Today, various media reported that the Chinese police extradited a major economic crime suspect named Zhang from Thailand. Since 2012, the MBI Group headed by the suspect Zhang has been carrying out illegal online pyramid schemes by issuing virtual currency.
The case involved more than 10 million members and more than 100 billion RMB in funds, far exceeding the Plus token case in terms of both the number of people involved and the amount of money involved. Below, the author will analyze the legal risks of virtual currency investment and financial management through the MBI large-scale transnational pyramid scheme case and several derivative cases involved in the project.
1. The past and present of MBI Group
The extradited criminal suspect Zhang, whose Chinese name is Zhang Yufa, is a Malaysian Chinese whose ancestral home is Chaozhou, Guangdong. He founded the MBI Group in 2009, which is headquartered in Malaysia and is mainly the Malaysian Enbi Group. According to public information on the MBI Group's official website, the MBI Group had previously invested in resort projects in Indonesia, gold, coal and other mining projects in Thailand, and also invested in commercial real estate in Huizhou, Guangdong.
Since 2012, MBI Group has started to expand its Internet business, and has established the "MFC" game financial management platform, the social platform Mface, and the online mall Mmall. MBI Group uses investment and financial management as a gimmick, and through the issuance of virtual currencies such as MFC coins and GRC, requires participating investors to pay membership fees to purchase MFC coins to obtain membership, so as to participate in various investment projects on the platform and obtain high returns.
MFC income is divided into static investment and dynamic investment. Static investment includes advertising space AP, free US dollars in exchange for barter points GRC, and dividend points SP. The income mainly comes from GRC split into multiples regularly every year. GRC can be converted into M coins and sold at a ratio of 1:7. It can also be directly consumed in physical stores and purchased through VISA cards.
Dynamic investment is divided into three types of rewards. The first is the advertising award, also known as the direct referral award. For every new member recommended by an MFC member, the company will deduct 6-10% of the new member’s registration fee as a reward. The second is the balance award, also known as the matching award. For the left and right markets under the MFC member account, the company will give the corresponding PV, and through PV matching, the bonus will be settled daily, and the region will not be cleared. The third is the game award, also known as the management award. MFC members can enjoy a 4% commission on the offline matching bonus.
According to MFC's financial management game rules, members make profits by buying and selling virtual currency "barter points", and the profits can reach more than twice the investment amount after one year; participants must pay membership fees of different levels of 7 in multiples of 7, such as 700 yuan, 1,400 yuan, 3,500 yuan, 7,000 yuan, 14,000 yuan, 35,000 yuan, 105,000 yuan, 245,000 yuan, etc., online to obtain membership qualifications; each member can have countless accounts, and each account has two membership accounts under it, forming two lines on the left and right, a dual-track system, and forming a hierarchy in this way, directly or indirectly using the number of people developed as the basis for remuneration and bonus settlement and rebates.
Regardless of the type of investment, the reward points are M-coins, and the cashing out of M-coins becomes the ultimate goal of investors. However, the rules of the game of MFC are that only 55% of the cashed-out money can be withdrawn, the remaining 30% must be used to continue purchasing GRC, 10% must be used as transaction fees, and 5% must be used to purchase items from the Mmall mall. The selling price of M-coins can only be raised but not lowered. The essence of this is to develop downlines to take over the ever-increasing prices of GRC.
Subsequently, He Zhenqiu, Gu Xiping and others joined MBI International Group and attracted investors and developed members in China. Relevant judgments showed that He Zhenqiu had directly or indirectly developed more than 200,000 downline accounts under his account.
At the end of June 2017, Zhang Yufa was arrested by the Malaysian police on suspicion of money laundering. Zhang Yufa’s 98 accounts and 210 million yuan in funds were frozen, and Zhang Yufa himself was also arrested by the police. However, less than a month later, Zhang Yufa was released on bail.
