Foreign The world is a diverse place with hundreds of unique cultures, languages and religions. But one trait that unites all people is selfish greed and the desire to collect as much resources as possible. Since the beginning of recorded history, there have always been people who use deception and fraud to move money from other people's pockets to their own. As Society has evolved, the scale and sophistication of financial frauds have increased in tandem.

The Allure of fraud can sometimes be so great that entire Industries operate purely to deceive unsuspecting victims. Perhaps the most shocking case of this happened in China In the early to mid 2010s, This was the golden age for the country's technology industry. The widespread adoption of the Internet created Limitless opportunities for entrepreneurs. One of the biggest Innovations was online peer-to-peer lending platforms, which seeked to disintermediate the traditional banking system by allowing individuals to lend and borrow money from each other directly.

The industry grew exponentially, and by 2015, there were over 200 billion dollars of outstanding loans in China. But as it turned out, the vast majority of these platforms for scams. In 2016, the industry collapsed when a company called Izubao, one of the biggest peer-to-peer lending platforms at a time, was exposed as a thinly disguised Ponzi scheme. Millions of investors lost their life savings causing Mass protests and social unrest.

The government responded with a harsh regulatory Crackdown essentially outlawing the entire peer-to-peer lending industry. Many analysts believe this disastrous experience was a key motivator for preemptive crackdowns on similar Industries including the blocking of Ant financials IPO in 2020 and the complete ban of all cryptocurrencies in 2021. In this video, we'll look at how China's peer-to-peer lending industry became the world's largest fraud, as well as key learnings which can help us detect similar scams in the future. Foreign to the emergence of peer-to-peer lending, China's Financial system was dominated by state-run Banks which tended to take a conservative approach to lending.

It was very difficult for small businesses and individuals with limited credit history to obtain loans. This stifled economic growth as small and medium-sized businesses employ the majority of the workforce. The government and private sector alike recognized the need to liberalize a financial system and increase the availability of capital. Additionally, China had one of the highest personal savings rates in the world.

The average Chinese household saves about 45 percent of their income. For comparison, the U.S personal savings rate is about six percent. So Chinese households have a huge amount of excess savings that they need to invest. This made China the perfect market for online peer-to-peer lending.

Here's how it works: Individuals are small businesses. Create a profile on the platform and submit a loan application. They'll say how much money they want to borrow, the purpose of the loan, what interest rate they are willing to pay, as well as credit history and income information. People with excess savings can look at the various loan applications and lend money to whichever one they choose.

The first peer-to-peer lending companies launched in 2010 and they were incredibly successful. Other entrepreneurs took note of the success and started their own companies. with a total number of active platforms surpassing 500 in 2013 and 3000 in 2015.. the total value of outstanding loans swelled to over 200 billion dollars in the beginning.

The government was supportive of the industry. In 2013 The People's Bank of China the country's Central Bank released a policy paper saying that peer-to-peer lending will help fill in the gaps left by the traditional Banks and allow small businesses greater access to. Capital One Of the entrepreneurs who got involved in the industry was a man named Ding Ning. In 2014, he founded a company called Izubao which quickly became one of the most successful peer-to-peer lending companies in 2015.

Just one year after launch, they had secured over 7 billion dollars worth of investment from 900 000 individual investors across China They came that the money they raised from investors was being lent to individuals and small businesses. They also claimed to enforce strict qualifications for borrowers, which made the loans almost risk-free Despite this, they were able to offer very competitive yields of 9 to 14 percent. Ding Ding knew that if he wanted investors to trust the platform, he needed to portray an outward image of legitimacy and success, and he had a few methods of doing this. The company spent Millions on television advertising.

They did specifically buy TV ad slots on state-run news channels. People erroneously assumed that because They were advertising on the state-run media, the government must have vetted them to make sure they're legit. Ding Ning also tried to bolster his own personal image. He attended numerous public and social events and even managed to score a photo op with the Cambodian prime minister.

This again lends credibility because people assumed for someone to meet with a prime minister, there would be some type of vetting. In addition to the television ads, Izu Bao Also put boots on the ground. They opened up brick and mortar retail locations all across across China Trying to get people to invest The women in this. Izu bow advertisement is named John Min and she was the president and public face of the company.

Ding Ding met her on a dating platform called Enzo Noble Gathering Circle. This is a dating platform in China where young, attractive females can meet wealthy men. Zhong Min Had little or no relevant experience and was eminently unqualified for the job, but she was very useful as the public face of the company. She gave numerous media appearances and starred in Izubao's high budget television commercials.

It wasn't just John Min Most of Yuzubao's Executives were young women who Ding Ming met through the Enzo platform is believed that founder Ding Ming had romantic relationships with some if not all of these women. The executives were compensated handsomely. Additionally, Ding Ning would personally give them gifts. For example, he gave John Min a 20 million dollar mansion in Singapore as well as a 2 million dollar pink diamond.

In total is estimated that Ding Ding spent 150 million dollars on gifts for the executives as well as his unrelated love interests. How was Ding Ning able to spend money so profligately was Izubao really that successful? Or was there something else going on? Foreign. As it turns out, Izubao was completely fraudulent. They never made any loans to anyone.

