Is P2P Lending a Scam? – How to Avoid Investing in a P2P Lending Scam

June 21st, 2020
9 minutes read

Before carrying out bigger investments, it is normal to be worried about to what extent your investment will be safe. This article will dive into examples of fraudulent P2P lending platforms and provide you with the necessary understanding of P2P lending scams as well as provide you with some tools to help prevent falling for a peer-to-peer lending scam.

P2P Lending Scam: How Does It Happen?

P2P lending is a form of crowdfunding that connects borrowers with lenders without the involvement of a financial institution. The phenomenon has grown very popular amongst investors during the last decade due to the possibility of receiving high returns on investments. However, all investments come with a risk, and peer-to-peer lending, in particular, poses an unprecedented risk of default and fraud.

A P2P lending scam normally happens, when a peer-to-peer lending platform after a period of mysterious activity blocks investors from withdrawing their money and shuts down. The question stands, whether the platform from the beginning was created with the purpose of deceiving people and stealing investors’ money or it closed down due to a bad investment and lack of liquidity.

In Which Type of P2P Lending Do You Find Most Scams?

In this paragraph, the article will look into which type of peer-to-peer lending is most likely to present you with fraudulent platforms. This will help you to know where to pay extra attention to mystical behaviours and general warning signs.

There are three main types of P2P lending:

  1. Consumer lending
  2. Business lending
  3. Real estate lending

Let us have a closer look at each of these three types of peer-to-peer lending below.

Consumer lending
Consumer lending seeks to provide small and unsecured loans to individuals by connecting borrowers with lenders, who will invest in these loans and earn returns from the interest rates.

Business lending
Business lending platforms enable investors to fund loans to small and medium businesses, either unsecured or secured against assets or a personal guarantee.

Real estate lending
All loans in real estate lending are secured by a legal charge over a property, which the platform can repossess and sell in order to redeem the loan in case of default.

One of the three above-mentioned types of peer-to-peer lending carries a higher risk of fraud: business lending. One of the reasons for this can be found in the online growth of online funding of small businesses and start-ups without the involvement of financial institutions. Nowadays, business finance can be arranged without the necessity of any face-to-face meetings. However great this might sound, it poses a severe threat of fraud since it opens the doors to unscrupulous individuals or groups who will trick investors into falling for a scam.

Below, the article will dive into three examples of business lending scams in P2P lending.

Three examples of Peer-to-Peer Lending Scams

In order for readers to better understand how a P2P lending scam can look like, the article will take you through three recent examples of peer-to-peer lending scams:

  1. Kuetzal
  2. Envestio
  3. Grupeer

What these three platforms have in common is that they all operate within the business lending type of P2P lending and they are all of Based in the Baltics; Kuetzal and Envestio in Estonia, and Grupeer in Latvia.
The platform Reinvest24 from Estonia have created an article to prevent being scammed in the Baltics that contains a list Baltic company registers and other relevant links to look up on companies & platforms in this area. While it is of course not only Baltic companies that scam in the world of P2P lending, this list of company registers worldwide might also be useful in your process of researching P2P lending platforms.

The Kuetzal Scam

The Estonian P2P lending platform Kuetzal was founded in November 2018. The platform sought to connect businesses in need of financial assistance with potential lenders/investors. In January 2020, it went out of business, leaving many investors behind with no chance of withdrawing their invested money. 

Let us have a look at some of the warning signs that came to light before the platform closed down:

  • The very young age of the managers of the platform was a concern from the beginning since not everyone agreed that these people in their early and mid-twenties had enough experience nor were sufficiently mature to lead a financial platform of this calibre.
  • In October 2019, Kuetzal suddenly changed their terms and conditions that registered users had no choice but to accept. However, those investors who actually read the new T&C policy saw that it enabled the people running the platform to close it anytime they saw fit and take the investors’ money with them.
  • Later on, in December 2019, it became clear that one of the companies that Kuetzal’s investors had lent money to was a false company called Aalborg Petrol run by a fake persona.
  • Since mid-December 2019, it became impossible for investors to withdraw their money from the platform. Kuetzal explained that due to many negative reports about the platform, the two banks they collaborated with had blocked their bank accounts and, therefore, they were unable to perform any operations.

The list goes on until the platform finally pulls the plug in January 2019 and shuts down, and it becomes obvious to those investors involved that the whole thing was a scam.

The Envestio Scam

Another Estonian P2P lending platform that disappeared at the beginning of 2020 while under claims about fraud is Envestio. This platform allowed both private and corporate investors to invest in various types of projects, among others, high-yielding projects with buyback guarantees and cryptocurrencies.

In general, the different types of investments on Envestio offered very little transparency. Additionally, many of the projects came from a wide variety of industries, which made it hard to believe that the platform had been able to evaluate the quality of all the projects before allowing them to be published on the platform.

