Attorney Shao Shiwei | Is It Reliable to Exchange Currency Through Licensed Foreign Exchange Companies Abroad? What Are the Legal Risks for Currency Exchangers, Introducers, and Exchange Companies? (Part I)

According to media reports in 2023[1], Changjiang Exchange, the largest Chinese-owned currency exchange company in Australia, had a turnover exceeding AUD 10 billion over the past three years.

In October 2023, the Australian Federal Police arrested and charged four suspects of Chinese nationality and three of Australian nationality in Melbourne. Police investigations revealed that the company transferred nearly AUD 10 billion and laundered nearly AUD 230 million over the past three years. These illicit funds originated from online fraud, tobacco smuggling, violent crimes, and drug trafficking. Authorities described this as the largest and most complex money laundering case in Australian history.

Changjiang Exchange’s method for facilitating currency exchange for clients required clients to remit Renminbi (RMB) into one or more bank accounts in China, after which the company would pay Australian dollars (AUD) to the clients in Australia. According to The Australian Financial Review[2], most of these funds were likely held in secure crypto wallets containing large amounts of the cryptocurrency “Tether Token.” “We suspect that a significant portion of client funds was held in the form of cryptocurrencies.”

From public news reports, we can obtain the following information:

• This was a currency exchange company established in Australia by Chinese nationals (four were Chinese citizens, and three were ethnic Chinese who had obtained Australian citizenship);

• It primarily engaged in currency exchange and remittance services targeting the Chinese community;

• The company had obtained relevant local qualifications and licenses abroad (its financial registration number with the Australian Transaction Reports and Analysis Centre was 100-572684);

• The specific method used for currency exchange was “offsetting foreign exchange transactions” (i.e., funds circulated unidirectionally domestically and overseas without physical movement, achieving “balance between two locations” through reconciliation);

• Changjiang Exchange maintained sufficient reserves of Australian dollars, Renminbi, or other currencies required by clients by using the cryptocurrency USDT (Tether) as an intermediary for conversion;

• The reason the company came under investigation was that its excessively large transaction volume attracted police attention; subsequent investigations revealed that its business activities involved money laundering;

Mainland China imposes foreign exchange controls. Therefore, ifsuch businesses are operated domestically, they will inevitably be defined as underground banks subject to crackdowns by judicial authorities.

So, if Chinese nationals“physically go overseas” to establish currency exchange companies abroad, is this a good method to circumvent domestic policies and regulations and achieve a “workaround”?？

Currency exchange companies established abroad by Chinese nationals, such as Changjiang Exchange, are quite common. In countries and regions with relatively open foreign exchange markets, such as Singapore, the United Kingdom, the United States, Australia, and Hong Kong, China, establishing currency exchange companies is lawful, provided that local financial regulatory requirements are complied with and necessary permits and certifications are obtained. Currency exchange companies are generally regarded as financial service providers and, therefore, must adhere to certain legal frameworks, particularly in areas such as anti-money laundering (AML) and counter-terrorist financing (CTF).

In plain language, the above means:Foreign jurisdictions allow private entities to operate currency exchange companies. Unless the business activities involve money laundering, they are generally not subject to investigation by foreign regulatory authorities.

Does this mean that currency exchange companies legally operating with relevant licenses obtained abroad can provide currency exchange services to users in mainland China? To be more precise, the key issue is not whether the users are from mainland China, but whether domestic funds are involved.

If operators establish companies abroad and, even while providing services to users in mainland China, the currency exchange business does not involve domestic funds (for example, converting pounds sterling from clients’ lawful overseas income into US dollars), then there is indeed little legal risk under the legal system of mainland China.

However, an overseas license is not a “shield” against Chinese law. If domestic funds are exchanged through overseas currency exchange companies, both theclients exchanging currency(the purchasers of foreign exchange),the currency exchange companies,and the entities introducing business to the currency exchange companies (i.e., the “introducers” mentioned earlier in this article, such asstudy-abroad agents, immigration agents, real estate agents, and financial industry practitioners, hereinafter referred to as “introducers”),）will all face varying degrees of legal risk.。

In the article “Is Private Foreign Currency Exchange Illegal? At What Amount Does It Constitute a Crime?,” Attorney Shao mentioned that the legal risks associated with private currency exchange fall into two levels. If investigated by the State Administration of Foreign Exchange, it may involveadministrative penalties.If the threshold for criminal prosecution for illegal trading of foreign exchange is met, it may constitute the crime ofillegal business operations.。

So, specifically regarding currency exchange clients, currency exchange companies, and introducers, what is the severity of risks for these three types of subjects?

1. Currency Exchange Clients—Will Private Currency Exchange Result in Penalties?

The crime of illegal business operations involving illegal trading of foreign exchange requires that the actor acts for profit, constituting a business activity. That is, the purpose of buying and selling foreign exchange is toearn profitsfrom such transactions. These profits may arise from exchange rate differentials or from commissions earned for facilitating currency exchange transactions.

For most currency exchange clients, they seek underground banks, currency exchange companies, or individuals holding foreign exchange primarily for personal use. Such personal use can be further divided into lawful purposes and unlawful purposes. Lawful purposes include production and operation, daily living needs, and investment and wealth management. Unlawful purposes include repaying gambling debts, transferring proceeds of crime, and bribery. In short, they are not acting to “earn profits.”

Although there are indeed cases in judicial practice where individuals have been convicted of illegal business operations for purposes such as establishing companies or repaying debts, the prevailing view remains that private currency exchange for personal use, regardless of whether the purpose is lawful or unlawful, should not be treated as a criminal offense.

Therefore, for currency exchange clients,the first legal risklies mainly inadministrative penalties.。

Some may question: “I used a legitimate foreign currency exchange company abroad; why can domestic authorities still regulate this?” This will be addressed in the section on risk analysis for currency exchange companies in Part II of this article.

The second legal riskis that if the currency exchange company collapses and fails to honor payments, clients face the legal risk of having their bank accounts frozen by domestic public security organs. From the perspective of currency exchange clients, to ensure the safety of their funds, they will naturally prefer currency exchange companies with qualifications, numerous branches, and good reputations, such as Changjiang Exchange before its collapse.

In reality, there is no absolutely reliable currency exchange company. As clients, how could they know in advance that the funds paid out by the currency exchange company actually originated from proceeds of upstream crimes received by the company? Consequently, bank accounts that have transacted with the currency exchange company may all be implicated.

For example, as shown in the figure below, a user stated that their parents used Changjiang Exchange to conduct transactions for purchasing property in Australia, resulting in the freezing of the user’s bank account and their parents being summoned by the police on suspicion of money laundering.

That concludes today’s discussion. This article uses the collapse of Changjiang Exchange as a starting point to discuss the potential legal risks faced by clients, introducers, and currency exchange companies, with an in-depth analysis of the legal risks for currency exchange clients.

In Part II of this article, we will continue to explore the legal risks for the other two parties involved in foreign exchange transactions—the currency exchange companies and the introducers. Specifically, we will address the following questions:

Currency Exchange Companies—If they obtain lawful licenses in overseas jurisdictions, can they avoid domestic legal risks?

If the behavior of currency exchange clients does not constitute a criminal offense, should introducers likewise be exempt from criminal punishment?

[1] Australia Solves Largest Money Laundering Case in History, Sending Shockwaves Through Chinese Retail Investors https://mp.weixin.qq.com/s/W1EK5WQ5RaRNODuyrzAX5g

[2] https://www.sohu.com/a/754952893_512834