In today’s world, this is a topic that every U business is concerned about. The once bustling agreements under the XX tree, XX inn, and the sleepless X o’clock community, are now deserted and abandoned, with many big shots caught up in illegal activities.
On June 12th, the Shanghai People’s Procuratorate released the “2023 Shanghai Financial Prosecutor’s White Paper,” discussing the innovative methods of foreign exchange and illegal payment settlement crimes, highlighting the risks of asset cross-border transfers using “virtual currency.” Some criminal organizations have started collaborating domestically and internationally to evade criminal prosecution and investigation. They exploit regulatory loopholes or industry regulations to commit illegal activities, using a combination of financial and non-financial means, attempting to form a self-sustaining criminal cycle gradually.
The white paper specifically addresses the legal supply and enhanced supervision of virtual digital currencies: China has maintained strict supervision of “virtual currency” but faces challenges such as difficult positioning of criminal activities, challenges in evidence collection, and monitoring of the flow of funds involved. Despite the difficulties, U businesses should not be misled by descriptions of “difficult positioning,” “challenges in evidence collection,” and “controversy.” Shanghai’s judicial authorities have always been at the forefront in understanding and combating virtual currencies in the country.
According to public reports, last August, Shanghai’s largest immigration company, Foreign Exchange Company, was investigated, and its actual controller, He, was subjected to coercive measures. He was recognized with an “International Leadership Award” by the Eisenhower Foundation in 2014 and was a successful woman featured on the big screen in New York’s Times Square. The charges against her were related to illegal business operations, specifically illegal foreign exchange. Running an immigration company has no barriers; success depends on how well one helps clients move money abroad. Today, using virtual currency for foreign exchange is a well-known “secret,” and the practices of Foreign Exchange Company were not sophisticated. Therefore, He’s arrest will likely implicate many U businesses.
As criminal methods evolve, so do the capabilities and methods of judicial authorities. When Foreign Exchange Company was caught, related underground banks were also busted. During the investigation, judicial authorities will undoubtedly update their understanding of how to combat currency-related crimes. Once the judicial authorities understand how the industry operates, the game will change, especially considering its low technical complexity and broad impact, which touches upon the bottom line of financial security. This will lead to a wave of targeted crackdowns, explaining the increasing number of virtual currency-related crimes recently. The white paper released by the Shanghai Procuratorate regarding foreign exchange issues is centered on this case.
The crackdown is happening nationwide, not just in Shanghai. In April of this year, Beijing police cracked a money laundering case exceeding 2 billion RMB. This case was discovered while investigating a case involving the infringement of citizens’ personal information. Among the three individuals arrested by Haidian police, two were represented by our team. Although the news headlines used the term “money laundering,” the charges for detention and arrest were related to illegal business operations, specifically illegal foreign exchange. In a case in Chongqing, the initial investigation was about other criminal activities, but it eventually uncovered issues related to illegal foreign exchange, making it the focus of the investigation. There is also a significant illegal business operation case under investigation in Zhejiang. These are just the cases related to illegal foreign exchange that I have represented or am aware of; there are likely many more.
Illegal business operations have long been criticized as a pocket crime. Due to the legal attributes of confiscation of illegal gains and penalties ranging from one to five times the fine, it is a commonly used charge in certain regions driven by profit. However, the cases discussed today all involve illegal foreign exchange, legitimate cases. These cases all share a common feature: after thorough investigation, U businesses are often found at the center. In the past, issues involving U businesses were mostly punished for aiding and abetting, and the investigation stopped there. However, recent cases indicate that if investigative authorities find U businesses involved in foreign exchange, they will focus on the illegal foreign exchange behavior and ultimately dismantle the entire exchange chain.
