Signs That a P2P Lending Platform Might be a Scam
In the last few months, three peer-to-business (P2B) platforms closed their operations. Two of them, Envestio and Kuetzal, turned out to be perpetrators of fraudulent activities which have resulted in millions of euro losses.
By the end of March 2020, two more platforms, Monethera ceased operations. While the management of the platform is blaming coronavirus and the resultant economic downturn, the platform was subject to difficulties weeks before the outbreak. No one knows whether investors will be able to retrieve their investments back.
As we write this article, another P2B platform, Grupeer, is facing serious accusations about the legitimacy of its loan originators.
So, with the current uncertain and threatening economic climate, let’s take a closer look at these P2B platforms: what’s going on here and how we can we investors avoid the scammers? Are all of them a Ponzi scheme that is built for the sole purpose of stealing investors’ money?
What is a Ponzi Scheme?
A Ponzi scheme is an investment scam, where the fraudulent party promises high-yields with seemingly less risk. The Ponzi scheme generates returns for early investors by acquiring funds from new investors. New investor’s funds are used to pay the earlier investors.
In this post, we are going to address some of the similarities between those platforms and try to find a pattern which should help you to avoid scammy platforms and protect your future investments.
Before we show you our findings, here are quick takeaways for new and experienced investors that can be used to protect your P2P and P2B investments.
We’ve been investing on P2P lending platforms for several years, and always complete thorough due diligence before investing (and writing our P2P reviews). Using our experience, we’ve created the following quick and easy checklist to help you avoid potential investment scams. When looking for new platforms, see how many of the following you can tick off before signing up:
- Background Check: You can find information about the CEO and the platform’s owners
- Background Check: You have not found any evidence that key management or owners (or the families of) are connected to money laundering
- T&C Check: You’ve checked the terms and conditions and you don’t recognise the clauses from other platforms’ T&Cs. (Illegitimate platforms often copy and paste the terms of their legitimate counterparts)
- T&C Check: The platform’s T&Cs don’t contain a clause reserving the right to change the terms and conditions without prior notice
- Loan Originator Check: The company offers full disclosure of loan originators and borrowers (businesses)
- Buyback Guarantee Check: The buyback guarantee is not provided by a third-party; instead, by the loan originator or the platform itself
- Banking Check: The company use a bank account from the same country that the company is registered in
- Company’s Address Check: You can find the company’s address on their website, it’s not virtual, and it is the same address as the company’s office
- Loan Agreement Check: The company is happy to share a template of the loan agreement before you’ve signed up
Chances are high that you will not be able to tick off everything on this list. Instead, it’s likely you will spot some red flags, and that’s true even with the most popular P2P lending sites. And, of course, the more red flags you find, the more cautious you should be when investing on this platform.
If your platform has three or more red flags from the above list, it’s safer not to invest on this platform at all.
🚩 Red Flags to Follow for Registered Investors
Okay, so you’re already registered to a platform and you’re now facing some issues or you’re just airing on the side of caution and want to check its legitimacy.
Don’t panic, you’ve come to the right place. With a close eye on the P2P industry, we’ve seen lots of concerning behaviour. As a result, we’ve been able to notice patterns in the ways illegitimate platforms work.
First thing’s first: see how many red flags on the following checklist align with your current platform and investment strategy. This will help you decipher the safety of your current investments, and take action accordingly:
- You’ve reached out to the platform with questions and issues and they’re unable to resolve your problems or answer critical questions
- Majority of your portfolio is delayed during normal market conditions
- You’ve chatted with investors and a number of them are reporting problems with withdrawals
- Investors have exposed potential fake projects
- There seems to be frequent changes in the management team (the most important employee being the CEO)
- You’ve spotted changes in the company’s terms and conditions
- You’ve been sent a time-buying letter
- The platform has been disabling some of the key features used by investors
If you have spotted suspicious behaviour about a P2P lending platform (not its loan originators) that we haven't mentioned, feel free to report your findings to email@example.com. Please be as descriptive and factual as possible.
While many investors promote P2P investments as a form of passive investments, this isn't the case anymore.
The P2P lending space is developing very fast and when the first suspicions about a “seemingly” good platform start to rise, it might not take long before the platform shuts down.
From what we have seen in the past, it can take around two months. The more of the above mentioned red flags come to light, the less time investors will have to exit their investments.
We’ll go into this more in our 10 Things (Potentially) Fraudulent P2P Lending Platforms Share section, but for now, let’s look at how you can best avoid being scammed...
How to Avoid Being Scammed
- Make regular withdrawals: Check whether the withdrawals are still working to avoid any unexpected issues
- Follow the blogs written by your P2P platform: Check for latest company news and evaluate how it influences your investments
- Follow P2P lending Facebook and Telegram groups: Find the group with the least toxic environment and the maximum value
- Watch interviews with the CEO and evaluate whether the person knows what he or she is talking about. Every business owner should know its business in and out
- Read and understand the platform’s terms and conditions
- Read our in-depth reviews and do your own due diligence
There is no guarantee that even the best investors won’t fall for very well executed scams, which is also the reason why you should check the source of your information.
