Attorney Shao Shiwei | Is Private Foreign Currency Exchange Illegal? At What Amount Does It Constitute a Crime?

A significant number of clients seeking legal advice from Attorney Shao often make this statement.

From a legal perspective, the distinction between "fines" and "imprisonment" lies in whether an individual's conduct should be characterized as an administrative violation or a criminal offense.

Even without detailed knowledge of relevant legal provisions, most people hold a simplistic view of private currency exchange: if I exchange currency for personal use rather than for profit (i.e., earning exchange rate differences), or if I merely introduce others to exchange channels, it may be illegal, but it probably does not constitute a criminal offense, right?

Let us examine the following scenarios:

1. A establishes Company A, which requires foreign currency equivalent to RMB 10 million as injected foreign capital. A uses private exchange channels and, through a "mirror transaction" method, has the counterparty transfer equivalent Hong Kong dollars to Company A via a Hong Kong company for registration purposes.

2. B, a compulsive gambler, seeks to repay gambling debts incurred at a Macau casino. B uses an underground bank to transfer RMB to a designated domestic RMB account via a "mirror transaction." The underground bank then repays the corresponding amount in Hong Kong dollars to the casino.

3. C has long been engaged in study-abroad and immigration services. One day, C’s client states that a friend wishes to exchange USD 9 million for RMB and asks if C knows anyone interested in exchanging RMB for USD. After identifying interested parties, C acts as an intermediary to facilitate the exchange between the two sides.

Are these behaviors merely illegal, or do they constitute crimes?

A few months ago, while meeting with a defendant in an economic crime case at a local detention center, he stated: "I clearly checked the legal provisions, and our company's business model did not violate any laws. Moreover, we have operated this business for several years without any intervention from local public security authorities. Why do they (referring to the public security organs handling this case) claim that my conduct is suspected of being a crime?"

Attorney Shao is frequently asked this question in daily practice.This issue involves the application of law in judicial practice, which is quite complex when examined in detail. To simplify: why might individuals be investigated by authorities (colloquially referred to as "uncles") for certain conduct even when the law does not explicitly state that such conduct constitutes a crime?

(There are, of course, many factors involved. Considering that excessive detail might trigger system warnings for violations and lead to deletion, this article will only discuss permissible content.)

The lag in legislative development and the expansive interpretation of laws by judicial organs are partial reasons.

Legislative LagWhat does this mean? For example, Attorney Shao’s team has handled over ten criminal cases involving digital collectible platforms in recent years. Although digital collectible platforms emerged in China in 2021, four years have passed, and judicial organs still lack explicit laws and regulations as guidance when handling such cases.

What isExpansive Interpretation of Laws by Judicial Organs? The legal provisions regarding private foreign currency exchange discussed in this article illustrate this issue.

First, let us list the relevant provisions:

By reviewing the legal provisions, one might seemingly reach the following clear conclusions:

Only speculative buying and selling and disguised buying and selling of foreign exchange, where the amount of illegal business operations exceeds RMB 5 million or illegal gains exceed RMB 100,000, constitute criminal offenses;

In other situations, depending on the specific conduct, administrative penalties may only be imposed if the amount exceeds USD 1,000 or USD 50,000;

The crime of illegal business operations, as the name suggests, should involve business activities. Therefore, currency exchange for personal use should not constitute a crime.

Are the above conclusions correct? Practice is the sole criterion for testing truth, so let us return to the three scenarios mentioned in the first part of this article. These three scenarios are actually excerpted from three criminal judgments.

Scenario 1: A was sentenced to two years of fixed-term imprisonment for the crime of illegal business operations [(2018) Yu Xing Zhong No. 481].

Scenario 2: B was sentenced to eight years of fixed-term imprisonment for the crime of illegal business operations [(2010) Er Zhong Xing Chu Zi No. 689].

Scenario 3: C was sentenced to five years of fixed-term imprisonment for the crime of illegal business operations [(2019) Chuan 01 Xing Zhong No. 1114].

Exchanging foreign currency for company registered capital (Scenario 1) or to repay gambling debts (Scenario 2) were both for personal use and did not involve seeking economic profit from the exchange itself. Thus, they do not involve the "purpose of profit" required for the crime of illegal business operations. From a jurisprudential perspective, they should not be classified as the crime of illegal business operations.

