Introduction

The literature on white-collar and corporate crime has aimed at understanding the causes and consequences of financial crimes (e.g., Barak, 2012; Pontell, 2005). Estimates show that financial fraud, against individuals alone, costs upwards of $50 billion annually in the U.S. (National Center for Victims of Crime, 2016). Large-scale financial crimes have been found to play significant roles in U.S. economic crises. The enormous losses in both the Savings and Loans (S&L) debacle and the 2008 mortgage crisis were in no small part the result of widespread fraudulent schemes (Calavita & Pontell, 1990; Calavita et al., 1997b; Nguyen & Pontell, 2010). The workings of finance capitalism have been used to explain the limited enforcement response and lack of recognition of fraud (Calavita et al., 1997b). For example, the financial industry’s ability to guide regulatory behavior can effectively render criminal prosecutions out of bounds (Barak, 2012).

Financial fraud is an important global issue, constituting a significant problem in both developed and emerging markets. In 2018, the total estimated global costs of fraud were $4 trillion (Association of Certified Fraud Examiners, 2018). Emerging markets, absent the sophisticated legal and regulatory experience necessary to effectively deter financial crimes, may succumb to high risks of market meltdowns. The regulation of financial crime is further complicated by country-specific political regimes, regulatory cultures, and organizational structures of government agencies. In addition, technological advances have exacerbated this issue by allowing the quick proliferation of financial transactions and fraudulent schemes via the Internet. Given the universality of white-collar crime, comparative study is essential for understanding this type of offending in globalized context (Kawasaki, 2019).

China, as a leading emerging market, has long attempted to thwart its increasing numbers of white-collar and corporate crimes. Since major economic reforms in the 1980s, China has increasingly experienced crimes associated with food safety, environmental hazards, and business operation (Cheng, 2012; Ghazi-Tehrani et al., 2013). The estimated economic costs of white-collar crime in China total hundreds of billions of RMB annually (Cheng & Friedrichs, 2013). This unprecedented volume of white-collar offenses has posed serious threats to Chinese society, impacting major issues of food safety, climate change, and financial market stability among others (Ghazi-Tehrani & Pontell, 2022; Ghazi-Tehrani et al., 2013).

This study examines the crash of China’s scandal-plagued peer-to-peer (P2P) lending market to provide additional criminological insights into matters of financial fraud and crises. P2P lending is a practice in which an online platform is supposed to serve as an information intermediary that connects borrowers and lenders. Once the largest online lending market in the world, the rapid growth of P2P lending in China was immediately followed by the industry’s massive failure in which thousands of P2P lending firms were shut down and the entire industry eventually closed. The collapse of the P2P lending market involved significant amounts of widespread fraud and financial malpractice. Utilizing media reports and official documents, we survey different fraud techniques widely utilized in P2P lending in order to examine the structural factors conducive to these crimes. Drawing upon white-collar crime studies of financial crises in the United States that examine the role of systemic fraud, this study assesses the applicability of theories of system capacity and non-issue making to China. Despite the major differences in both government and economic structure, the dynamics of fraud in the P2P lending crisis appear similar to those found in studies of financial crises conducted in the United States.

Financial crime theory and China

Fraud in crises

Scholars have defined financial crime in varying ways (Ryder, 2011). Most broadly, financial crime can be used inter-changeably with white collar crime (e.g., Pickett & Pickett, 2002); a narrower definition relates to crimes by financial institutions (e.g., Reurink, 2018). In this study, we consider financial crimes as offenses directly related to financial institutions and/or the financial market order. Criminological research on financial crime can be categorized as follows: (1) institutional approaches; (2) organizational perspectives; (3) examinations of costs, consequences, and victims; and (4) assessments of legal and political responses (Reurink, 2018). Institutional contexts have been studied the most extensively in criminology. White-collar crime researchers have collectively attributed the prevalence of financial offenses in the U.S. to the transformation of the American economy (Calavita et al., 1997b; Tillman & Indergaard, 2005; Tillman et al., 2017). The post-1980’s financialization of the economy has generated many more opportunities and motives for market players to engage in financial crimes than in the past (Tillman et al., 2017). Financial crimes are linked to structural changes in financial markets through the burgeoning of “structural holes” (Burt, 1992)—the lack of ties between buyers and sellers—during market restructuring, which allows bogus brokers to reproduce (Tillman & Indergaard, 1999).