10 Things (Potentially) Fraudulent P2P Lending Platforms Share
Having looked into the recently failed platforms (and a number of others when creating our P2P reviews) in immense detail, we’ve noticed a number of patterns that fraudulent P2P lending platforms tend to follow. We briefly mentioned these above, but here we’re going to go into these in more detail:
1. They’re Often Less Than Three Years Old
All of the recent fraudulent platforms are less than three years old:
- Grupeer was founded in 2017
- Envestio in 2018
- Monethera in 2019
- Kuetzal in late 2018
When looking at these stats, it’s more likely that a young (and less established) platform will commit fraud than a platform that has been on the market for years.
2. Registered in Estonia
Most of the P2P lending platforms in Estonia do not need a special license to offer their service, which is the main reason why platforms choose to register their companies in Estonia. The process of launching a crowdlending platform is much easier here than it is in Lithuania, for example.
Here is an overview of companies that are regulated by financial authorities:
- Bondora received a credit provider license and is regulated by the Estonian Financial Supervision Authority.
- EstateGuru collects local licenses in the market where the platform is operating. Currently, EstateGuru is regulated by the Bank of Lithuania which is one of the biggest regulators in the Baltics.
- Profitus and NEO Finance are two other platforms regulated by the Bank of Lithuania.
Most other platforms from the Baltics, Mintos included, are not regulated under any financial service license.
While we are not suggesting that all Estonian platforms are suspicious, the fact that Monethera, Envestio and Kuetzal were registered in Estonia coupled with the lax Estonian regulations is reason enough to be more conscious of Estonian-registered platforms.
3. Banking Issues
Every one of the above-mentioned platforms has had issues with their banking provider. And, in most cases, the platforms have not informed their investors about the reasons for the changes in banking.
Changes in methods of banking is a potential sign that you should be extremely cautious when considering making investments on the platform.
Why? Because, unless there is a logical explanation for the change, it’s likely that the platform’s bank accounts have been frozen due to suspicions of money laundering. Banks simply do not freeze accounts without a good reason for doing so.
If you spot that the platform’s bank account is located in a different country to the company’s offices, this could be another potential red flag. Estonian-registered Monethera, for example, asked their investors to transfer funds to a bank account in Slovakia only a few months ago.
4. Fake Projects
Doing due diligence about business projects from companies that fall under different legislation and are operating in a different country is quite a time consuming and complex task, which most investors ignore.
But, sooner or later, investors do their due diligence on individual projects listed on a platform, and this is sometimes when the cracks start to show. There are various Telegram and Facebook groups where investors share their thoughts and experiences.
In the case of Envestio, investors found out that the platform funded a fake project for a non-existent petrol company worth €850,000. This started the domino effect which caused the downturn of Envestio’s Ponzi scheme.
P2B platforms typically do not disclose all of the financial information as well as the information about the management of the business to their investors. This makes the risk evaluation of a business loan extremely hard.
There is a severe lack of transparency in the P2B lending niche, which most investors accepted in exchange for higher yields.
As soon as someone spots a potentially fraudulent project and there is no immediate explanation from the platform, it’s a sign to leave the platform as soon as possible.
Tip: The easiest way to spot a fake project is to perform a Google search on the company and see whether they actually exist. If you cannot find any entries in one of the business registries, no address or option to contact the owner, and no LinkedIn profile, the chances are high that the platform is a scam.
5. Time-Buying Communication
As soon as the accusations of a scammy platform start spreading across the internet, the platform might send out some ‘reassuring’ email stating that “everything is fine”.
This technique is meant to buy some time. While it’s not easy to immediately mark this as a red flag, one way of doing a quick check is by looking for a personal signature at the end of the email. In the case of Envestio, there was none, in the case of Monethera it was signed by “Monethera Group”.
If you happen to receive an email like this, try to get out if you still can or at least download all the data about your transaction and loan agreements.
In the case of Envestio, it was only five days later and the site wasn’t accessible anymore.
6. Changes to the Terms and Conditions
Every investor that signs up to a P2P lending platform should read and understand the terms and conditions as well as the loan agreement. This is the only “legal” safety you as an investor have.
A huge red flag is when a platform reserves the right to amend the terms and conditions without prior notice.
Source of the above screenshot.
This was also one of the techniques applied by Kuetzal. In fact, today there are more platforms out there than ever before that have this clause stated in their terms and conditions. Often how this works is that users automatically accept the new terms as soon as they log in into the system, but for a more accurate idea of what such a clause looks like, we suggest having a look at our Flender review.
Alongside the right to change the terms and conditions without any notice, some platforms also tend to reserve the rights to assign claims to undisclosed third parties and share your data with anyone. A great example of this is Ekassa.
