China cracks down on US$7.6 billion Ezubao Ponzi scheme

Last updated 18:45, February 2 2016

Stringer Shanghai/Reuters

The perpetrators literally buried evidence of their wrongdoing six metres underground.

The faces behind China’s Ezubao Ponzi scheme: Ding Ning, Zhang Min and Yong Lei.

Chinese police have arrested 21 people connected with an online finance company accused of fleecing US$7.6 billion (NZ$11.6 billion) from investors in one of the world's largest-ever Ponzi schemes.

The enormous size of the Ezubao scam, which stole from more than 900,000 investors nationwide, casts a shadow on China's lucrative but largely unregulated online and peer-to-peer lending industry, part of the country's shadow banking system which has seen a growing number cases of fraud come to light.

The perpetrators literally buried evidence of their wrongdoing. State media reports said police had to use heavy earthmoving equipment to recover thousands of account ledgers and documents buried six metres underground, on the outskirts of Hefei, in eastern Anhui province.

While smaller than the infamous Bernie Madoff scandal in dollar terms, Ezubao has affected more people and was able to accumulate its 50 billion yuan (NZ$11.6 billion) in funds in just 18 months of operation.

The company's 34-year-old founder, Ding Ning, reportedly spent more than 1 billion yuan on lavish gifts, including luxury apartments, cars and a 12 million yuan diamond ring for his wife.

"We cleaned out the Louis Vuitton and Hermes stores across the country," another company executive said in a televised confession aired on state broadcaster CCTV.

Investor fraud has spiked in China over recent years, with low interest rates on savings accounts, a cooling housing market and a volatile stockmarket leaving many looking for alternatives to park their cash. Capital outflows from China were an estimated US$700 billion last year, with wealthy investors seeking to make investments in safe havens like Australia and the United States as China's economy slows.

Ezubao promised annual returns of between 9 per cent and 14.6 per cent. Like other peer-to-peer platforms, it promised higher rates by matching individual investors with other people who needed cash for an investment or business.

But Ezubao was a "complete Ponzi scheme", authorities said. More than 95 per cent of investment products it advertised were fake, with new cash simply used to make interest payments to existing clients.

Already criticised for its management of the economy, stockmarket and its currency, the Chinese government has been under pressure to crackdown on a number of high-profile financial scandals, some which have sparked significant public protests.

Police opened an investigation into Ezubao in December and froze their assets, prompting demonstrations across a number of cities from investors unable to withdraw their funds.

Chinese investors lost some US$23 billion to financial scams last year, including US$6 billion caught up in the collapsed Fanya Metals Exchange which promised zero risk and an annual return of 13 per cent on investments made based on its online rare metals trading platform.