An online finance company in China bilked its investors of over $7.6 billion, that was spent on lavish gifts, salaries and buried that evidence according to authorities who described it as being a huge Ponzi scheme.
These accusations throw a big shadow over the online China finance industry, a lucrative sector that has nurtured global leaders. However, it is one that authorities are saying also has seen a number of flameouts and frauds.
Officials in China say that Ezubao, the dynamo of this industry, offered mostly fake products for investments to its close to 1 million investors.
Reports said that authorities arrested 21 people in the eastern province of Anhui, where Ezubao has its base and closed down some of the operations of the online lender.
The official news agency in China Xinhua said that Ezubao was a Ponzi scheme and quoted a former company executive at the company saying officials in the company were not available for comment.
A slew of companies in China have emerged of recent to do for clients what the state-owned banks will not. Chinese customers use their smartphones to transfer money and buy groceries while new finance companies offer loans to smaller businesses as well as students and others, the banks have ignored traditionally.
Ezubao told its investors that it was a peer-to-peer lender that matches investors with possible borrowers over the net.
China’s peer-to-peer growth or P2P, lending has increased, with Morgan Stanley estimating its volumes in 2015 that totaled over $33.2 billion, led the U.S.
Morgan Stanley has estimated that the market in China is very fragmented with over 1,500 of these types of lending platforms.
However, cases of fund raising illegally related to lending peer to peer have grown quickly the last two years.
Officials pledged in December to tighten their regulation of this industry.
Due to the large amounts of funds that are involved and its large base of investors, the collapse of this major financing online platform could cause concerns over the confidence in and the security of these types of investments.