Ezubao: a US$7.6b Ponzi scheme
- By Guo Yiming
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E-mail China.org.cn, February 2, 2016
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Office of E Rent Treasure in Hangzhou, Zhejiang province, is locked in December. [China Daily] |
"We promised high yield and low risks as you can invest as little as one yuan and get back your money anytime," this was the slogan of Ezubao, the once all-powerful online lending firm which touted itself as the country's largest peer-to-peer (P2P) platform.
"I was convinced that even if the company's investments failed, the money would still be there," said Mr. Zhang, one of the 900,000 investors falling for Ezubao's "alluring" offers which promised a staggering return of 14.6 percent , much higher than that of similar products offered by banks.
"Most financial services do not allow for the flexibility offered by Ezubao which can return your money whenever you want," claimed another investor surnamed Xi.
High-yield, low-risk and flexibility, hyped by Ezubao, seemed to be the contributors to the platform's runaway success in the past one and half years. However, it proved too good to be true.
Ezubao: a Ponzi scheme
Ezubao was launched in 2014 by Ding Ning, chairman of holding firm Yucheng Group. He was among the 21 suspects arrested on allegations of illegal fund-raising, illegal absorption of deposits from the general public and illegal ownership of firearms.
From its launch in July, 2014 until its meltdown in December of last year, Ezubao absorbed over a total of 50 billion yuan (US$ 7.6 billion) through fraudulent investment projects with a constant infusion of new investors to pay older ones, involving 900,000 investors from 31 provinces, regions and municipal cities.
It was not until late last year that things surrounding the firm went awry. On Dec. 5, the police noticed that Yucheng Group, which operates Ezubao, and its affiliates did not have a sufficient cash flow and were on the brink of a financial meltdown.
At the same time, the group reportedly began transferring some of its capital, destroying certain evidence, and a few senior executives fled. Out of fear of more losses, China's Ministry of Public Security led a intense manhunt for the firm's leaders on Dec. 8.
"Ezubao is absolutely a Ponzi scheme," claimed Zhang Min, president of the Yucheng Group, after she was detained by police in Beijing.
Zhang also said that all the senior executives in the company were aware of the scheme, according to Xinhua News Agency.
In most cases, financial leasing businesses earn the spread between lending and borrowing and the platform survives via intermediary fees. As it turns out, Ezubao actually tried to gain something from nothing as they had very little financing projects.
95% of the projects were fake
"From what I have seen, 95% of the projects on Ezubao's platform were fake," claimed Yong Lei, a risk controller at a leasing company under Yucheng Group. Yong also noted that Ding asked his subordinates to buy information from companies using 1.5% to 2% of the funds in order to create fraudulent projects on the online platform.
To boost investor's confidence, they even concocted registered capital for those "companies," he added.
Among the 207 companies that police identified on the Ezubao platform, only one had business operations with the firm.
Some companies even had no idea that their projects had been listed on the notorious financial leasing platform. An executive surnamed Wang from a firm based in Bengbu, Anhui Province said Ezubao was also charged with identity theft as it misrepresented his company by using its business license and tax registration certificates without informing him in advance.
Where was the money spent?
According to the police investigation, a large chunk of the funds served for extravagant personal outlays, lavish spending on the firm's operation, investment on non-performing loans and massive advertising campaigns.
Investigators claimed that Ding spent over a billion yuan on gifts such as properties, cars and luxury goods. He once gifted Zhang Min with a villa in Singapore worth 130 million yuan, a pink diamond ring valued at 12 million yuan, and 550 million yuan in cash.
Ding also paid high salaries to his employees, especially to top executives. Almost 80 people at the firm received an annual salary over one million yuan, according to Zhang Min's confession. Nearly 800 million yuan was used for paychecks in November last year.
Several executives noted that Ding even asked his secretaries to wear luxury clothes and accessories in order to sport the firm's "deep pockets."
Authorities reported that Yucheng Group is a massive network with branches and subsidiaries scattered all around the country with hundreds of thousands of investors duped by this investment scam.
Investigations into the online scam are still underway with the Ministry of Public Security, as well as other agencies like the central bank and banking regulators, working in synergy.
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