In the previous article, we talked about "Web3 Entrepreneurship Criminal Risk Prevention Guide (I): Identifying and Preventing Pyramid Scheme Risks". In this article, we will continue to discuss another topic: virtual currency exchange business. Because the virtual currency market and the foreign exchange market are volatile, and the exchange rate difference generated by the combination of the two will be higher, then when multiple exchanges are carried out, some people will aim at the transaction difference to make some "change", and thus become USDT merchants (abbreviated as "U merchants") or provide virtual currency exchange services. However, when virtual currency and foreign exchange are intertwined, the complexity and risk are doubled, which will lead to the consequence of only making a little money but getting into big trouble.
Therefore, in this article, Attorney Mankiw will start with the crime of illegal foreign exchange trading and talk about virtual currency exchange.
Inventory of illegal foreign exchange trading cases
Case A
From January 2018 to September 2021, Guo Mouzhao and others set up websites such as the "TW711 Platform" to provide foreign currency and RMB exchange services to customers using the virtual currency Tether USDT as a medium. After the exchange customers place an order on the above-mentioned website, they pay the foreign currency to the overseas account designated by the website. After the website uses the above-mentioned foreign currency to purchase Tether overseas, Fan Mouzhen sells it through illegal channels to obtain RMB, and then pays the corresponding amount of RMB to the domestic third-party payment platform account designated by the customer according to the agreed exchange rate, earning the exchange rate difference and service fees. The above-mentioned website illegally exchanged more than 220 million RMB. Among them, Fan Mouzhen received more than 6 million Tethers from Chen Mouguo and exchanged more than 40 million RMB by operating the virtual currency trading platform accounts and RMB bank accounts provided by Zhan Mouxiang, Liang Mouzuan and others.
On June 27, 2022, the People's Court of Baoshan District, Shanghai, made a judgment, sentencing Guo Mouzhao to five years in prison and a fine of RMB 200,000 for the crime of illegal business operation; sentencing Fan Mouxun to three years and three months in prison and a fine of RMB 50,000; sentencing Zhan Mouxiang to one year and six months in prison and a fine of RMB 5,000 for the crime of assisting information network criminal activities; and sentencing Liang Mouzuan to ten months in prison and a fine of RMB 2,000.
Case B
From February 2019 to April 2020, Zhao's gang provided foreign currency dirham and RMB exchange and payment services in the UAE and China. The gang received dirham cash in Dubai, UAE, and transferred the corresponding RMB to the other party's designated domestic RMB account. Later, they used dirhams to purchase "Tether" (USDT, a stable currency anchored to the US dollar) locally, and then illegally sold the purchased Tether through domestic gangs immediately to obtain RMB again, thus forming a circulation of funds at home and abroad. Through the exchange rate difference, the gang can obtain more than 2% of the profit in each foreign currency trading business. After investigation, Zhao and others exchanged more than 43.85 million yuan from March to April 2019, and made a total profit of more than 870,000 yuan.
On March 24, 2022, the Xihu District People's Court of Hangzhou City, Zhejiang Province sentenced the above-mentioned persons for the crime of illegal business operation.
Summary: It can be seen that the above-mentioned persons involved in the case did not directly exchange RMB for foreign exchange, but adopted a roundabout way, using virtual currency as an intermediate medium to earn the exchange rate difference. So why did this behavior involve illegal operations and was eventually convicted and punished?
How to identify illegal foreign exchange trading operations?
Let us look at the definition and constituent elements of illegal foreign exchange trading activities in the sense of administrative law and illegal foreign exchange trading crimes in the sense of criminal law.
According to Article 2 of the "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 Illegal Fund Payment and Settlement Business and Illegal Foreign Exchange Trading" (hereinafter referred to as the "Interpretation"), if one violates state regulations and engages in illegal foreign exchange trading such as reselling foreign exchange or trading foreign exchange in disguised forms, disrupting the order of the financial market, and the circumstances are serious, it constitutes the crime of illegal business operation.
Therefore, the definition of illegal foreign exchange trading activities is very straightforward, including the following two situations:
① Foreign exchange speculation refers to illegal activities such as buying low and selling high in the domestic foreign exchange black market to earn exchange rate differences;
② Disguised foreign exchange trading refers to the act of converting currency value by repaying RMB with foreign exchange or repaying foreign exchange with RMB, or by exchanging foreign exchange for RMB.
Then on this basis, if the circumstances are serious, it constitutes the crime of illegal business operation, which is punishable by imprisonment of not more than five years or criminal detention, and a fine of not less than one times but not more than five times the illegal gains.
According to Article 225 of the Criminal Law of the People's Republic of China, Article 71, paragraph 3 of the Provisions of the Supreme People's Procuratorate and the Ministry of Public Security on the Standards for Filing and Prosecuting Criminal Cases under the Jurisdiction of Public Security Organs (II) and Article 3 of the Interpretation, the standard for serious circumstances is (one of the following is met):
The amount of illegal business operations is more than 5 million yuan.
The amount of illegal income is more than 100,000 yuan.
