Abstract:
If you or your family members have been arrested for illegal foreign exchange trading, do not panic merely because the bank transaction flows appear large. Not all such flows are counted—only currency exchange amounts supported by a complete chain of evidence constitute the crime. This article explains: amounts admitted solely by you but not identified by the counterparty are not included; bank transaction flows uncorroborated by chat records or witness testimony are also excluded. Illicit gains may also be claimed at a rate of one per thousand. After reading, you will understand which amounts can be deducted and how the case is likely to proceed.
Keywords:
Crime of Illegal Business Operations, Deduction of Currency Exchange Amounts, Determination of Illicit Gains, Chain of Evidence, Illegal Foreign Exchange Trading
Special Disclaimer:This article is an original work by Attorney Shao Shiwei, representing only the personal views of the author, and does not constitute legal consultation or legal advice regarding specific matters. For article reposting, legal consultation, or professional exchange, please add: sswls66.
Main Text:
A crucial metric for sentencing in crimes of illegal business operations involving foreign exchange trading is the assessment of the currency exchange amount and the amount of illicit gains.
However, from the perspective of practical case handling, whether involving traditional underground banking “matching” exchanges, individual currency exchange by scalpers, cash-out schemes via overseas POS card swiping, or, in recent years, virtual currency OTC exchanges mediated by USDT and fund bridging embedded within cross-border payment channels, every sum alleged to constitute illegal foreign exchange trading must be proven by the investigative authorities through a complete chain of evidence establishing the nature of the funds.
Portions where the evidence fails to form a closed loop should not be included in the criminal amount.。
Therefore, identifying defense leverage points within these two categories of amounts to achieve the goal of deducting amounts from the defense perspective has become a key issue for defense counsel handling such cases.
Proceeding from practical case handling, this article unfolds along two lines—currency exchange amounts and illicit gain amounts—aiming to provide inspiration and food for thought for fellow lawyers handling illegal business operation cases involving foreign exchange trading, as well as for families of defendants in criminal cases.
I. Author: Attorney Shao Shiwei
1
How to Deduct Currency Exchange Amounts? Three Defense Strategies
The currency exchange amount refers to the “illegal business operation amount” in crimes of illegal business operations involving foreign exchange trading. Regardless of whether the involved model is traditional underground banking “matching,” individual currency exchange by scalpers, or OTC exchanges mediated by USDT, the evidentiary rules for determining the currency exchange amount are uniform: there must be a complete chain of evidence proving that the nature of the funds in question is indeed for currency exchange. The following elaborates on three leverage points.
(1) Sole Confession by the Defendant Is Insufficient to Determine the Currency Exchange Amount
Determining the currency exchange amount requires mutual identification and corroboration between the defendant and the counterparty. If there is only the defendant’s confession without other corroborating evidence, it should not be recognized as the currency exchange amount.
For example, in the case referenced as (2020) Gui 07 Xing Zhong No. 163, the procuratorate accused the defendant of a currency exchange amount of RMB 150 million, but the court ultimately recognized only over RMB 26 million.
The court held that, in this case, only RMB 26,299,910 was mutually identified and corroborated by Kang Lutai and the counterparty as funds used for illegal foreign exchange trading. The remaining sums were supported only by Kang Lutai’s confessions and identifications, with no other evidence confirming they were used for illegal foreign exchange trading. The protesting organ’s recognition of the entire RMB 151,963,481.50 confessed and identified by Kang Lutai as the illegal business operation amount did not comply with evidentiary rules and failed to exclude the reasonable doubt that the unclarified sums were used by Kang Lutai for other lawful purposes.
(2) Bank Transaction Flows Do Not Equal Currency Exchange Amounts; Further Proof of Fund Nature Is Required
In determining the currency exchange amount, only funds whose nature can be clearly identified as currency exchange amounts should be included. Amounts from normal business transactions and funds for which there is no evidence proving they are involved in the case must be excluded. We illustrate this with the following cases:
1. Illegal Business Operation Case Involving Xu Mouyue and Others (Beijing Chaoyang Court)—Smuggling POS Machines Overseas for Card-Swapping Currency Exchange
In the illegal business operation case involving Xu Mouyue and others handled by the Beijing Chaoyang District Court, Xu Mouyue and others facilitated currency exchange for others by cracking domestic POS machines and smuggling them overseas for card swiping.
One approach adopted by the procuratorate in determining the currency exchange amount was to exclude the possibility of other sources for funds in accounts linked to the POS machines by verifying transaction times and the actual operating conditions of the merchants, thereby ultimately determining the currency exchange amount.
2. Illegal Business Operation Case Involving Wang Mouliang and Others (Qingdao Shinan Court)—Large Volume of Fund Inflows and Outflows Without Association with Overseas Accounts Excluded
In the illegal business operation case involving Wang Mouliang (a former employee of a state organ in Qingdao) and others handled by the Shinan District Court of Qingdao City, Shandong Province, Wang Mouliang colluded with others to illegally exchange RMB for USD for multiple companies through domestic bank accounts under his control, earning spreads from the transactions.
