Four rural mutual financial cooperatives in a small county in East China became the victims of a more than 110 million yuan ($17.6 million) fraud.
Eight of the eleven suspects are now in police custody, the publicity department of Guannan county in Jiangsu province's Lianyungang said on Tuesday.
The department also said that the four grassroots financial organizations, which are designed to give small loans to farmers, had instead used the savings of about 2,500 people to take a chance on a high risk investment.
The fraud was discovered on Oct 15 when two of the four cooperatives shut down because they ran out of money.
Police found that money had been illegally loaned to Long Cheng Group in Jiangsu in the hope of getting high returns. The group is involved in various businesses including real estate, e-commerce and online games.
Wang Minglong, the group's president, has been listed as an online fugitive.
The county government has promised to spend 43 million yuan compensating victims of the fraud.
Experts said the incident has exposed loopholes in the monitoring of small financial institutions in rural areas and called for an overhaul.
Different from rural credit cooperatives, the four organizations are among the 25 mutual cooperatives that are not monitored by China's financial watchdogs but by a government agency in Guannan.
"Those cooperatives give farmers higher interest than commercial banks, but they are only allowed to invest the deposits in agricultural areas, which are unstable and have low returns," Zhou Qin, director of the finance department under Southeast University, was quoted by China News Service as saying.
"Therefore, they would take the risk to loan to large companies that need financing," said Zhou.
But the local government said another 21 farmers' mutual cooperatives in the county are in good shape.
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