The Interpretations of the Supreme People's Court and the Supreme People's Procuratorate on Several Issues concerning the Application of Law in handling Criminal Cases involving Illegal Fund Payment and Settlement Business and Illegal Foreign Exchange (FX) Trading were approved by the Judicial Committee of the Supreme People's Court on 17 September 2018 and the 13th Procuratorial Committee of the Supreme People's Procuratorate on 12 December 2018. The interpretations took effect on 1 February 2019.
Criminal activities such as illegal payment and settlement business and FX trading have become increasingly rampant in recent years. Underground banks have become the main conduit through which criminals engage in money laundering and illegal funds transferring, as well as telecoms fraud, online gambling and other criminal activities.
Although illegal payment and settlement business and FX trading have been classified as business crimes in various laws and regulations, the applicable penalties have been unclear. However, the new interpretations set out the convictions and penalties for illegal business operations involving FX trading and payment and settlement business.
Among other things, the interpretations set out:
- the criteria used to determine whether an activity constitutes:
- illegal payment and settlement business;
- illegal FX trading;
- serious circumstances; or
- a particularly serious crime;
- the principle of alternative punishment for:
- illegal business operations;
- money laundering; and
- terrorist financing;
- the criteria for recognising illegal business operations and the applicable penalties (including fines, which will be determined based on the amount of illegal income generated);
- the applicable penalties and sentencing standards for enterprise crime;
- when and how leniency will be applied;
- how criminal sites will be identified; and
- the interpretations' validity period.
According to the interpretations, the following activities constitute 'illegal payment and settlement business':
- paying money to designated payers through illegal means, such as fictitious transactions, fictitious prices and transaction refunds, acceptance terminals or network payment interfaces;
- illegally enabling third parties to withdraw funds from an enterprise's bank settlement account or transfer money from such an account to a personal account;
- illegally converting cheques into cash; or
- illegally engaging in other types of payment and settlement business.
According to the interpretations, 'illegal FX trading' means implementing FX transactions in violation of Chinese law – for example:
- illegally buying or selling FX; or
- undertaking disguised FX trading which may disrupt the financial markets.
If the circumstances are serious, the guilty party will receive a criminal conviction for committing illegal business operations.
In practice, illegal FX trading through underground banks mainly includes:
- buying and selling FX in the form of direct domestic transactions; and
- undertaking disguised FX trading in the form of cross-border payments via domestic and foreign 'knocking'.
'Buying and selling FX' means buying low and selling high in the domestic FX black market and earning exchange rate differences. 'Disguised FX trading' refers to repaying renminbi yuan in FX or repaying FX in renminbi yuan and realising the conversion of currency value through a FX or renminbi yuan exchange. 'Cross-border redemption' is a typical form of disguised FX trading, through which underground banks collude with overseas personnel, enterprises or institutions to use overseas bank accounts to assist others in cross-border remittances and funds transfers.
Underground banks and disguised FX transactions will be the key target of the new enforcement regime introduced by the interpretations. However, some associated acts, such as domestic and foreign knocking transfers, may also result in criminal legal liability in future.
For further information on this topic please contact Wu Jiejiang at Jingtian & Gongcheng by telephone (+86 10 5809 1000) or email (email@example.com). The Jingtian & Gongcheng website can be accessed at www.jingtian.com.
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