Illegal fundraising influx

By Li Xuanmin Source:Global Times Published: 2017/8/6 17:23:39

Controversial ‘Batie’ project among the increasing number of online finance scams duping senior investors

Transit Elevated Bus undergoes a test run on a road in Qinhuangdao, North China's Hebei Province, last August. Photo: IC

Illegal fundraising cases in China have been on the rise in recent years, partly due to the burgeoning online finance sector. A typical case study is the high-profile traffic-straddling Transit Elevated Bus project also known as "Batie," developed by online lending company Huayingkailai, which folded in July after unlawfully soliciting 4.8 billion yuan from 40,000 investors. The Global Times spoke with several investors victimized by the scam as well as lawyers to investigate the common tricks employed by financing platforms and areas where governments could strengthen supervision.

For 56-year-old Beijing resident Wang Yan, it only took less than four months for her lifetime savings of 2 million yuan ($297,000) to evaporate into a financial black hole.

Wang invested money into financial products sold by Huayingkailai, a Beijing-based online lending company which developed the high-profile and controversial traffic-straddling Transit Elevated Bus (TEB) project, commonly known as "Batie."

In July, the company was probed by the Beijing police for illegal fundraising after owing investors about 4.8 billion yuan. A total of 32 company employees, including CEO Bai Zhiming, have been arrested and are awaiting further investigation.

Wang recalled that in January, a salesperson of Huayingkailai approached her when she was dancing in the street and started explaining to her that the funds she could invest in "would be used for the TEB's test run." Subsequently, she was promised an annual return of 12 percent.

Wang was, at the start, skeptical about the project. But after searching for media coverage on Batie and visiting the investing firm's fancy office in Galaxy Soho in Beijing's Chaoyang district, she became interested.

"During that visit, the staff there explained the project in technical terms and showed me a video of Batie moving slowly on its test track in Qinhuangdao, [North China's Hebei Province], so I became gradually convinced that the project would be a revolution in Chinese transport and had great market potential," Wang told the Global Times Wednesday.

But what prompted her and the other 40,000 investors, mostly in their 50s and 60s, to sign the investment agreement was the company's claimed partnership with local governments.

"The salesperson stressed that the project was being developed in a public-private-partnership model whereby governments play a leading role…so I thought the risk was very low," another investor surnamed Li said.

After being introduced to the company by her friend, Li purchased Huayingkailai's wealth management products for about 200,000 yuan in February.
Since April, both Li and Wang have not received any monthly interest promised by the company. And their attempts to withdraw their investments have failed.

The two seniors did not lose complete faith in the company and its TEB project until early July when Beijing police announced that they had launched a probe into the company for alleged illegal fundraising.

But at this point, it was already too late for them to retrieve their money.

The investors' funds "must have been transferred into foreign accounts after such a long time, which makes it extremely difficult to trace them back," a lawyer familiar with the matter told the Global Times on condition of anonymity. 

Can never be too cautious

The TEB case is just the tip of the iceberg and sheds light on the common pitfalls of illegal fundraising.

And for investors like Beijing resident Xing Xilan, merely staying cautious did not mitigate potential fraud risks.

The 63-year-old retired worker purchased 230,000 yuan worth of financial products developed by Shenzhen-based investing firm Yuecheng in February. A month later, the company's website was shut down and senior managers became uncontactable, defaulting over 300 investors with 15 million yuan in principals.

In January, Xing noticed that the company's advertisements often showed up on major Chinese news websites with slogans like "invest 100,000 yuan in futures trading and yielding of up to 3,000 yuan in five days." 

Before Xing made the decision to invest, she carefully examined the company's business record and license. "I found that the company had a registered capital of 300 million yuan and hired many well-educated employees, which alleviated my concerns," Xing told the Global Times over the weekend.

"I had been so cautious, but still ended up losing all my pensions," Xing said.

Illegal fundraising cases have been "skyrocketing" in recent years partly due to the rise of the online finance industry, according to a report released by the Beijing Academy of Social Sciences in July.

From 2013 to November 2016, Beijing authorities investigated more than 600 cases of illegal fundraising, with 1,200 people being detained.

During the January-November period of 2016, the number of such cases jumped 101.77 percent year-on-year in Beijing alone, compared to a lower 49 percent increase in 2015, the report noted.

An elaborate scam

"Illegal fundraising platforms have evolved to be more complex, but still share some similar characteristics: promised low risk of investment and high returns of at least 10 percent in a year, as well as extravagant offices in central business districts in areas such as Guomao, Beijing to cover up their Ponzi schemes," Li Shuang, a lawyer at Beijing Ruitian Law Office, told the Global Times Thursday.

More importantly, most of these companies adopt aggressive yet savvy marketing strategies through launching extensive, misleading advertising campaigns and then wetting investors' appetites with so-called high-tech projects, Li said, noting that seniors are especially vulnerable to these intricate hoaxes.

Such illegal online financing firms also take advantage of the authorities' supervision loopholes, making it harder for investors to recover the losses once a scam is ascertained.

For example, "due to the lack of comprehensive regulations, most agreements signed between investors and the financing company are in the form of a loan contract, allowing investors' funds to be transferred to private accounts instead of the company's account, which are [of course] subjected to higher scrutiny," Zhang Zhiyou, a lawyer at Beijing Zhicheng Law Office, said, adding that private lending out of one's own willingness is legal under certain laws.

Against the backdrop, it is important for regulators to raise the threshold of online financing and to tighten supervision, experts advise.

In April, Chinese authorities vowed to step up a crackdown on illegal funding scams and considered a ban on organizations and individuals, except qualified financial institutions, from publishing investment-related advertisements.

"Some companies merely did not follow regulations due to impunity. Maybe it's time [the authorities] rolled out appropriate punishment measures to ensure the rules are better enforced," Zhang suggested.

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