Calavita and Pontell (1990) documented the effects of accelerated deregulatory policy on the thrift (S&L) industry during the Reagan administration, finding that it was “the cure that killed.” They argued that financial fraud in the thrift industry resulted from neoliberal political-economic ideologies of the 1980s promulgating deregulation and protectionism, which in turn “unleashed unprecedented incentives and supplied tempting opportunities to commit fraud” (Calavita & Pontell, 1990, p. 335). Similarly, Barak (2012) found that deregulatory zeal was central in accounting for the prevalence of financial fraud perpetrated during the 2008 mortgage crisis.

Financial crime research has focused on how perpetrators use organizations as vehicles to commit crimes (Black, 2005; Calavita & Pontell, 1991). The term “control fraud” refers to “situations in which those who control firms or nations use the entity as a means to defraud customers, creditors, shareholders, donors or the general public” (Black, 2005, p. 734). Studies of the S&L crisis found that in many cases thrifts became vehicles for the perpetration of fraud and insider looting, also known as “collective embezzlement” (Calavita et al., 1997b; Tillman & Pontell, 1995).

Economic costs and victimization are also significant components of white-collar and corporate crime research on financial fraud. One devastating economic and social consequence of systemic financial crime is the production of financial crises (Pontell, 2005; Friedrichs, 2013). In addition to monetary damages, financial crimes have also caused emotional, psychological, and behavioral consequences to individual victims (Reurink, 2018).

Researchers have also noted that the discovery of major white-collar crime is influenced by limited legal and enforcement capacity, and political issues resulting in non-issue making (Goetz, 1997). Legal sanctioning, according to system capacity theory (Pontell, 1984), tends to be greater where “resources are generous and demands light.” Major financial crimes that are well-hidden in extraordinarily complex business transactions can greatly complicate enforcement efforts and severely strain existing government resources (Pontell, 1984; Pontell et al., 1994). This characterized the U.S. subprime mortgage crisis of 2008, as “anonymous arms-length transactions and the opacity of products and processes decrease the likelihood of detection” (Fligstein & Roehrkasse, 2016, p. 622). Material fraud built into financial markets may also remain virtually undetected until its consequences reach epic proportions (Rosoff et al., 2018).

Non-issue making of major criminality alludes to the circumstances where enforcement agencies ignore salient white-collar crimes when such lawbreaking provides economic benefits (Crenson 1971; Goetz, 1997). For example, regarding the S&L crisis, Calavita and Pontell (1994) have argued that the U.S. government emphasized “damage control over crime control” in response to widespread lawbreaking by elites, which both allowed occurrences of fraud to go unchecked and continued maintenance of state legitimacy. In the 2008 mortgage crisis, the financial industry’s ability to influence Congress and regulators through strong lobbying campaigns including massive political contributions eventually resulted in regulatory collusion where “criminal prosecutions of securities fraud are out of bounds” (Barak, 2012, p. 76). The social status of those involved in financial fraud acted to exempt them from being accused of criminal wrongdoing (Pontell et al., 2014). The chronic problem of system capacity was manifested by major white-collar crime becoming a “non-issue,” in effect trivializing it, resulting in enforcement efforts being focused downward onto lesser offenders.

Financial crimes in China

China’s unprecedented economic growth in the past three decades has been accompanied by burgeoning white-collar and corporate crimes. Official statistics show that the number of offenders committing “crimes against socialist economic order” in accordance with the Chinese Criminal Law climbed rapidly, from 25,257 in 2000 to 113,285 in 2018 (National Bureau of Statistics of China, 2020). Despite the growing number of white collar crimes, research on the topic has been limited due to the lack of reliable data and funding (Pontell et al., 2019).

Bank fraud, securities fraud, and Ponzi schemes of increasing number, volume, and complexity, pose a threat to China’s economy and society (Cheng, 2016). In 2015 alone, almost fifteen-hundred bank employees committed fraud and other associated crimes (Cheng, 2016). Cheng and Ma (2009) found that 80% of bank fraud in China stemmed from some form of corruption facilitated by guanxi wang (informal connection networks) and baohu san (protective umbrellas) well-embedded in business culture. In addition to formal finance, the informal financial sector contains higher systemic risks, allowing for complicated forms of fraud under the influence of what has been labelled a “casino culture” (Cheng, 2016). A recent study shows that causes of white collar crimes that “involve numerous and unspecified victims” in recent years include lax regulation and inadequate financial literacy (Peng et al., 2021).

