Xinhua Insight: Online P2P lender suspected of $US 7.6 billion fraud

Weeks of police investigation have found substantial evidence that online peer-to-peer broker Ezubao cheated about 900,000 investors out of more than 50 billion yuan (7.6 billion U.S. dollars).

The P2P platform had been in operation for 18 months when it was shut down by police in December after conducting transactions involving 70 billion yuan. Most investment projects featured on the company website were fake, a police source said on Sunday.

Ezubao was nothing but a Ponzi scheme, according Zhang Min, president of Yucheng Global, parent company of Ezubao, who claims senior executives were fully aware of the nature of the business. She is one of 21 suspects arrested on Jan. 14.

Ding Ning, chairman of Yucheng Global and the main suspect, told Xinhua that Ezubao invented projects to attract funds, paying commission to third parties to act as a fake operator. Funds were transferred from Ezubao via the operator to an associated enterprise of Yucheng Global.

About 800 million yuan of commissions were paid, according to Ding.

"To my knowledge, 95 percent of investment projects on Ezubao were fake," said Yong Lei, a senior manager with the company's branch in east China's Anhui Province. His department was in charge of "filling in details of investment projects and promoting them on online."

The police investigation supports the suspects' statements. Police investigated 207 companies on Ezubao's books but only one turned out to have actual business transactions with Ezubao. Many companies did not even know they were being promoted on the platform. An Anhui businessman told Xinhua that he had no idea his company was listed with Ezubao until police froze his bank account.

"They stole my business registration and taxation information through another transaction between my firm and Yucheng Global then faked the project. It's an outrage," he said.

Ezubao promised investors returns of up to 14.6 percent a year, much higher than banks. In the event of the investment project turning sour, Ezubao promised to return principals to investors with interest at the average bank rate.

WHERE DID IT ALL GO WRONG?

Today, 100,000-yuan deposited in a regular bank will generate about 2,000 yuan in a year, but Ezubao promised up to 14,000 yuan, according to an investor.

The scheme started to fall apart late last year when the company ran short of cash as redemptions of principals soared.

The company estimated that it would have to find around 900 million yuan in January, and that amount would grow in the coming months. Yucheng Global's three other businesses had a combined revenue of 800 million yuan and net profits of less than 100 million yuan, nowhere near enough to cover Ezubao's needs.

Abnormal transactions attracted the attention of financial regulators and police, and in early December, according to the police source, senior company executives began to hide assets and destroy evidence, with some planning to flee.

The company had branches across the country with a huge number of investors and disastrous financial management, the police source said. The investigation was particularly testing for law enforcers who had to go through around 200 servers to retrieve digital transaction records.

Attempting to destroy evidence, the suspects even packed about 1,200 volumes of financial documents into 80 travel bags and buried them six meters underground at a location in Hefei, the provincial capital of Anhui. It took police 20 hours to dig them out with two excavators.

WHERE DID THE MONEY GO?

While some of the funds went to pay disgruntled investors, a considerable amount went straight into the pockets of senior executives.

According to Zhang Min, about 80 company executives earned annual salaries above 1 million yuan. In November 2015 alone, the company paid a salary bill of 800 million yuan. Zhang herself received a bonus of 550 million yuan cash, together with a villa, jewelry and cars. A large amount went on advertising and promotion of the company.

Police told Xinhua that they are still tracking the money flow and will try their best to minimize losses for investors. Victims will soon be able to register their grievances on the Ministry of Public Security website. Endi