Ezubao and the Risk of Scandals in the Peer-to-Peer Finance Market

Treasury procurement alignment

Have you read about the Chinese firm Ezubao? If you haven’t, it’s worth following the story, which may yet have implications for western countries and firms, and indeed has some aspects that procurement and finance managers need to understand.

Ezubao was closed down recently and appears to have been a Ponzi scheme, potentially one of the biggest ever seen in fact. Ding Ning, the 34-year-old founder and previously a small-time businessman, set up an on-line peer-to-peer financing platform in China, which took money from investors, offering returns of 15% annually, and apparently lent the money to businesses for various projects. Some reports suggest that an element of this at least was in effect supply chain finance (underpinned by invoices issued).

But it looks like only a very small proportion of the money invested was actually lent, the rest was siphoned off by the perpetrators of the fraud, or used to pay back the early investors (the classic Ponzi scheme, a la Bernie Madoff and many others). “95% of our projects are fake” said one arrested insider.

The end result is likely to be big losses for the naïve investors. Reports suggest that some 880,000 people have collectively lost £5.3bn after falling for the hype.

Now, financial services of all kinds are generally better regulated in Europe and the US than in China. (However, do remember where Madoff operated …) But we are seeing a huge growth in peer-to-peer lending platforms in the Western world too. Some work on the basis of offering loan finance to firms at competitive rates, yet still offering good returns to the providers of the capital, returns which are particularly attractive in the current low-interest environment. Other platforms are based around supply chain finance of some sort; the ventures (often on-line platforms like Ezubao) buy invoices, in effect, offering the owners of the invoices a discount for immediate payment.

But might any of these operations be fraudulent? How do we know that the due diligence is really done on the firms who are getting the financing? How do we know they will repay the loans or that the invoices that act as collateral are real invoices from customers who are going to pay up? How do we even know that the money is actually going to provide finance against real invoices?

We’re not having a go at any specific firms operating in these markets, but this is just really a “buyer beware” for anyone in either their personal or corporate lives looking at this type of operation. Do your research, and always remember, if something looks too good to be true, it probably is!

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