Ineffective enforcement of these crimes is attributable to prominent institutional constraints. The dynamics of system incapacity found to facilitate financial crimes in the S&L crisis also characterizes ineffective enforcement against bank fraud in China (Ghazi-Tehrani et al., 2013). Enforcement of existing laws against white-collar crime is thwarted by constraints on fiscal and physical resources (Ghazi-Tehrani & Pontell, 2019). Local protectionism makes detection and prosecution of these crimes difficult (Pontell et al., 2019). In pointing out the relatively low number of prosecutions for bank fraud in comparison to its actual rampancy in the industry, Cheng (2016) contends that both banking and securities regulatory authorities require institutional autonomy and additional resources if they are to be effective agents of control.

Non-issue making regarding white-collar and corporate crime (Goetz, 1997) is another structural impediment to its control in China. A lax regulatory system and the willingness to pursue continued economic growth at almost all costs ensures that many major white-collar crimes remain a “non-issue” (Cheng, 2016; Ghazi-Tehrani et al., 2013). While criminal enforcement campaigns often appear to be the solution when financial crimes are perceived as threats to stability and growth, general deterrent enforcement strategies have been found to be largely ineffective despite the frequent use of “crackdowns” (Cheng, 2016; Cheng & Ma, 2009; van Rooij, 2012). Typical enforcement campaigns have only short-term “stop-gap effects” and fail to achieve sustained impacts on non-compliance with the law (van Rooij, 2012).

White-collar crime is a critical issue for both Western and non-Western countries (Pontell et al., 2019). Its recognition as an important universal topic necessitates the expansion of traditional Western-based perspectives to include more global insights through comparative criminological research. This study seeks to help fill this conceptual gap. The P2P lending crisis attracted widespread attention from both domestic and international news agencies, making it an excellent case study with a ready supply of data.

Methods

This research uses a white-collar criminological framework to examine factors that contributed to the P2P online lending crisis in China. Criminological studies have identified the structural, organizational, and individual causes for financial wrongdoing (McGrath, 2019, 2020; Vaughan, 2007). While this study constitutes a structural analysis, it integrates macro (structural) and micro (individual) dimensions, and seeks to emphasize how structural influences affect micro-level factors in sha** white collar criminality. To allow for as much documentation as possible, qualitative and historical data were gathered from various sources, including government reports, China’s official and reputational newspapers (e.g. China Daily, ** countries, examining commonalities and differences in patterns, cited causes, and official reactions. This comparative approach allows for an assessment of both theories and conclusions regarding the role of endemic financial fraud in market crashes.

P2P online lending in China

“Barbaric growth” and crisis

P2P online lending originated in the UK, where the first peer-to-peer lending company, ZOPA, was founded in 2005. P2P online lending, in which an online platform serves as an information intermediary connecting borrowers and lenders, was originally devised to overcome “ill-treatment by the banks”—which charged extremely high fees by taking advantage of their monopoly status—and to enhance the competitiveness of the financial industry (Hulme & Wright, 2006). Within two years, the first Chinese P2P lending firm, Paipaidai, was launched in Shanghai. Different than ZOPA, it was modeled after the Grameen Bank in Bangladesh devised to micro-finance the local indigent population.

The Chinese P2P lending market grew steadily in its early stage, but in a few years the market surged, and in 2015 the number of firms jumped to 3,464. At its peak, the market constituted the world’s largest P2P lending industry, with outstanding loans of $217.96 billion (Zhang, 2019). A dozen Chinese P2P lending firms went public on the U.S. Nasdaq. Platforms were unevenly distributed in geography, and the most economically advantaged provinces and municipalities had the majority of platforms. Such rapid expansion was termed “barbaric growth” in media reports, and was the same as the title of a book describing troubled pathways to success of Chinese businesses in the private sector (Feng, 2012).

The unprecedented surge of the P2P lending market is attributable to several factors. The first was the market’s need for alternative financing channels. The traditional financial sector in China is characterized by repression and a preference for state-owned enterprises (SOEs), leaving small businesses and individuals insufficient access to bank financing, so that they relied heavily on private lending. P2P lending offered ample opportunities for small- and medium-sized enterprises (SMEs) to meet capitalization needs, as well as for investors, who had few options to profit from their capital (Huang, 2018). Second, the government’s initiative in Internet financing and Fintech constituted an important driving force for the thriving P2P lending market. Third, the rapid expansion of the P2P lending market was facilitated by the unprecedented development of digitalized finance and the Internet in China.