The act of illegally introducing buyers and sellers for foreign exchange in Scenario 3 is listed as an administratively punishable act under the 2008 Regulations on Foreign Exchange Administration. However, the 2019 Interpretation does not explicitly stipulate that "illegally introducing buyers and sellers for foreign exchange" constitutes the crime of illegal business operations.

1. Does a Clear Boundary Truly Exist?

The term "boundary" is a high-frequency word often heard by lawyers from clients. From the perspective of ordinary people, there seems to be a line that can clearly and accurately define criminal risks versus other legal risks (civil and administrative). However, legal issues are actually very complex, and the final outcome of a matter may result from multiple factors. Even if a line could truly be drawn, numerous variables arise during actual enforcement, leading to many unforeseen situations.

2. Different Judgments in Similar Cases: Comparison of the Liu Han Case and the Huang Guangyu Case

Discussions on illegal foreign exchange trading must mention the famous Liu Han case and Huang Guangyu case. Both involved the same reason for exchange (repaying overseas gambling debts) and the same method (mirror transactions). The final judgment in the Liu Han case determined that the defendant did not constitute the crime of illegal business operations. In contrast, the Huang Guangyu case resulted in a guilty verdict (i.e., Person B in Scenario 2 above).

The reason can be found in the judgments of both cases. In the Liu Han case, although the perpetrator objectively engaged in foreign exchange activities (i.e., transfers), the court determined that the purpose was to repay overseas gambling debts. Since there was no profit motive, it was not considered a business operation. In the Huang Guangyu case, however,the viewpoints of the defense lawyers and the judge listed in the judgment contained no discussion on whether the defendant had a profit motive; instead, the discussion focused entirely on "whether repaying foreign exchange gambling debts with RMB constitutes buying and selling foreign exchange."This deviated from the core issue, resulting in an erroneous judgment.Regrettably, an erroneous judgment is still an effective judgment.

3. Points for Defense Must Be Excavated in Specific Individual Cases

Why do intermediaries sometimes receive criminal sentences in practice for illegally introducing foreign exchange transactions, even though the 2019 Interpretation does not explicitly list such conduct as the crime of illegal business operations?

Attorney Shao believes this is not due to legislative oversight. Rather, the conduct of intermediaries can vary significantly in scale and nature, generating substantial controversy. Therefore, each case must be evaluated based on its specific facts in practice.

Based on cases handled by the author, considerations include: Was the introduction compensated or gratuitous? If compensated, how much service fee was charged? How many transactions and what amounts were facilitated? Did the intermediary participate specifically in negotiating exchange rates, transfer times, accounts, and amounts? What was the depth of the intermediary's involvement, and should they be classified as a principal or an accessory offender? What were the specific reasons for the buyer's and seller's need to exchange currency—was it for money laundering, earning exchange rate differences, overseas property purchase, investment, etc.? Different purposes for exchange affect the severity of the intermediary's involvement. Did the intermediary represent the buyer, the seller, or both parties?

The object of infringement for the crime of illegal business operations is market order. Clearly, the harm to market order in the various scenarios mentioned above can range from significant to minimal.

For criminal cases, according to Article 8 of the 2019 Interpretation, if the criteria for filing a case for the crime of illegal business operations are met, but "the perpetrator truthfully confesses the criminal facts, pleads guilty and shows remorse, actively cooperates with the investigation, and returns illegal gains, a lighter punishment may be imposed; if the criminal circumstances are minor, non-prosecution or exemption from criminal punishment may be granted in accordance with the law." Therefore, even if a criminal case has been filed, in-depth analysis of the individual case and identification of strong defense points may bring a turning point.

However, it must be noted that while private foreign exchange through methods such as "mirror transactions" is relatively concealed, and related transaction parties are rarely investigated solely due to a single transaction, once associated parties are investigated, it may implicate upstream and downstream participants. Administrative penalty amounts are also not insignificant. Additionally, if one unfortunately receives illicit funds through currency exchange, there is a risk of having bank cards frozen or being suspected of aiding information network criminal activities or concealing criminal proceeds.

Therefore, everyone must abide by laws and regulations and avoid taking chances, so as not to become entangled in related legal risks and cause unnecessary trouble.