Subsequently, police in Guangxi, Jiangsu, Sichuan and other places arrested MBI Group’s community leaders and agents at all levels in China on charges of organizing and leading pyramid schemes.
In the early morning of November 8, 2017, after a year of investigation, the Shanghai police launched a concentrated arrest operation in multiple urban areas. More than 40 suspects were arrested in this operation. According to the information released by the Shanghai Economic Investigation Corps, the MBI Group had developed more than 30,000 members in the country at that time.
Although a group of criminals who helped MBI Group attract investment and develop members were arrested and tried in China at that time, the mastermind behind the scenes, Zhang Yufa, has not been punished. Instead, he fled to Thailand and started real estate and entertainment businesses on the border between Thailand and Malaysia. Zhang Yufa owns a large-scale comprehensive industry including hotels, amusement parks, and markets in the area, covering an area of 240 acres and worth tens of billions. He also spent 50 million baht to build the Four-Faced Buddha for Thai people and tourists to worship at the Dannok Ganesha Temple.
In November 2020, the Chongqing Municipal Public Security Bureau opened an investigation into Zhang Yufa in accordance with the law, and subsequently issued a red notice through Interpol to arrest Zhang Yufa.
On July 21, 2022, the Thai police arrested Zhang Yufa, and China submitted an extradition request to Thailand based on the bilateral extradition treaty.
In May 2024, the Thai court made a final ruling to extradite Zhang Yufa to China. On August 14, the Thai government made an administrative decision to support the court's final ruling.
II. Will MBI Group’s defrauding of investors’ funds involve judicial disposal of virtual currency?
In recent years, regulatory and law enforcement agencies in the United States, Germany and China have confiscated large amounts of virtual currencies such as BTC and ETH when investigating and punishing currency-related crimes. When dealing with the illegal proceeds of criminal groups, they need to convert virtual currencies into legal tender through judicial disposal. Selling through the secondary market has become the first choice for many overseas law enforcement agencies for judicial disposal. A large amount of secondary market selling pressure in a short period of time will inevitably lead to a drop in currency prices.
So a friend has been asking me these days, the MBI Group’s pyramid scheme fundraising through issuing virtual currencies such as MFC and GRC is similar to the Plus token case, but the scale of the funds involved is much larger. This time, the Chinese police extradited Zhang Yufa back to China. Will the virtual currency he obtained from the crime be disposed of by judicial means, which will affect the price in the secondary market?
First of all, from the above introduction, we can understand that MBI Group has been raising funds by issuing virtual currencies such as MFC and GRC since 2012, and developing members through MLM methods with static and dynamic returns. Participants need to pay different levels of membership fees to the upstream, and the membership fees here are collected in RMB.
This can also be verified by the judgment document (2016) Su03 Criminal Final 364 heard by the Xuzhou Intermediate People's Court of Jiangsu Province. "In 2012, the defendants He Zhenqiu and Gu Xiping joined the Malaysian MBI International Group (hereinafter referred to as MBI) through Malaysian national Zhang Yufa. The social financial management platform with the theme of "Soothing Plan, Financial Freedom" requires participants to pay a fee ranging from 700 yuan to 35,000 yuan to purchase the virtual currency M coins issued by the platform to obtain membership qualifications and obtain a member account on the platform website. Members are organized into upper and lower levels according to the order of recommendation and development. The number of people developed and the amount of payment are directly or indirectly used as the basis for rebates. The slogans such as "investment will have high returns and will only rise and not fall" are used as bait to induce participants to continue to develop others to participate, defraud property, and disrupt the social and economic order." In other words, the MBI pyramid scheme case did not defraud investors of virtual currencies such as BTC, LTC, and ETH.
In addition, in the judgment documents related to the MBI pyramid scheme case, such as (2021) Gan 11 Criminal Final No. 307 and (2018) E 11 Criminal Final No. 61, no relevant information about on-chain wallet transfers was found. Participants transferred coins through platform apps and registered accounts on websites, and used bank cards and WeChat transfers for legal currency settlement. These cases basically occurred between 2014 and 2016, when the on-chain infrastructure and ecology had not developed, and it was unlikely that ordinary users would participate in such pyramid schemes through on-chain wallets.