When determining the currency exchange amount, the procuratorate stated: “Considering the large volume of fund inflows and outflows in the accounts, and in the absence of direct association with overseas accounts and specific purposes for the transfers, amounts from normal business transactions and sums lacking evidence of involvement in the implicated transactions were deducted, leading to the final determination of the criminal amount for illegal business operations.”
From the above two cases, it is evident that the burden of proof for recognizing currency exchange operations lies with the judicial authorities, not the defendant. However, in practice, based on Attorney Shao’s experience in handling illegal business operation cases involving foreign exchange trading, some case-handling units determine the involved amounts solely based on bank transaction flows, or even merely on oral statements by the parties. This clearly violates the principle that doubts should be resolved in favor of the defendant.
(3) Determining Currency Exchange Amounts Requires a Complete Chain of Evidence
According to judicial practice, in handling illegal business operation cases involving foreign exchange trading, case-handling units may still determine the involved amounts based on domestic evidence even in the absence of evidence regarding overseas fund flows.
However, when only domestic fund flow records are available, it cannot be automatically assumed that all remittances belong to the defendant. There must also be chat records and testimony from the currency exchangers (i.e., clients) to mutually corroborate the purpose and nature of the funds as currency exchange funds, thereby forming a complete chain of evidence.
Otherwise,if the upstream operator has not been brought to justice,orif the amounts were not recognized in the upstream operator’s case, and there are norelevant chat records, testimony from currency exchangers, or otherevidence providing comprehensive corroboration,then,the amounts should not be recognized as currency exchange amounts. The following case serves as a typical example:
Illegal Business Operation Case Involving Zhang Mouhu and Zhang Mouxian (Wuxi Huishan Court)—Recognition Only Upon Mutual Corroboration of Evidence
In the illegal business operation case involving Zhang Mouhu and Zhang Mouxian adjudicated by the Huishan District Court of Wuxi City, the two defendants earned spread profits by acting as intermediaries introducing others (underground banks and clients) to conduct “matching” foreign exchange transactions.
Regarding the determination of the involved amounts, the procuratorate reviewed the currency exchange amounts according to the following standards:
-
Amounts where chat records mutually corroborated fund flows were recognized as criminal amounts;
-
Amounts where client testimony mutually corroborated fund flows were recognized as criminal amounts;
-
For certain funds entering underground banks through bank accounts controlled by Zhang Mouhu,
which were neither recognized in the illegal foreign exchange trading case involving Wu Moupeng (the upstream operator) and others, nor supported by relevant chat records, client testimony, or other evidence proving the purpose and nature of the funds, were not recognized as criminal amounts.
2
How to Deduct Illicit Gains? Are Exchange Rate Spreads Included in Illicit Gains?
On this point, drawing from past case-handling experience, Attorney Shao raises a question:
How should the involved illicit gain amount be determined? Where the party charges a currency exchange service fee, will gains obtained from exchange rate spreads be calculated separately?
Example:
Xiao Pang helped his clients exchange Thai baht worth over RMB 100 million into British pounds through his own channels, charging a service fee of RMB 800 for every 3 million Thai baht exchanged.
In this scenario, is Xiao Pang’s illicit gain amount calculated solely based on the RMB service fee converted according to the above ratio, or does it also include the exchange rate spread gained from converting Currency A into Currency B, in addition to the RMB service fee?
(1) Will Judicial Authorities Proactively Recognize Exchange Rate Spreads as Illicit Gains?
To answer this question, there is a preliminary issue: Will judicial authorities proactively recognize exchange rate spreads?
The answer is that they likely will. We illustrate this with the following two cases.
Illegal Business Operation Case Involving Zhao Mou and Others (Hangzhou Xihu Court)—Illicit Gains of RMB 870,000 Estimated Based on a 2% Exchange Rate Spread
For instance, in the illegal business operation case involving Zhao Mou and others handled by the Xihu District Court of Hangzhou City, the court found that, through exchange rate spreads, the gang could obtain returns of more than 2% on each foreign currency trading transaction. From March to April 2019, the exchange amount totaled over RMB 43.85 million, with total illicit gains exceeding RMB 870,000.。
So, how did the court determine the defendant’s illicit gain amount to be RMB 870,000 in this case?
Attorney Shao believes this figure was derived solely by extrapolation from the currency exchange amount, rather than being based on the defendant’s actual bank transaction flows reflecting illicit gains. The reasons are as follows:
-
Based on publicly disclosed information about this case, the procuratorial organs described only the investigative work conducted to calculate the over RMB 43.85 million, without mentioning any statistical work regarding bank flows corresponding to the RMB 870,000;
-
Regarding illicit gains, the case description stated that returns exceeded 2%, not that there was a fixed 2% return;
-
The figure of RMB 870,000 can be obtained through simple multiplication (43.85 million * 2% = over RMB 870,000), but in the actual scenario of the defendant’s currency exchange activities, such precision is unlikely.
