China’s way of fighting a financial fraud boom

When Jenny Fan got a phone call in early February, she thought she’d hit a lucky draw. The caller, who said he represented a skin care company, told Jenny – a college sophomore in northern China’s Hebei province – that she was eligible for $1,000 compensation. Rmb (£117). Reason? Three months ago she bought a face cream Rmb200 which had no effect on her skin.

The man “claimed to be a customer service representative for the ice cream maker,” Jenny said. “He provided all the purchase details, even a snapshot of the transaction records, so I find it very difficult not to trust him.”

To claim the money, he told Jenny that she had to set up a “special payment channel” by making several “test” transfers to a custodian account. Once the system is up and running, Jenny will receive her refund plus compensation.

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The 19-year-old student made three payments totaling Rmb20,000 (£2,332). Soon after, this man blocked her on social media and stopped taking her calls. Jenny went to the police, only to be told she was “too silly” for buying a scam. “They told me the money was gone because it was difficult for online scammers to track down,” she said. “What I should do is only take calls from people I know.”

Jenny is among tens of thousands of Chinese nationals who have fallen victim to financial fraud. Crime has become a fact of life in the world’s second-largest economy, which has a rapidly growing middle- to high-income population. “We are seeing an increase in scammers as households’ wealth increases,” said Nie Chengtao, a lawyer specializing in financial fraud in Beijing.

Financial programs have had a strong history in China, where decades of relentless economic growth have created not only huge personal wealth, but also a get-rich-quick-start mentality in the industry. they. Scammers have also profited from a lack of regulation and a state-imposed cap on deposit rates, which has made it easier for them to convince customers who want higher returns. from their hard earned savings.

Column chart 1995-2019 showing fraud cases investigated by Chinese police

The rise of the Internet, especially online payments, has exacerbated the problem by making financial scams easier to commit and harder to trace. China’s technology companies are deeply involved in the development of financial services. For example, last year, Fidelity launched a retirement savings guide using Ant, one of the major financial platforms.

Scammers have been targeting customers of the platforms, as they are able to reach far more potential victims than they could reach through face-to-face meetings.

All of this has combined to commit financial fraud – from selling “click farm” memberships (in which scammers hire shoppers from online stores in exchange for full money). cashback plus fees) to investment products with no underlying assets – a national problem that is affecting Chinese society as a whole. David Zhang, an anti-fraud lawyer based in Hangzhou, said he has handled fraud victims ranging from university professors, factory workers to high school students. “No one is immune to scammers. We all have weaknesses that they can take advantage of.”

The problem has no easy fix. While Beijing has made a major effort to put scammers behind bars, and the number of annual arrests has increased fivefold in the past three years, a significant number of scammers have emerged. gratuitously through operations abroad or concealing their identities with better technology.

“We are running out of resources to locate the scammers,” a police officer specializing in financial fraud based in Shandong told the FT.

A police officer speaks to tourists at East Dezhou station, on the Shanghai-Beijing high-speed railway line, as part of an early campaign to warn Chinese consumers about financial fraud this year
A police officer speaks to tourists at East Dezhou Station, on the Shanghai-Beijing high-speed rail line, as part of an early campaign to warn Chinese consumers about financial fraud this year © Costfoto / Barcroft Media / Getty

A nationwide campaign against education fraud was launched by the Chinese government in 2019, after President Xi Jinping declared at a conference that fighting cheating was a “top priority” when it came to making education work. everyone feels safe. The campaign culminated earlier this year with the launch of the National Anti-Fraud Center, a mobile app that has been downloaded more than 500m times, making it one of the most popular apps in the world. gender. The government uses a variety of channels, from street posters to television commercials, to inform the public about what scams are like and how to avoid them. But the app has also sparked controversy over its tracking of cell phone usage, censorship of overseas phone calls, and labeling business apps like Bloomberg News as “malicious”.

Few Chinese adults can go a day without being swayed by state-sponsored anti-fraud propaganda. Most apartment buildings have posters in the lobby asking residents not to transfer money to strangers. Buses carry ads on how to identify scams, while LED screens feature images of celebrities proposing a “people’s war” against scammers.