Two additional red flags you can easily spot when completing a quick check of a platform’s terms and conditions are:
- Copy pasted terms and conditions from other platforms
- Obvious grammar errors
It’s the above issues with company’s T&Cs that pose them as threats. If platforms are inaccurate with important documents like their T&Cs then they’re unlikely to be reliable when it comes to looking after your money..
7. No Access to Loan Agreements
The loan agreement is a written contract between you and the borrower, and some platforms make it really hard to access these.
It’s important you have access to this agreement, for it contains information about the:
- Loan term
- Repayment schedule
Here are three examples of our favorite platforms that offer you access to individual loan agreements.
You can find EstateGuru's loan agreements under My Portfolio → Documents
On Mintos, the loan agreements are listed under your current investments.
On PeerBerry , you will find the loan agreements under My investments. You need to click on the PDF icon to view the contract.
Every platform should give you access to a loan agreement before you start investing. Usually you can find it somewhere on the bottom of the website. Sometimes loan agreements are only visible to registered users. This is the case with Wisefund and Lendermarket and it’s something that certainly does not help improve the transparency.
Some platforms like Grupeer take it even further: the only way to see one of their loan agreements is to actually invest in a business project.
Monethera, does not show you any loan agreements unless you invest either.
8. No Information About the CEO and Owners
While most companies have a dedicated team page, smaller platforms are not always as transparent. Sometimes it isn’t even obvious who the CEO of the company is.
Finding out who the owners are often requires some good old detective work. It’s not uncommon that during our due diligence about individual platforms, we have to browse through various business registries to find more information about the legal owner.
Another great example of this is Ekassa. In order to find some name that is connected to the platform, we had to read all the legal documents on the platform, just to find out that the person in charge is some ex-banker from the Ukraine with an outdated profile on Upwork, a website freelancers use to find work.
Why would investors be willing to invest on a platform without knowing the key management behind it?
CEOs of trustworthy platforms speak at conferences, hold webinars, give valuable interviews and engage with the P2P lending community. That’s the kind of information you should be looking out for.
9. Key Management is Connected to Fraud
The chance that a new investor is able to expose people connected to scams and money laundering is rather small.
Changes in the Management
What investors can find out easily, however, is whether there has been a recent change in the platform’s management team. This point is particularly relevant in today’s P2P climate, as both Envestio and Kuetzal went through management changes before it was found that they were practising fraudulent behaviour.
In fact, Envestio closed down only two months or so after the change in management.
Investors can Google the new people in charge and evaluate whether they have enough skills and experience to lead a P2P lending platform.
In connection to this section, we have also found very disturbing evidence against the current CEO of Fast Invest, Simona Vaitkune who was accused of fraud and failure of the credit union Taupkase.
While everyone in the P2P lending community knows about this, Fast Invest’s support was never able to adress or explain those accusations and there are still plenty of investors using Fast Invest. Read more about it in our Fast Invest review.
10. Third-Party Buyback Guarantee for Business Loans
We have already explained our thoughts on the buyback guarantee in our in-depth guide.
Some young platforms, Monethera included, thought that it might be a good idea to use this added “benefit” and offer this ‘safety net’ to the investors.
The problem with this platform was that Monethera was not able to cover this buyback guarantee itself and they also did not collaborate with a loan originator. Having a provision fund like Crowdestor or NEO Finance was probably not good enough for Monethera.
Monethera decided to arrange an agreement with a Hong Kong-based company that was supposed to repurchase investors’ claims if they wished to exit the investment.
This was heavily criticized by the investors as there was only a very limited amount of information available about the company. A few weeks later, Monethera decided to disable the buyback guarantee.
Wisefund followed a very similar strategy, for which it was heavily criticized by P2P bloggers.
We thought that it would be good to interview the CEO Ingus Linkevics and ask him to give explanations for the accusations against him. To our surprise, he was very responsive and we have published this interview in our Wisefund review.
While there is certainly a lot of room for improvement when it comes to Wisefund’s transparency, we see the reaction from Wisefund’s CEO as something rather positive, at least for now. Kuetzal and Envestio avoided all the critical questions. This wasn’t the case with Wisefund which disabled the buyback guarantee for future projects a few weeks ago.
While anyone can become a P2P investor within a few minutes, it’s not a risk-free investment, which many investors do not realize at first.
P2P lending is and has been a very good alternative to the stock and crypto market as it’s nowhere near as volatile.
There are, however, other risks that investors should take into consideration. One of them is unfortunately the possibility of being scammed.
We are truly sorry for any investor who has lost money due to fraudulent platforms in the past. We hope our website will help prevent investors’ money loss in the future.
The P2P lending industry undeniably lacks transparency, which is why we are committed to helping educate investors like yourself about all of the possible aspects, so you can make investment decisions based on hard facts rather than emotions and promises.
We hope you found our article helpful, if so, please share it on social media and help other investors protect their P2P investments.
If you would like to raise any other “red flags” which we haven’t thought of, drop us an email to firstname.lastname@example.org, we’d love to hear from you!