Thus, we can only infer that the RMB 870,000 does not reflect actual flow evidence but was calculated based on the currency exchange amount at a 2% rate. In other words, this amount was presumed by the case-handling unit.
Illegal Business Operation Case Involving Guo Mouzhao and Others (Shanghai Baoshan Court)—USDT as Medium; Both Exchange Rate Spreads and Service Fees Included in Illicit Gains
In the illegal business operation case involving Guo Mouzhao and others handled by the Baoshan District Court of Shanghai, Guo Mouzhao and others established the “TW711 Platform” and “Huosu Platform,” providing foreign currency-to-RMB exchange services to clients using USDT as a medium.
The individuals involved “paid the corresponding amount of RMB to third-party payment platform accounts designated by clients within China according to agreed exchange rates, thereby earning exchange rate spreads and service fees.”
In this case, the defendant’s illicit gains were described as comprising both exchange rate spreads and service fees, meaning both components were recognized as part of the illicit gains.
(2) Defense Strategies Regarding Illicit Gain Amounts
Returning to the earlier example.
Given that judicial authorities do treat exchange rate spreads as part of the party’s illicit gains, how might Xiao Pang’s illicit gain amount be determined? How can counsel mount a defense regarding his illicit gains?
According to open market exchange rates, 3 million Thai baht can approximately be exchanged for 67,000 to 70,000 British pounds. However, the agreement between Xiao Pang and his client was to exchange 3 million Thai baht for 60,000 British pounds for the client.
Thus, Xiao Pang would have an exchange rate spread gain of 7,000 to 10,000 British pounds (for illustrative purposes only; this does not necessarily reflect the actual circumstances of informal channel exchanges).
Will such gains necessarily be recognized in judicial practice?
From the preceding discussion on currency exchange amounts, it is evident that in crimes of illegal business operations involving foreign exchange trading, determining the involved amounts requires a clear chain of evidence proving the nature of the funds.
Therefore, in Xiao Pang’s scenario, several possible situations may arise:
-
Xiao Pang employed nominees, utilizing the annual foreign exchange quota of USD 50,000 per person in China to conduct exchanges through banks;
-
Xiao Pang conducted private exchanges through underground banks, contacts among foreign trade merchants, and other channels;
-
Xiao Pang used virtual currencies as a medium to conduct private exchanges through relevant OTC merchants.
In the first scenario involving employed nominees, if Xiao Pang defrauded the bank of foreign exchange by employing nominees, this situation would require bank-provided transaction flows and testimony from the individuals assisting with the exchanges to confirm the actual exchange amounts before Xiao Pang’s illicit gains from exchange rate spreads could be further calculated.
In such circumstances, although big data from banks exists, it remains necessary to determine which nominees were employed by Xiao Pang and whether the amounts exchanged by these nominees were actually for their own use.
Specific exchange amounts and other details still require further investigation by the case-handling unit to achieve comprehensive corroboration.
In the second and third scenarios, from the perspective of investigative evidence collection, verifying the relevant illicit gain amounts becomes even more difficult. For example, transactions involving underground banks and virtual currencies possess stronger concealment characteristics.
Moreover, in the first scenario, the exchange rates for buying and selling foreign exchange through banks follow fixed standards, and banks can provide corresponding bases. However, in these latter two scenarios, even if the actual transaction exchange rates deviate significantly from standard market rates—a common characteristic of such concealed transactions—one cannot directly infer Xiao Pang’s illicit gain amount by reversing calculations from market exchange rates.
In such situations, the defense leverage point is to argue for recognition based on one per thousand (1‰) of the currency exchange amount, a figure that is often lower than the party’s actual illicit gains in practice.
According to Article 7 of the 2019 Interpretation of the Supreme People’s Court and the Supreme People’s Procuratorate on Several Issues Concerning the Application of Law in Handling Criminal Cases of Illegally Engaging in Fund Payment and Settlement Businesses and Illegally Trading Foreign Exchange, where the amount of illegal income from illegally engaging in fund payment and settlement businesses or illegally trading foreign exchange is difficult to determine, it shall be determined asone per thousand of the illegal business operation amount,anda fine of not less than one time but not more than five times the illegal income shall be imposed concurrently or separately in accordance with the law.
3
Conclusion
Defense in crimes of illegal business operations involving foreign exchange trading largely hinges on the determination of currency exchange amounts and illicit gain amounts. The amounts charged in the Opinion on Prosecution or even the Indictment are not equivalent to the amounts ultimately recognized by the court.
For defense counsel, regardless of whether the involved model is underground banking “matching,” individual currency exchange by scalpers, USDT-mediated virtual currency OTC exchanges, or settlements through cross-border payment channels, it is necessary to scrutinize each involved amount on a case-by-case basis to maximize the protection of the client’s legitimate rights and interests within the legal framework.
Recommended Reading
