A massive P2P Ponzi was uncovered in China
Loans on Ezubao were fake.
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.
“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.”
Returns from loans on Ezubao sound too good to be true
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.
Firms borrowing from financial leasing companies often pay an annual interest rate of 7 to 8 percent, and that “clearly fell short of the yields offered by Ezubo’s wealth management products,” a person close to the company said.”
Lenders do not know who they are lending to.
Individual investors had to first pay upfront before getting a contract and were not told who they were lending to, an Ezubo employee, who declined to be named, said.
With fraud at such a massive scale, I’m sure MAS and other regulators in the world are studying this case carefully. I believe it is only a matter of time before MAS regulates the sector. In the meantime, investors should exercise their own due diligence. Here are several ways to do so.
Visit the office and speak to the management
One of the advantages of being an early adopter of the p2p movement is that there are still chances to speak to the founders of lending platforms. I’m a firm believer in face-to-face meetings and I usually go into meetings with 2 or 3 questions in mind. If management is unable to give a straight answer, then maybe I would reconsider. So far, the people I’ve met so far appear to be decent and quite candid in discussing with me what they try to do.
Observe management over time
Actions speak louder than words. Some founders are quite charismatic and may be able to disguise their flaws well. But I can always pick up a few things when I observe the company over time. For example, there were several cases of default and late payments recently. How each company handles the different cases give me an indication of their level of experience level and their core values.
Look out for transparency
In my view, a good lending platform should always be upfront about its borrowers, defaults and fees. It shows that they have nothing to hide and is confident in facing up to their competitors. If a platform is unwilling to provide certain information, I always try to find out why. Sometimes, it is reasonable.
Understand the business of the lending platform
The business models for CM, FS and MS are quite straight-forward: they earn fees from each loan transaction. Should there be defaults, the platforms themselves should not be too severely impacted. As a lender, this means that your risk mainly come from the loan you selected. For New Union, it is more complicated. New Union earns a spread on fees and guarantees all loans originated on their platform. This means that when you lend, your risk doesn’t just come from the loan that you choose, but all other deals done by New Union. My personal preference is to stick with CM, FS and MS – where the risks are easier to understand.
What do you think? Are there any other ways to do due diligence on lending platforms?