Attorney Shao Shiwei | Legal Perspective: Private Foreign Exchange Transactions by Foreign Trade Companies Should Not Constitute the Crime of Illegal Business Operations!

What are the key points of criminal defense when being investigated by public security organs for private foreign exchange transactions?

This article is an original work by Attorney Shao Shiwei. It reflects only the personal views of the author and does not constitute legal consultation or legal advice on specific matters. For article reprints, legal consultations, or business exchanges, please add: sswls66

When engaging in international trade, cross-border e-commerce or foreign trade companies should theoretically conduct currency exchange and cross-border payments through formal channels. However, some business owners still choose to engage in private foreign exchange transactions through illegal means.

There are many reasons for choosing private foreign exchange transactions, some of which are due toeconomic costconsiderations (formal foreign exchange channels may involve higher handling fees and tax costs; additionally, private foreign exchange channels often offer more favorable exchange rates),time costconsiderations (the formal foreign exchange process may require more time and documentation),regulatory evasion(transactions involving gray or black market industries);

others are due todifficulties in foreign exchange caused by objective factorsFor example, U.S. economic sanctions against other countries, such as restricting Russian banks from using the SWIFT system and prohibiting Iran from conducting transactions in U.S. dollars, may create obstacles for Chinese enterprises engaged in trade with these countries when settling payments between foreign currencies and the renminbi.

Due to the aforementioned reasons, some business owners have opted for private currency exchange methods. Some directly useunderground banks or currency exchange intermediariesto directly convert funds into cash, while others chooseindirect methods such as converting funds into USDT (a virtual asset) or gaming prepaid cardsfor fund conversion.

Currency exchange transactions often involve multiple parties, including underground banks, intermediaries, both buyers and sellers of foreign exchange, and corporate finance personnel acting on instructions from business owners. If any one of these individuals is investigated by public security authorities, they may disclose upstream and downstream participants in the transaction out of self-preservation or in an effort to be recognized as having performed meritorious service.

Therefore,does a foreign trade company owner’s currency exchange conducted for business purposes constitute the crime of illegal business operations?

By Attorney Shao Shiwei

01 In practice, there are numerous similar scenarios.

Zhang San frequently requires U.S. dollars. Li Si has extensive connections and knows many foreign trade company owners, including Wang Wu. Whenever Zhang San needs U.S. dollars, he transfers renminbi to Li Si. After deducting his service fee, Li Si transfers the remaining amount to Wang Wu. Wang Wu, who also needs to convert funds into renminbi, transfers proceeds received from his foreign trade activities to Li Si, who then forwards them to Zhang San.

Li Si, acting as an intermediary, provided currency exchange services to Zhang San and Wang Wu, profiting from the spread.(Attorney Shao has previously authored multiple articles on whether intermediaries facilitating foreign exchange transactions constitute the crime of illegal business operations. Readers familiar with these works would recognize that Li Si, as an intermediary, commits the crime of illegal business operations.)On a certain day, Li Si was arrested. In an effort to "meritoriously assist" authorities, he implicated Wang Wu, claiming that the US dollars he transferred to Zhang San were all provided by Wang Wu.

Subsequently, Wang Wu received a call from police officers requesting his cooperation in the investigation. He then consulted Attorney Shao, asking whether his conduct constituted a criminal offense. Attorney Shao opined thatit did not constitutea crime, primarily for the following reason:The currency exchange activities involving Wang Wu were not business operations conducted for profit.

As the owner of a foreign trade company, why did Wang Wu collaborate with Li Si for currency exchange? Because his corporate account held substantial proceeds from foreign trade transactions. For various reasons, engaging an intermediary like Li Si for currency exchange was both convenient and rapid. Therefore, Wang Wu’s and Li Si’spurposes for currency exchangewere fundamentally different. Li Si facilitated the exchange transaction between the two parties with the aim of earning the spread, whereas Wang Wu’s purpose was merely to convert his foreign-currency receivables from goods sales into RMB.

The crime of illegal business operations is colloquially known as a "catch-all offense." However, if the conduct in question is not of a "business" nature, it should not be prosecuted under this offense. The essential characteristic of a business operation is a market transaction conducted for profit, i.e., obtaining economic benefits through the transaction itself.Wang Wu did not seek to obtain economic benefits through the currency exchange transaction itself.

For example, Decision No. 70 (2019) of the Echeng District People’s Procuratorate, Hubei Province, on Non-Prosecution in Criminal Cases, and Decision No. 1 (2019) of the Public Prosecution Department of the Wenzhou Municipal People’s Procuratorate, Zhejiang Province, on Non-Prosecution in Criminal Cases, both adopt this view: “Although XXviolated state regulations on foreign exchange administration by exchanging foreign exchange for another person, the foreign exchange exchanged was derived entirely from payments for goods received by his own foreign trade company, and the exchange was not conducted for the purpose of profit-making. His conduct did not possess a business nature and therefore did not satisfy the constituent elements of the crime of illegal business operationselements of the crime.

02 Further discussion: What if Wang Wu, in addition to converting the payment for goods into RMB, also collected profits from the foreign exchange exchange?