The barbaric growth of the industry reached a turning point in 2016. As Fig. 1 shows, the number of operating platforms fell from its peak of 3,464 in 2015 to 343 in 2019. There were two major waves of failures. The first took place in 2016, marked by the Ezubao Ponzi scandal, in which those controlling the firm looted approximately $7.3 billion from about 900,000 investors (** sentenced life in the first-instance trial (“联璧金融”非法集资案造窟窿125亿余元 顾国**一审被判无期). Caixin. https://finance.caixin.com/2021-12-09/101815671.html . Accessed 8 January 2022." href="/article/10.1007/s10611-022-10053-y#ref-CR93" id="ref-link-section-d288749433e1486">2021b). Aside from its size, this case gained major attention due to its association with China’s e-commerce giant JD.com, a publicly traded company on Nasdaq. Lianbi took advantage of consumer finance and online shop** in order to advance a tech start-up venture. After the fraud was uncovered, investors gathered at JD.com’s headquarter demanding a return of their money.

The central figure in the scheme was Guo** Gu (Gu), the controller of Phicomm, a leading tech company dealing in telecommunications equipment. Its flagship product, routers, became the key item in Lianbi’s financial conspiracy. In 2016, Phicomm and Lianbi launched a “0 RMB Purchase” promotion on different e-commerce platforms (Bei**g News, 2018). Customers who participated paid $61 for the most basic Phicomm router. When they received the product it included a “K code”, along with instructions directing them to the Lianbi app and website where they could enter the code in order to obtain a $61 credit in their accounts.

By accepting the promotion consumers became entrapped in a conspiracy designed to lure them into investing more money for supposed high returns, purchasing additional financial products sold by Lianbi, or purportedly saving more by buying other refund-eligible products. Lianbi was able to attract large numbers of victims within a relatively short period of time due to Phicomm’s collaboration with JD.com in the promotion. During JD.com’s 2018 online shop** festival, Phicomm had record-high sales of 722,000 electronic products (Bei**g News, 2018). The day after the festival, however, investors found that they were unable to access their accounts on Lianbi. In response to investor complaints, the Shanghai Songjiang Public Security Bureau immediately began an investigation. Gu and Lianbi’s legal representative both fled the country, but were apprehended and returned to China shortly thereafter.

The Lianbi scam was a hybrid of a Ponzi scheme and a self-financing fraud partially driven by Gu’s tech start-up craze on Phicomm. Gu had been a successful entrepreneur with a long start-up history, including a company in Silicon Valley in 2007. Branding Phicomm as a “New Economy” enterprise, Gu expanded the company to technological frontiers ranging from cloud computing to smart life, each having a substantial financing demand (Zhu, 2021b). Gu’s ambitious plan to back-door list Phicomm on the stock market went awry in 2016, and he was barred from entering the securities market in 2017 for malpractice (Zhu, 2021a). The booming P2P lending industry turned out to be an ideal channel for Gu to seek financing, and he used it to create the phony “0 RMB Purchase” promotion. As a result of these activities, Phicomm’s declining revenues in 2016 were immediately reversed to the extent that it was able to sponsor a Victoria Secret show and two marathon games in 2017 (Bei**g News, 2018).

Lianbi, Phicomm, and the borrowing companies on the Lianbi platform were all controlled by Gu and his fellows. Similar to Ding in the Ezubao case, Gu launched a variety of financial products on Lianbi based on assets and projects of shell companies he controlled (Zhu, 2021b). The funds collected were used for investor repayments, operating fees, and payments for goods and debts (Zhu, 2021a). Notably, more than 15% of Phicomm’s shares were indirectly controlled by a local SOE (Zhu, 2021a). In the aftermath of the scandal, Lianbi was among the top priority cases supervised by the Ministry of Public Security and the SPP. The Shanghai No.1 Intermediate People’s Court convicted Gu and sentenced him to life imprisonment (Zhu, 2021b).

China’s P2P lending frauds: a criminological comparison with the U.S.

Lax regulation

Since the 1980s, there has been a global trend toward financial liberalization. Subsequent crises that have severely affected both domestic and global economies were found to be associated with governments’ loosened reins on the financial industry. In the U.S., the Reagan administration instituted deregulatory policies in response to thrift industry losses that began in the 1970s (Calavita et al., 1997a). Policymakers dismantled most of the regulatory infrastructure that had kept the thrift industry in check (Pontell & Calavita, 1993). In 1980, the Depository Institutions Deregulation and Monetary Control Act allowed federally chartered thrifts to make commercial real estate and consumer loans and to purchase corporate debt instruments. The Act freed thrifts from geographic limitations, and authorized the issuance of credit cards by thrift institutions (Pontell & Calavita, 1993). The law raised the maximum federal insurance on each deposit from $40,000 to $100,000. Industry regulators also eliminated a 5% limit on brokered deposits which not only allowed for the transfer of huge amounts of money from pension funds and other sources, but also for illegal kickbacks in order to attract them. Finally, individual entrepreneurs were allowed to own and operate federally insured savings and loans (Pontell & Calavita, 1993). “Deregulation … set the stage for the explosive growth of these institutions as well as the epidemic of financial fraud that accompanied that growth … shielding thrift offenders from regulatory scrutiny” (Calavita et al., 1997a, p. 169, 174).

