P2P-Banking and El Espanol have broken worrying news over the past couple of days. Comunitae, a large European peer to business lending platform, have detected internal fraud and are suspending activity – probably shutting down.

What Happened?

Comunitae is Spain’s largest P2P lender, and one of the largest Euro-SME lending platforms. Founded in 2008, they’ve raised over €3.5 million in external funding (for platform development). Data from Altfi shows an all time lend of around 45 million euros, 9 million of which was in the year to date.

At the start of November, Comunitae sent out a letter to its investors explaining that they had interally detected fraud affecting 18 guarantors. El Espanol explains that their own risk analyst was complicit in a form of payment fraud with various businesses. Comunitae state in their investor email that there are now criminal proceedings against the employee in question.

I can’t find an official number of how big the fraud was. A couple of speculative posts on this Spanish forum discuss a figure at 500 thousand – 600 thousand euros. That would put it around 6% of the year to date lending figure. This seems a bit low to me to cause a closure of entire lending platform, though it seems the last nail is already in the coffin with a loss of investor confidence. The Comunitae founder, Arturo Cervera, says that although the percentage of fraudulent loans was not big, they left a ‘bad taste’ in the mouths of many investors.

Protections for Lenders

Altfi news describes regulations from the Spanish regulatory body, the CNMV. Theoretically all regulated crowdfunding and P2P lending platforms required to have social responsibility insurance with a minimum coverage of €300,000 for a complaint about damages and €400,000 per year for all complaints. Comunitae’s main terms and conditions do mention coverage for €300,000 (section 1.1 here) – though in such an important document they seem to have been a bit careless to misspell their insurer ‘Liberty Mutual’ as ‘Linerty Mutual’. It will be very interesting to see what happens with this.

What Can We Learn From This?

As investors, we now have a 3rd risk to consider when investing in P2P loans. Aside from the obvious two:

1. Borrower unable to repay
2. Platform goes bankrupt

We now have a case of:

3. Internal platform fraud

With 1. and 2. there are well established solutions. The first can be mitigated through a wide diversification across small loan parts, a provision fund or asset-backed lending. The second (I believe) has regulation in the UK from the FCA, to nominate a 3rd party to run off the loan book if the original platform runs into trouble. But what protection do we have against an internal risk officer signing off on lots of bad loans for personal gain? I like the idea of mandatory insurance to cover this, though I am not certain that was what the Spanish regulator had in mind with their social responsibility insurance requirement.

Were There Any Warning Signs?

Could investors have seen this coming? By its nature, probably not. However, if you look at the website it doesn’t exactly scream “invest in me”:

• The last blog post/ media release was in 2015
• Aside from the occasional retweet and a single tweet in 2016, the last consistent twitter activity was in December 2015
• Their Facebook page (as linked to from the website) seems to have expired