Some places have gone further. Last month, Dongjing, a town in Shanghai, began requiring hotel guests to read and sign an anti-fraud tip before checking in. Meanwhile, local restaurant waiters are instructed to inform customers about fraud prevention before serving their food.

“We want anti-fraud education to reach every aspect of people’s lives,” said a Dongjing official.

One of the main beneficiaries of the policy initiative is university students, who have suffered greatly from financial fraud. A survey last year of 2,746 university students nationwide by the official China Youth Daily found that more than a tenth of respondents had lost money to scammers. That has prompted a new wave of education campaigns aimed at making young people more vigilant. Last year, Shanghai began requiring 140,000 college freshmen to take an online anti-cheat course, highlighting five common scams, ranging from blackmail and impersonation of government officials to online dating. online for the purpose of selling fake investment products.

Some cities are so interested in the fight against fraud that Jinan, an eastern city, last year asked university students to allow anti-fraud police to join their social media groups. surname. The idea is that agents will post phishing prevention tips and monitor for suspicious messages. “We want to make sure students are always protected from scammers,” said a Jinan official.

A billboard in Sanlitun, Beijing, warns shoppers of the risk of financial fraud © Fran Lu / FT

Retail investors are another prime target for education, as their financial literacy has not kept pace with the boom in household wealth. A survey of 140,000 adults by the People’s Bank of China in April found that more than half of respondents could not calculate annual returns and did not understand what investment diversification meant. Forty-four percent said they would ignore or just skim financial contracts.

To bridge the knowledge gap, financial regulators (including the People’s Bank of China, China Banking and Insurance Regulatory Commission, and China Securities Regulatory Commission) held organize more and more online and on-site training courses, to help investors earn more make informed decisions. (These courses have increased significantly since Mr. Xi’s speech in 2019.) The authorities also require financial advisors and wealth managers to require investors to complete tests. Risk assessment is videotaped before deciding which product to sell.

“We’ve done what we can to match investors’ risk preferences with expected returns,” said John Wang, owner of a Shanghai-based high-yield bond fund.

Many retail investors assume a guaranteed return (incentivized by fund offerings) for fixed-income investment products, although that does not exist in practice. A default could lead disgruntled investors to sue asset managers for providing false information.

Column chart of 2018-20 shows Number of people arrested in China for electronic fraud

But the education campaign still did not stop the scam from flourishing. Court records show that last year investor scams nationwide were up more than a third from 2019 levels.

The campaign’s failure was partly due to its limited scale. Most government-backed investor education courses reach only a small number of students due to a lack of publicity. While many privately run financial literacy programs are more widely available, they have a conflict of interest in promoting investment products for profit.

Worse still, most educational programs are too general to cover what is needed to prevent fraud.

Daniel Wu, a software engineer in Zhejiang who took a few financial literacy classes before losing Rmb1 million to a program said: “Teachers told us that the profits were high. comes with high risk. “But he didn’t say which part of the investment contract we should read carefully to avoid falling into a trap.”

Although Beijing has enacted one of the strictest personal data protection laws in the world, enforcement of the law is patchy at best. Sun Yin, a professor at Southwestern University in Politics and Law, said in an article last year that the lack of strong penalties for the theft of personal information had made scammers “undeterred.” “.

Ji Shaofeng, a financial consultant based in Nanjing and a former bank manager, said better education could help the public fend off scams in the long term. “In the short term,” said Ji, “the rule of law is more important.”

However, as scams continue to prosper, many believe that education alone is not enough to fend off scammers. Nie, an anti-fraud attorney, said the lack of personal information protection allows scammers to craft messages so tailored that victims can’t resist.

Jenny Fan, the victim of a student scam, knows this from bitter experience. “It’s hard to pick up a stranger when they know so much about you,” she says. “You just keep listening until you get stuck.”

Additional reporting by Wang Xueqiao in Shanghai

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