In less than a decade, the U.S. government pushed deregulatory processes on the entire financial market. The best policy was believed to rely on the self-regulating mechanisms of the free market (Pontell & Calavita, 1993), which “stripped away key safeguards” (FCIC, 2011, p. xviii). Lax regulation and the accompanying lack of external controls that accounted for the potential for fraud created a crime-facilitative environment by offering increased opportunities for offending (Needleman & Needleman, 1979). By the time of the 2008 mortgage crisis which created a worldwide economic disaster, “[d]eregulation in the banking industry driven by neoclassical policies has circumvented legal and social constraints, ethics, and accountability in a period of subprime lending expansion where increased government supervision and oversight was paramount” (Nguyen & Pontell, 2010, p. 607).

China had a repressive financial policy that generally outlawed private fundraising (Shen, 2020). To support financial inclusion and invigorate private economy, the PBOC acknowledged the significance of Internet finance as a means of channeling funds to SMEs and underserved individuals, stating that “the services [were] filling an innovation gap left by traditional financial institutions, and should be encouraged” (** criminalization of perpetrators in China, including some highly reputable business magnates. Also, unlike the U.S. where intense lobbying affects policy, the actions of the Chinese government are not directly influenced by the financial industry. The Internet and cybercrime were major features of P2P lending offenses and demonstrated the ability of new financial crime to victimize on a massive scale. In addition, China’s lax regulation of P2P lending was due largely to government inexperience in a new sector of the economy coupled with policies designed to grow Internet finance, whereas the U.S. federal government’s loosening of specific regulatory rules in both the S&L and 2008 financial crises reflected neoliberal policies initially adopted by the Reagan Administration. The P2P lending decline shared more similarities with the S&L crisis than with the 2008 subprime mortgage debacle in terms of the gravity, the status of culprits, and legal responses.

As a rising economic superpower, China faces institutional challenges of social management in its course of modernization. Historical evidence suggests that corporate scandals and public outrage lead to new “tough” regulations, but as time passes and the public’s attention is diverted, regulatory restrictions and criminal accountability are again diminished (Ramirez, 2016). Rather than relying on a policy-oriented model of harsh campaign-style enforcement in co** with white-collar criminality, this study suggests that China may be well-served by further modernizing its financial monitoring and compliance systems through the promotion of both the rule of law and proactive enforcement in order to prevent future white-collar crime waves that can possibly lead to major financial crises.

Conclusion

Financial crimes present in China’s P2P online lending ultimately led to a dramatic market failure. The findings from this study show that: (1) the massive failures of P2P lending firms in China caused widespread and severe economic and social consequences; (2) fraud was the main contributor to the collapse of the industry; (3) a plethora of fraud techniques were extensively used in P2P lending; and (4) lax regulation, financialization, and system capacity and non-issue making, identified as contributing to the crimes in the U.S. S&L and 2008 subprime mortgage crises, constituted underlying structural conditions conducive to white-collar criminality in China’s online lending market.

The findings of the study corroborate the conclusions in previous studies that white collar crime and its consequences in China do not differ greatly from those found in the U.S. and other countries (e.g., Ghazi-Tehrani & Pontell, 2015). As in previous comparative research on white-collar crime, this study demonstrates the applicability of theories accounting for the structural dynamics underlying financial crimes in countries with different governmental regimes. In fact, “the differences are largely a matter of degree” (Ghazi-Tehrani & Pontell, 2015, p. 259).

As China continues its economic and social development, especially in light of rapid technological advances, white-collar offending that takes on more complicated forms will emerge as a challenge to the state’s governance. The results of this study suggest that China should empower its financial regulatory departments, establish a comprehensive compliance system, and undertake proactive and consistent enforcement rather than react with periodic but harsh criminalization campaigns, which have only temporary effects and tend to exhaust government resources while leaving private companies and investors vulnerable to additional losses. The evidence presented here suggests that recognizing the potential for serious and endemic fraud and malpractice in financial markets is a necessary and central first step in formulating effective regulatory policies to prevent future crises. Additional comparative research on fraud in both developed and develo** countries that further elaborates and specifies the results found here regarding regulation, white-collar crime, and their roles in creating major market crashes and crises can foster more effective policy measures that may prevent them from occurring in the future.