Zhang San urgently needed to exchange USD, but Li Si happened to be short of liquidity and unable to facilitate the transaction. Seeing that Li Si was under pressure to provide USD to his client Zhang San, Wang Wu proposed to Li Si that he could facilitate the exchange but would charge a service fee, to which Li Si agreed. In such circumstances, Wang Wu is suspected of committing the crime of illegal business operations. However, whether his conduct constitutes a crime must be determined through a case-specific analysis based on the particular facts.

The defense counsel’s key arguments may be developed as follows:

1. The existing evidence is insufficient to support a conviction

In practice, the disguised buying and selling of foreign exchange through “offsetting” arrangements is often highly concealed. For ease of illustration, the diagram above simplifies the relationships among the parties. In reality, Zhang San, Li Si, and Wang Wu are generally not the direct payers or recipients of funds; instead, they instruct their affiliated companies (or relevant responsible persons) domestically and abroad to carry out the transactions. Apart from Zhang San, there may be other parties with foreign currency needs, such as Zhang San-1, Zhang San-2, Zhang San-3, and so on; similarly, there may be multiple counterparts to Li Si and Wang Wu. Li Si’s role is effectively that of a fund allocator among numerous participants in foreign exchange transactions. Which specific transaction constitutes the deal between Zhang San and Wang Wu facilitated by Li Si? What is the transaction amount? Is the chain of evidence establishing the affiliated relationships complete?

Was Wang Wu’s subjective purpose in conducting the foreign exchange conversion purely to convert his own proceeds from goods, or did he also intend to earn a spread from the exchange? Can either purpose be substantiated by evidence? If both purposes existed, the amounts related to the conversion of proceeds from goods should be deducted from the amount involved in the case. If the judicial authorities are unable to ascertain these amounts, then, in accordance with the principle that doubts should be resolved in favor of the defendant, any amounts that cannot be clarified should likewise be deducted from the amount involved in the case.

For example, in Criminal First Instance Case No. 181 (2020) of the Taishan Municipal People’s Court, Guangdong Province (Yue 0781), the court held that keywitnesses had not provided relevant testimony on record, and thus the facts pertaining to that portion could not be ascertainedIn summary, the evidence in this case does not exclude the possibility that Xie Xiaocan paid the corresponding RMB to Wang Xiao based on the settlement method for goods agreed upon between Xie Weican and Wang Xiao. In this foreign exchange conversion, Xie XiaocanNot for profit-making purposesFurthermore, there is currently no evidence in this case to substantiate that the foreign exchange conversion at issue constituted a business operation conducted for profit-making purposes.Therefore, the benefit of the doubt shall accrue to the defendant.It is determined that this portion of Defendant Xie Xiaocan’s conduct does not constitute the crime of illegal business operations. The public prosecution organ’s corresponding charges are unsupported due to insufficient evidence and are therefore not upheld; the amount involved in this portion of the charges is excluded.The defense counsel’s arguments and opinions asserting that this portion of the conduct does not constitute the crime of illegal business operations are accepted.

2. Non-prosecution Due to Minor Circumstances

Under applicable legal provisions, the illegal buying and selling of foreign exchange must meet the threshold of “serious circumstances” to constitute a criminal offense. If the amount involved in the individual’s foreign exchange transactions is around RMB 5 million or the illegal gains are around RMB 100,000, or if such amounts are lower than the aforementioned figures, it may be argued that the circumstances of the case are minor. In such cases, pursuant to legal provisions, the people’s procuratorate may issue a decision not to prosecute, or the public security organ may dismiss the case.

For example, in Case No. Rong Jian Xing Bu Su [2021] No. 64, Mr. Lin needed to convert US dollars into Renminbi (RMB) for the operation of his company in Hong Kong. He therefore engaged Co-defendant Ma Moujia to convert US dollars into RMB through a “mirror transaction” arrangement. The specific method was as follows: Mr. Lin transferred US dollars from his Hong Kong bank account to a Hong Kong account designated by Co-defendant Ma Mou; subsequently, RMB was remitted from a bank account controlled by Co-defendant Ma Mou to Mr. Lin’s bank account. Through this method, Mr. Lin and Co-defendant Ma Mou illegally bought and sold foreign exchange, with the transaction amount exceeding RMB 5.13 million. The public prosecution organ held that, given the minor nature of the criminal circumstances and the presence of voluntary surrender, a decision not to prosecute Mr. Lin was warranted.

3. Other Defense Grounds for Seeking Lenient or Mitigated Punishment

Such grounds include unit crimes, accessory liability, voluntary surrender, meritorious service, and restitution. These are conventional defense points in criminal cases and require analysis tailored to the specifics of each case; they will not be elaborated upon further in this article.

Attorney’s Note:

The viewpoint presented in this article is that if an individual’s foreign exchange conversion is not a business operation conducted for profit-making purposes, it does not constitute the crime of illegal business operations. This represents the prevailing view in judicial practice. However, as China is not a common law jurisdiction, there remain a small number of judicial cases in which defendants have been found guilty (for example, the well-known Huang Guangyu case). Therefore, criminal risk persists.

Furthermore, under the administrative regulations governing foreign exchange administration, private currency exchange activities constitute administrative violations even if they do not amount to criminal offenses. Therefore, to mitigate potential legal risks, currency exchanges must be conducted through lawful channels.