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New Criminal Standards Target Illegal Foreign Exchange Traders

One of the challenges for foreign companies to operate in China, is the restriction on foreign exchange, with limitations on why, how and how much foreign currency can be exchanged into Chinese Yuan and vice versa. While this makes China different from many other major economies, it is generally not a problem for international businesses that invest in China, plan ahead and operate in a legal way.

China’s foreign exchange restrictions are much more of a challenge for Chinese individuals who want to invest or hold assets abroad. Every Chinese individual has a yearly quota of USD 50,000 (or equivalent) that can be converted into foreign currency, but restrictions continue to apply on how these funds can be used. For example, funds cannot be exchanged into foreign currency for investment purposes, and it is prohibited to use the quota of another.

Supervision to enforce these rules has mainly been delegated to China’s banks, but anyone familiar with China will not be surprised to find that such supervision is inconsistent. This may be one of the reasons why China has taken the next step in tightening things up: new rules that penalize abuse. In the Interpretation on Several Issues concerning the Application of Laws in the Handling of Criminal Cases Involving Illegal Fund Payment and Settlement Business and Illegal Foreign Exchange Trading effective on 1 February 2019, the Supreme People’s Court and the Supreme People’s Procuratorate (China’s highest prosecutor) provide a very detailed definition of “illegal fund and settlement business (Article 225 of the PRC Criminal Law).

In particular, any illegal fund payment and settlement business or illegal foreign exchange trading is deemed a crime if the following thresholds are met:

  • The settled / traded amount is more than CNY 5 million or the amount of illegal income from such activities is more than CNY 100,000.
  • The settled / traded amount is more than CNY 2.5 million or the amount of illegal income from such activities is more than CNY 50,000, but there is an aggravating circumstance:
  • The person has previously been pursued for the same crime.
    • In the last two years, the person has been subject to administrative punishment for the same activity.
    • The person refuses to cooperate with the investigation and recovery of the funds.
    • The foreign exchange has caused other serious consequences.

Considering the thresholds, the interpretations seem to be particularly focused on Chinese individuals that need foreign currency for private investment purposes, and (especially) intermediaries that assist Chinese individuals or companies with currency swaps. Under contract, such an intermediary matches buyers and sellers of foreign currency in China.

The potential penalties: up to 5 years in prison, or in extremely serious circumstances more than 5 years in prison plus a very high penalty.