China Fights Explosion of Financial Scams

When Jenny Fan got a phone call in early February, she thought she had won a lottery. The caller said that he represented a skin care company and that Jenny — a second-year college student in northern China’s Heibei Province — was entitled to compensation of 1,000 yuan (about R$885). The reason? Three months earlier she had bought a face cream for 200 yuan ($170) that didn’t work well for her skin.

The man “claimed to be the cream maker’s customer service representative,” Jenny said. “He gave all the details of the purchase, including a printout of the transaction log, so I found it hard not to trust him.”

To receive the money, the man claimed, Jenny had to create a “special payment channel” by making several test transfers to a “custodial account.” Once the system was in place, Jenny would receive restitution plus compensation.

The 19-year-old student made three payments totaling 20,000 yuan (BRL 17,000). Shortly thereafter, the man blocked her on the social network and stopped answering her calls. Jenny went to the police, but was only told that she was “very silly” for believing in the coup. “They told me the money was lost as it is very difficult to locate the scammers online,” he explained. “What I should do is just answer calls from people I know.”

Jenny is one of tens of thousands of Chinese who have been victims of financial fraud. Crime has become commonplace in the world’s second-largest economy, which boasts of the rapid growth of its middle- and upper-income populations. “We are seeing an increase in scammers as household wealth grows,” said Nie Chengtao, a Beijing lawyer specializing in financial fraud.

Financial scams have an ancient history in China, where decades of high economic growth have created among the public not only enormous personal wealth but also a get-rich-quick mentality. Fraudsters also take advantage of the lack of regulation and the state-ordered cap on deposit rates, which makes it easier for them to convince customers eager to get higher returns on their savings.

The rise of the internet, especially online payments, has exacerbated the problem by making it easier to execute financial scams and harder to locate scammers. China’s technology firms are deeply involved in the development of financial services. Last year, for example, Fidelity launched a retirement savings tool using Ant, one of the leading financial platforms.

Scammers target the clients of these platforms, as they are able to access many more potential victims than they could in face-to-face meetings.

All of this has combined to make financial fraud a national problem that affects the entire Chinese society. The modalities range from the sale of participation in “click farms” (“click farms”, in which scammers hire people to buy products from online stores in exchange for a full refund plus a commission) to investment products with no underlying assets. David Zhang, an anti-fraud lawyer based in Hangzhou, said he has seen victims of scams ranging from college professors to factory workers and high school students. “No one is immune from fraudsters. We all have weaknesses that they take advantage of.”

The problem has no easy solution. While Beijing has made a big move to put the scammers behind bars, and the number of annual arrests has increased fivefold in the past three years, a significant number of fraudsters have gotten away with doing overseas operations or hiding their identities with improved technology.

“We are running out of resources to track the scammers,” a Shandong police officer specializing in financial schemes told the Financial Times.

A national education campaign against fraud was launched by Chinese authorities in 2019 after President Xi Jinping announced at a conference that combating the problem was a “high priority” to provide security for the population.

The campaign culminated earlier this year with the launch of the National Anti-Fraud Center, a mobile app that has been downloaded more than 500 million times, making it one of the most popular in the world. The government uses a variety of channels, from street posters to TV commercials, to inform the public about what the scams look like and how to avoid them.

But the app has also caused controversy by tracking cell phone usage, censoring calls from abroad, and labeling business apps like Bloomberg News’ “malicious” apps.

Few adult Chinese can go a day without being bombarded by state-paid anti-fraud propaganda. Most apartment buildings have signs at the entrance telling residents not to send money to strangers. Buses have posters on how to spot scams, while LED screens show celebrities proposing a “people’s war” against the scammers.

Some places went further. Last month, Dongjing, a district in Shanghai, began asking hotel guests, when they register, to read and sign a booklet with instructions against fraud.
Meanwhile, restaurant waiters have been trained to inform customers about scam prevention before serving dishes.

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

One of the main potential beneficiaries of this initiative are college students who have suffered greatly from these scams. A survey last year of 2,746 university students across China by the Chinese Youth Daily showed that more than a tenth of respondents had lost money to scammers.

This has sparked a new wave of educational campaigns aimed at making young people more cautious. Last year, Shanghai began requiring 140,000 first-year students to take an online anti-fraud course, highlighting five of the most common scams, from blackmail and impersonation of government officials to online dating, with the aim of selling fake investment products.

Some locals are so committed to fighting the coups that Jinan, a town in the east of the country, last year asked university students to allow anti-fraud police to join their social networking groups. The idea was for authorities to publish prevention tips and watch for suspicious messages.

“We want to ensure that students are constantly protected from the scammers,” said an official in Jinan.

Retail investors are another important target of the educational measure, as their financial expertise does not keep up with the strong growth 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 did not know how to calculate annualized earnings and did not understand the meaning of diversifying investments. Of these, 44% said they ignored or just overread the financial contracts.

To narrow the knowledge gap, the finance regulator (which includes the People’s Bank of China, the China Banking and Insurance Regulatory Commission, and the China Stock Regulatory Commission) offered a number of online and in-person training courses designed to help investors make more informed decisions.

These courses increased significantly after Xi’s 2019 speech. The agency also required financial advisers and asset managers to have investors complete video risk assessment tests before deciding which products to sell.

“We did our best to match investors’ risk option with expected returns,” said John Wang, owner of a Shanghai-based high-yield bond fund who turned dozens of investors away because of his low risk tolerance.

Many retail investors assume a guaranteed return (which is encouraged by the fund’s sales campaigns) from fixed income investment products, although this does not actually exist. A failure could lead angry investors to sue fund managers for providing false information.

But the educational campaign did not stop the scams from flourishing. Court records show that last year investor fraud cases nationwide increased by more than a third from 2019.

The campaign’s failure is due in part to its limited scale. Most government-sponsored investor education courses only reach a small number of students due to lack of publicity. Many private financial education programs enjoy greater popularity but suffer conflicts of interest for promoting investment products for profit.

Worse yet, most educational programs are too generic to cover what is needed to prevent fraud.

“The professor told us that high returns include high risk,” said Daniel Wu, a software engineer based in Zhejiang who took many financial education classes before losing 1 million yuan ($850,000) in a coup. “But he didn’t say which part of the investment contract we should read more carefully so we don’t get cheated.”

Beijing has passed one of the strictest personal data protection laws in the world, but enforcement is very patchy. Sun Yin, a professor of politics and law at Southwestern University, said in a paper last year that the lack of harsh punishment for stealing personal information puts scammers “at ease.”

Ji Shaofeng, a Nanjing-based financial adviser and former regulator of the banking system, said the best information can help the public fight long-term scams. “In the short, the rule of law is more important,” he said.

While fraud cases continue to flourish, however, many believe that education alone is not enough to fight fraudsters. Attorney Nie said the lack of protection of personal information allows scammers to produce such well-crafted messages that victims find it impossible to resist.

Jenny Fan, the student fraud victim, knows this from experience. “It’s hard to turn off a phone call from a stranger when he knows so much about you,” he said. “You listen until you fall into the trap.”

Translated by Luiz Roberto M. Gonçalves