Meanwhile Kuetzal was undergoing an investment crisis; a lot of investors drew similarities between the issues in Kuetzal with what was going on in Envestio. The panic from Kuetzal spread to Envestio, and investors started raising serious concerns about the platform – and with a good reason. 

The platform suddenly vanished at the end of January 2020, and investors had no chance to collect their invested money.

The Grupeer Situation

A more recent incidence found in the field of P2P lending involves the Latvian peer-to-peer platform Grupeer, which has suspended its payments to investors since the end of March 2020. However suspicious the circumstances appear, it is not yet clear whether this can be considered a scam, yet.

Here is an overview of what happened with Grupeer:

  • At first, the P2P company laid off several of its staff members
  • Various false investment projects were discovered by investors on the platform
  • One of the loan originators stopped offering buyback guarantee
  • Grupeer all of a sudden changed their banking providers
  • Investors started experiencing more issues with late payments
  • It became increasingly more difficult to withdraw money from the platform
  • All withdrawals were finally blocked late March 2020

Grupeer showed some of the same behaviour as Kuetzal and Envestio did before they closed down. In other words, these three examples of P2P lending scams show a behavioural pattern that investors should pay great attention to when investing their money in any peer-to-peer lending platform.

What to Be Aware of Before Investing

Below, the article will present you with a list of red flags that should make you consider whether the platform you are planning to or already investing in is a scam.

Here is a non-exhaustive list of warning signs:

  • If the platform asks for a very high starting investment such as, for instance, 3,000 EUR (note that a starting fee of 1,000 EUR is relatively normal on real estate lending platforms)
  • If the promised average monthly return is unrealistically high, e.g. more than 19%
  • If the company has offices in one country and bank accounts in another country
  • If the bank account information changes without explanation while you are investing
  • If the deposit and identity verification process is unclear
  • If the platform is not recognized and approved by national regulation
  • If the platform offers very aggressive bonuses to attract new investors and, thus, more money (before closing down)
  • If the platform’s funding volume sharply decreases while the number of projects remains the same or even decreases whilst the overall market increases, as well, without any clear explanation of why it is happening, it might be a sign of trouble

Incredibly high returns are, in fact, incredible, and should not be trusted. What you should expect, is a return ranging from 2% to 20% ROI per year. Anything higher than that should make your alarm clocks ring. However, as an investor you always have to consider the fact that high rewards come with high risks, why you should also note that 20% is extremely high and impossible to find without significant risk.

Blue Trading is another example of fraud that tried to attract new investors by offering a 10% bonus of the invested money for one entire month. This was a trick to get more money onto the platform before closing it down and running away with the investors’ money. That said, you can also easily find bonus programs on 100% legitimate platforms, so this should be seen in the light of other encountered red flags.

As you can see, the list presents various factors that investors should be aware of not only before deciding to invest in a platform but also after having invested. If one or more of the red flags presented above are waived, you should consider carefully whether it is time to withdraw your money even though it might come with a loss.

How Regulations Help Prevent P2P Loan Scams

Compared to China and the USA, crowdfunding and, in that sense, P2P lending has not yet taken off fully in Europe. This might very well be due to the lack of common rules about crowdfunding in the EU. Consequently, the regulation of peer-to-peer lending in Europa is based on national legislation.

That said, investors must be aware that not all countries do have national legislation within the area of crowdfunding and P2P lending. This goes for, among others, a lot of the Baltic countries such as Estonia and Latvia as we saw in the scam examples above.

Nevertheless, even when countries do regulate peer-to-peer lending platforms nationally, there is a risk of scam. This happened, for instance, with the Swedish platform TrustBuddy, which went bankrupt in 2015 and was investigated for misconducting the law.

In 2018, The European Commission proposed a regulation on European crowdfunding with the purpose of creating one set of rules that all European platforms ought to comply with instead of various regulatory regimes, thus enhancing the legal certainty for investors and minimizing the risk of scams.

Conclusion: How to Avoid a P2P Investing Scam

There is no doubt investing in P2P lending comes with high risk, why it is very important to conduct thorough due diligence on any platform where you consider investing your money.

It can seem tempting simply to rely on reviews performed by third parties. Even though these reviews might be very well written and based on facts and research, it is important that you do not rely on these reviews blindly and spend your own time investigating and reading about a potential platform. Don’t trust in promises of high returns unless it is clear that they come with a significant (but bearable) risk, and don’t see a certain number of active investors as a guarantee – look past these advertising catchphrases and dig deeper into the company behind the platform.

What it all boils down to is that every investment carries risk and if you lose money on a platform, it doesn’t necessarily mean that you have been the victim of a scam – losing money is part of the game; without taking a risk, you will not receive a return. Therefore, instead of giving up on investing and peer-to-peer lending altogether, you should try to review the circumstances and learn from them. Because overall, the net results from investing in peer-to-peer lending, if done right, is more positive than negative.