Group in July 2014, was used to enrich top executives, Xinhua said.
That
included more than 1 billion renminbi, or around $150 million, that
Ding Ning, the chairman of Yucheng, is reported to have spent on items
and gifts including real estate, cars and luxury goods, according to the
news agency.
The
report added that the salary paid to Mr. Ding’s brother, Ding Dian, was
increased to 1 million renminbi a month from 18,000 renminbi. The
company spent as much as 800 million renminbi on payroll in the month of
November.
Another
executive, who was in charge of risk management at a company affiliated
with the Yucheng Group, said that more than 95 percent of the
investment products Ezubao marketed on the platform were fake, according
to the report, and those responsible went to considerable lengths to
conceal their ruse.
The
Xinhua report said that suspects had placed about 1,200 documents and
other pieces of evidence related to the scheme in 80 bags and had buried
them six meters, or nearly 20 feet, underground at a site on the
outskirts of Hefei, the capital of Anhui Province.
It
took the police 20 hours with two excavators to unearth the evidence,
Xinhua said, and the police described the case as “extremely difficult.”
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