When it comes to illegal foreign exchange involving virtual currencies, the Zhao Dong case cannot be ignored. Analyzing individual cases can effectively explore the boundaries of illegal foreign exchange related to virtual currencies. According to reports, from February 2019 to April 2020, Zhao organized Zhao Peng, Zhou, and others to provide exchange and payment services for Dirham and RMB in the UAE and domestically. The group collected Dirhams in Dubai and transferred the equivalent RMB to designated domestic accounts. They then purchased “Tether” (USDT), a stablecoin anchored to the US dollar, in Dubai, and sold them illegally through domestic partners to obtain RMB, creating a cycle of funds between domestic and foreign markets.
Regarding the Zhao Dong case, through the information disclosed in the report and materials shared by netizens, I wrote an article analyzing the case. Many friends familiar with the situation came to me after the article was published, expressing that my speculations were accurate. Based on the report, if the full chain of service involves RMB, virtual currency, and foreign currency, using Tether as a medium to convert the currency values constitutes illegal trading of foreign exchange and illegal business operations.
Some may ask, “I only provide virtual currency acceptance services, not the full chain. Is there a risk of involvement in illegal activities?” My answer is: Yes. The “2023 Shanghai Financial Prosecutor’s White Paper” specifically mentions that financial criminals intentionally increase the complexity of their crimes to make tracking and monitoring of funds more difficult. This means that judicial authorities may consider virtual currency acceptance businesses complicit if they knowingly provide services to clients who intend to engage in illegal foreign exchange, even if the RMB-virtual currency-foreign currency loop is not completed. In practice, many cases are judged based on “indirect trading of foreign exchange.” Even if you choose to plead not guilty, it is a long and agonizing process, and persistence may be futile if the crime is evident.
U businesses face even greater risks when it comes to illegal activities involving foreign exchange, especially for licensed acceptance businesses operating abroad. Having a foreign license but conducting business domestically is equivalent to not having a license. Previous crackdowns targeted those who knowingly accepted illicit funds, then expanded to include those who may have known about the illicit activities. Now, the focus has shifted to those facilitating capital outflows. Therefore, seemingly compliant businesses are now under scrutiny, and arguments related to the effectiveness of evidence such as overseas transfer records, lack of contact between exchange facilitators and defendants, and the legality of obtaining overseas chat records are mostly ineffective. From the perspective of criminal jurisdiction, as long as there is a domestic transfer of funds, even if the person is not physically present in the country, domestic authorities still have jurisdiction.
Everyone in the foreign exchange chain may face criminal responsibility, even if they did not profit from the activities. The “2023 Shanghai Financial Prosecutor’s White Paper” emphasizes strengthening research on foreign-related rule of law and improving integrated supervision to govern the financial ecosystem. It calls for increased punishment for individuals involved in key areas of financial crime chains, including those providing financial assistance or technical support. In short, everyone in the chain is a target for prosecution.
In summary, one-way exchange of virtual currency into legal tender does not constitute a crime. However, full chain involvement or knowledge of illegal activities can lead to charges. Foreign licensed acceptance businesses cannot escape liability. Everyone in the chain faces criminal risks, and if unable to prove innocence through defense, it is essential to focus on reducing the amount in question and consider defending against profit claims, as fines may be imposed. Instead of discussing whether a crime has been committed with a lawyer, the focus should be on how to prevent being investigated. Regarding illegal activities involving virtual currencies, I have written several articles on my public account. If the business only involves acceptance and does not touch on foreign exchange, it may not meet the requirements of the law or constitute illegal business operations. However, if foreign exchange is involved, many cases are judged as “indirect trading of foreign exchange.” Even if you choose to plead not guilty, it is a long and challenging process that may prove futile if the crime is evident.
The risks of U businesses being involved in illegal activities are difficult to avoid and prevent. Even if you are cautious, you never know when or where an investigation will implicate you. Real prevention involves not discussing whether a crime has been committed but considering how to avoid being investigated. It is crucial to focus on reducing the amount in question if unable to prove innocence and to defend against profit claims, as fines may be imposed. Consideration should also be given to how to prevent involvement in such activities.