It was purely a Ponzi scheme where money from new investors was used to pay back old investors. Ding Ning used the money as his personal piggy bank to fund his lavish lifestyle in December of 2015. Less than two years after the company's founding. Izu Bao Ran out of money and was unable to pay its investors.

Tens of thousands of people had lost their life savings, leading to protests on the street. When police raided Ding Ding's Mansion they found tens of millions of dollars worth of paper, cash and jewelry. The company's internal records showed that no loans were ever made. Ding Ning was sentenced to life in prison.

The authorities clawed back the remaining assets, But because Ding Ning had already spent so much of the money, victims only ended up getting back about 35 percent of their original principle. Ding Ning was able to live a life of luxury for about a year and a half in exchange for spending the rest of his life in prison. which doesn't sound like a good trade in hindsight. So why did he run Izuba as a Ponzi scheme? Given the advantages of peer-to-peer lending we discussed earlier, why not just run Izubao as a legitimate platform? While online peer-to-peer lending sounds great in theory, there are a few major challenges which make it very difficult to implement.

In practice, there's a reason the large state run Banks were reluctant to lend to small businesses and people with little credit history. It's because these types of loans are risky. With peer-to-peer lending, the borrowers submit their loan application online and self-report their income credit history. Etc Because it was all online, it was much easier for borrowers to fake their income, fake their Identity, or otherwise obtain loans through fraudulent means.

Many people would use fake identities to borrow money and immediately disappear with no intention of ever paying it back. It wasn't feasible to do the types of comprehensive income and identity verification that traditional Banks employ. Peer-to-peer lending platforms use two main methods to solve this problem. Some of them would effectively become Loan Sharks using intimidation and blackmail to kill worse borrowers to make their payments.

Others, including Izu Bal would run Ponzi schemes without actually lending any money to anybody. The Ponzi scheme in loan shark platforms were able to offer far higher yields to investors in their legitimate counterparts, making it impossible for the legitimate platforms to attract investors. Because of this, many platforms that started off as legitimate turn to fraud to keep up with the competition. By 2016, an estimated 80 of Chinese P2P lending platforms did not segregate customer funds from their own corporate funds.

The vast majority of them were committing fraud to at least some extent. The Ezu Bow Ponzi scheme was a major wake-up call for the Chinese Regulators who had previously taken a hands-off approach and let the industry grow. They launched investigations into other peer-to-peer lending platforms, leading to thousands of arrests. Over the next five years, More and more platforms were exposed as frauds and shut down.

The total number of peer-to-peer lending platforms operating in China declined from a peak of over 3000 in 2015 to just a few hundred by 2019.. in 2020, the government concluded it was too difficult to regulate the industry, so he just completely banned it altogether In 2019. China's Supreme People's Procuratory, which is their equivalent of the Department of Justice published a study about how fraudulent peer-to-peer lending platforms were able to fool so many victims. They found four main methods: Firstly, they hired celebrities to act as paid spokespeople.

Secondly, they sponsored philanthropic and social events. Thirdly, they partnered with state-owned Enterprises or publicly traded companies. And finally, they falsely claimed to be compliant with government regulations. All of these methods were designed to make the platform appear legitimate by association.

If you were being endorsed by some A-list celebrity, surely you must be legit because the company's agent must have gone through some type of due diligence if your ads are shown on state-run television and you had some type of partnership with a state-owned Enterprise Surely the government must have checked that you're legit. That's what tens of millions of people assume when they invested their money into these platforms, which in many cases ended up being scams on the other side of the world In the U.S which has a very different culture and economy, Fraudsters pretty much use the same exact PlayBook Take the example of FTX Sam Bakeman Free had spent copious amounts of time in Washington DC publicly testifying in front of Congress about crypto regulations. Many people assume that if you're testifying before Congress there must be some type of background check or due diligence. They also spend tens of millions of dollars paying A-list celebrities including Tom Brady to appear in their commercials.

They even offered Taylor Swift 100 million dollars for an endorsement deal, which she accepted, but FTX pulled out at the last minute, probably because they knew they were running out of money. Another example is a fraudulent hydrogen truck company. Nikola Shortly after their public debut, they announced a strategic partnership with General Motors The announcement sent Nicholas share price up almost 50 percent. Again, if General Motors one of the largest car companies in the world will partner with Nikola there must have been significant due diligence right as part of the deal.

GM received an 11 stake of Nikola's stock, but GM didn't have to spend one penny up front. Instead, they agreed to provide Technical and Manufacturing support for Nikola's trucks. It was basically a no risk proposition for GM. If Nikola ends up being a success, they'll benefit from their Equity stake.

If it ends up being a failure, they can pull out the deal without having lost anything. Because the deal was so favorable for GM, they didn't feel the need to perform due diligence and thus had no idea the company was a massive fraud. It's the same with Ezubao's advertisements on state-run television. The TV network gets paid to place the advertisements they're not putting any of their own.

Capital At Risk It'd be infeasible to do comprehensive due diligence on every single. Advertiser Alright guys, that wraps it up for this video. What do you think about China's peer-to-peer lending industry? Was it the right decision to shut it down altogether? Let us know in the comments section below. As always, thank you so much for watching and we'll see you in the next one! Wall Street Millennial Signing out.