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Ponzi Case Raises Death Penalty Questions

01-15 17:24 Caijing Magazine

Do financiers tied to all sorts of investment fraud, 'underground banking' and private borrowing deserve to be executed?

By staff reporter Ye Doudou

From Caijing Online


An illegal but not uncommon financing scheme could mean the death penalty for a 44-year-old Zhejiang Province woman convicted of cheating investors out of 700 million yuan.


The People’s Supreme Court is expected to review a local court’s decision to execute Du Yimin, a businesswoman whose conviction stems from a nationwide crackdown on underground financing and illegal investment schemes.


The case, which reached the nation’s highest court after a provincial supreme court in Zhejiang rejected Du’s appeal January 13, also raised questions about whether China’s death penalty is appropriate for a wide range of financial crimes.


So-called ‘underground banks’ and Ponzi schemes such as Du’s became more frequent in 2008 after financial regulators rejected proposals to legalize certain private lenders. Instead, authorities stepped up probes of these activities.


Yet unconventional financing for small entrepreneurs has become rampant in China, especially in recent months because many banks are reluctant to lend to small- and medium-sized enterprises (SMEs).


Courts nationwide have been handling an increasing number of underground financing cases. Zhang Tao, an investigator with the Ministry of Public Security, said police opened 1,416 cases involving a total 10 billion yuan in 2008, recovering about 2 billion yuan for victims.


In Du’s case, the court ruled in March 2008 that she raised money from individual investors, including residents of Li Shui, by promising returns as high as 10 percent. New investor money was used to pay the interest on her previous loans.


Du is known by the nickname “Little Girl” in Li Shui, where she spent decades with various business ventures. After a cosmetics business failed, she tried a flurry of investment projects including real estate developments and mines in Vietnam as well as inland China.


In her defense, Du said her purpose was not to run a Ponzi scheme. Rather, she claimed the borrowing began when her business headed south, and most funds she raised were used to pay off debt.


Capital Punishment


Du is one of several convicted illegal financiers sentenced to death in recent years. Their cases have prompted some legal scholars to raise questions over whether these economic crimes deserve death.


Currently, Chinese law lumps all illegal fund-raising into two categories: illegally collecting money from private investors, and fund-raising fraud. The main distinction between the two crimes is intention.


The former is an unauthorized form of banking that involves soliciting and raising money from the general public. In exchange, investors get certificates and are promised interest and principal repayments within specified time periods. The maximum sentence for this crime is 10 years.


Fund-raising fraud, however, is considered far more serious and can incur a death sentence. By definition, this crime involves duping investors.


Du was one of several defendants in Zhejiang courts in recent years whose crime was defined as fund-raising fraud, punishable by death.


The death penalty was first used to punish illegal financiers in 1986 when another Zhejiang woman was convicted for her role in a 62 million yuan scheme. She was executed after the Supreme Court upheld the sentence in 1991.


In February 2008, the chairman of a trading company was convicted and sentenced to death for a creative scam involving fund-raising for an “ant farming business.” He promised high returns to eastern and northeast farmers who bought his ants to “raise” them, collecting nearly 3 billion yuan for the company and himself.


Nevertheless, some underground financing projects are actually considered lifelines for SMEs that have been rejected by banks and are suffering financial strain.


So far the central government has refused to consider legalizing these unconventional financing methods. But at the same time, some investment channels for private funding have dried up.


Some scholars think if the Supreme Court upholds Du’s death penalty, she will join other financiers executed for a faulty financial system.


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Article in Chinese: http://www.caijing.com.cn/2009-01-14/110048016.html   

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