Ezubao Financial Fraud: Multi-Billion Dollar Ponzi Scheme Could Be The Largest In Chinese History [Report]

The Chinese authorities have arrested 21 people who are accused of defrauding $7.6 billion to almost one billion investors through Ezubao, China’s largest private lending platform. Ezubao’s financial fraud operation resembled a “Ponzi” or pyramid scam, according to local press. USA Today reports that the case could possibly be the biggest financial fraud in Chinese history.

At first glance, Ding Ning, 34, appeared to be a young, successful Chinese businessman success. Ding had no training whatsoever in the financial world. His professional career had started just out of his teens, when he started helping out at his family’s hardware store in Anhui, one of the poorest provinces in China. When e-commerce began to emerge, he saw his opportunity and began selling products through the Internet.

His initial success could not handle the competition, so he focused his activities on small-scale loans. He then founded the company, Yucheng, with which he took his first steps into the financial sector. In 2014, encouraged by the success of financial products in other e-commerce platforms like Alibaba, he created Ezubao, which specializes in P2P lending.

But now, Ding is being called the mastermind behind the largest Ponzi scheme ever discovered in China. Authorities accuse his company of attracting investors with false projects by offering returns of between 9 and 14 percent, which is significantly higher than traditional banks, but in line with those of other companies in the growing sector of finance for Internet. Reportedly, 95 percent of their borrowers were fictional entities created by Ezubao, a former company executive told investigators.

As mentioned above, a total of 21 people have been arrested so far. All of them worked in the Ezubao platform that promised returns much higher than bank interest to those who would invest in it, according to published officials in Chinese media. Two of the company’s former employees have admitted to committing fraud on TV.

“The truth is that it’s a fraud… it’s a typical Ponzi scheme,” Ding’s business partner, Zhang Min, said in an interview.

“As far as I know, 95 [percent] of projects on Ezubao are fake,” Yong Lei, Director of Risk Control at Yucheng, told reporters in a statement published by Xinhua, the official Chinese news agency.

According to Lei, the company bought information from other companies to set up fake profiles on Ezubao’s platforms under Ding’s orders.

The investigation into Ezubao’s financial fraud intensified in December. When police examined the books of Ezubao, they found that of 207 companies that were mentioned, only one had truly conducted an operation with the platform, according to Xinhua.

After police shut down Ezubao in December, scores of protesters gathered outside a Beijing government building to demand their money back. Simmering anger on social media also spurred public security officials to phone Internet users to warn them against criticizing the Communist Party online.

Although it is not the biggest Ponzi scheme in history — that honor goes to the plot organized by Bernie Madoff — it is striking how quickly the fraud spread, which in just 18 months acquired tremendous popularity and affected over 900,000 people.

Ezubao promised returns as high as 14.6 percent, which was music to the ears of many small Chinese investors, who were perfect victims because they often had limited experience in investing. Ignorance and greed were often motivating factors in their investments, and it should have seemed too good to be true.

[Photo by Lam Yik Fei/Getty Images]