For those whose illegal business amount is more than RMB 2.5 million, or whose illegal income is more than RMB 50,000, and who have any of the following circumstances: having been criminally prosecuted for illegal foreign exchange trading; having been administratively punished for illegal foreign exchange trading within two years; refusing to explain the whereabouts of the funds involved or refusing to cooperate in the recovery work, resulting in the inability to recover the stolen money; causing other serious consequences.
If the circumstances are particularly serious, the offender shall be sentenced to fixed-term imprisonment of not less than five years and a fine of not less than one time but not more than five times the illegal gains or confiscation of property. The criteria are (one of the following is met):
The amount of illegal business operations is more than 25 million yuan;
The amount of illegal gains is more than RMB 500,000;
The amount of illegal business operations is more than RMB 12.5 million, or the amount of illegal income is more than RMB 250,000, and one of the four circumstances that meet the third standard of serious circumstances exists.
According to the above cases, although the Guo and Zhao gangs did not conduct direct transactions between RMB and foreign currencies in form, they used virtual currency transactions as a medium to repay RMB with foreign exchange or repay foreign exchange with RMB, and exchange foreign exchange and RMB to achieve currency value conversion, which essentially realized the exchange between RMB and foreign currencies. At the same time, the amount involved was huge and the circumstances were particularly serious. In the Guo Zhao case, Fan helped the principal offender to exchange foreign currencies and RMB in a long-term and one-way manner using Tether USDT as a medium. There were also other connections between the two parties, such as investment and helping to solve bank card freezing problems. The relationship was close and he was identified as an accomplice.
From this point of view, it is not difficult to find that the illegal foreign exchange trading activities in the virtual currency market can be summarized into the following two characteristics:
Profit-making purpose. Obtaining profits through trading activities is an inherent requirement of business behavior, including direct profits from foreign exchange trading, as well as indirect profits from activities related to foreign exchange trading. It can be directed to profiting for oneself, profiting for others, or letting others profit for oneself. In either case, the key lies in whether the perpetrator has the subjective purpose of pursuing profits through illegal foreign exchange trading.
Unauthorized foreign exchange transactions. All foreign exchange transactions outside designated foreign exchange banks and the China Foreign Exchange Trading Center and its sub-centers are unauthorized foreign exchange transactions, which are mainly divided into two situations: foreign exchange speculation and disguised foreign exchange transactions.
The latter situation is common in the current cryptocurrency market, and the most typical method is called "counter-trading". In such cases, the perpetrators usually use the special properties of virtual currencies to circumvent the state's foreign exchange supervision, by collecting RMB from customers in China or collecting foreign currency from customers abroad, and then depositing the equivalent amount of foreign exchange into the customer's designated overseas bank account or domestic bank account, so that the funds can be circulated in a one-way manner at home and abroad. On the surface, the two parties did not directly buy and sell RMB and foreign exchange, but in fact, they had completed the act of buying and selling foreign exchange.
Therefore, although it is essentially just a virtual currency as a medium, objectively as long as the exchange of RMB and foreign exchange is realized, it may constitute the crime of illegal foreign exchange trading. In this case, although virtual currency does not have the attributes of legal currency, it objectively plays a role as a medium and cannot cover up the essence of illegal foreign exchange trading.
Attorney Mankiw recommends
Therefore, based on our understanding of illegal foreign exchange trading operations, we must adopt a rigorous and prudent attitude to minimize the risk of being involved in this type of crime. Attorney Mankiw suggests the following:
Avoid profit-making behavior. When individuals or foreign trade companies buy and sell cryptocurrencies, they need to avoid being involved in business or profit-making activities, and must clarify whether the purpose of the transaction is for personal use. "Personal use" here means to meet the needs of individuals or companies themselves, rather than for resale or other commercial purposes, that is, not for the purpose of making profits through the exchange rate difference of cryptocurrency transactions;
Avoid direct or indirect exchange. In cryptocurrency transactions, the actual exchange of RMB and foreign exchange should be avoided. If it is objectively only a one-way flow between virtual currency and RMB or between virtual currency and foreign exchange, it will not involve illegal business operations;
Avoid assisting criminal behavior. This includes introducing people who need to exchange currency, providing financial support, providing support for receiving accounts, and providing assistance in the virtual currency buying and selling process. For example, in the case of Guo Mouzhao mentioned above, the virtual currency trading platform accounts and RMB bank accounts provided by Zhan Mouxiang, Liang Mouzuan and others were identified as assisting. At the same time, the subject of the behavior should also do a good job of AML and KYC to avoid crimes other than illegal operations.
Conclusion
In the digital age, cryptocurrencies are slowly penetrating every corner of the global economy. From the perspective of global market integration, the convenience of capital flows, the variability of regulatory policies and the resonance of market sentiment, the interaction between virtual currencies and foreign exchange has become more sensitive. In this context, relevant investors should be quite vigilant about virtual currency exchange business to avoid turning from making a little money into a criminal act.
If you have already participated in it and cannot effectively manage and control risks, please seek help from a professional legal team in time to solve possible problems. Mankiw will continue to output various common compliance issues of blockchain and open up a safe and compliant future path for more entrepreneurs and investors. Stay tuned!