Therefore, the MBI Group actually used the gimmicks of blockchain and virtual currency to start a pyramid scheme and a Ponzi scheme to defraud investors of legal currency. The virtual currencies such as MFC and GRC issued within its platform are actually equivalent to internal points, which are settlement and exchange tools in the pyramid scheme process and are essentially not on the chain.
So will the MBI pyramid scheme criminal group including Zhang Yufa and He Zhenqiu launder the defrauded legal currency by purchasing BTC and ETH?
It can be seen from these judgments that after being arrested, the core community members headed by He Zhenqiu who assisted the MBI Group in developing members in China had tens of millions of RMB funds involved in the case confiscated, but no virtual currencies such as BTC and ETH purchased for money laundering were seized, so this part will not involve the issue of judicial disposal and cash conversion.
From the introduction in the first part, we can learn that the boss behind the scenes, Zhang Yufa, was arrested in Malaysia for money laundering in his early years. At that time, the media reported that the Malaysian police seized luxury cars and mansions and froze his 98 bank accounts, but did not seize his virtual currency-related property.
The author believes that at the time, the police did not know much about the criminal methods of using virtual currency to launder money, the focus of the search did not extend to virtual assets, and there was a lack of relevant traceability tracking tools and assistance from security companies. Virtual currency, due to its own anonymity and decentralization, could easily become a tool for Zhang Yufa to transfer and hide the proceeds of illegal crimes.
In summary, core members of the MBI criminal group, including Zhang Yufa and He Zhenqiu, may indeed have transferred and concealed the defrauded property through virtual currencies such as BTC and ETH. However, since the focus and means of the investigation at the time were not here, a large amount of RMB funds had been seized in related cases, and Zhang Yufa lived overseas for many years, it was difficult for the police to seize a large amount of BTC, ETH and other virtual assets like in the Plus Token case, and then conduct judicial disposal.
III. Analysis of civil litigation cases arising from the MBI Group pyramid scheme case
The MBI Group lured hundreds of thousands of members in China in a short period of time by offering high returns and layers of rebates. Among them, in addition to the participants who were criminally tried for suspected crimes of organizing and leading pyramid schemes, there were also cases of civil disputes caused by investments in virtual currencies such as MFC and GRC.
In most of these cases, investors were introduced by relatives, friends, etc. to invest in MFC projects in order to seek high investment returns. Some investors even continued to invest despite knowing that MFC was a pyramid scheme. After the project collapsed, they lost all their money and then sued the introducer in court, demanding that he bear the losses.
Case 1: Both the plaintiff and the defendant knew that the MFC platform was a pyramid scheme, and the court dismissed the plaintiff's lawsuit
In the case No. (2021) Jing 0108 Minchu 26107 heard by the Haidian District Court of Beijing, both the plaintiff and the defendant confirmed that the investment project of the "MFC platform" was of the nature of a pyramid scheme. The court held that pyramid schemes or disguised pyramid schemes shall be identified and punished by the industrial and commercial administrative authorities. If a dispute between the parties arising from pyramid schemes is brought to the People's Court, the People's Court should not accept such disputes as civil cases and dismiss the plaintiff's lawsuit.
In addition, in the case No. (2021) Yue Min Shen 9226 heard by the Guangdong High Court, the plaintiff's lawsuit was dismissed because he knew that the MFC platform was a pyramid scheme.
Case 2: Investor filed a civil lawsuit after a criminal case was filed, and the court dismissed the lawsuit
In the case No. (2019) Gui Min Shen 4449 heard by the Guangxi Higher People's Court, the plaintiff reported the case to the public security organ before filing a civil lawsuit, and the public security organ then opened a case for investigation. The court held that the case involved suspected criminal offenses and did not fall within the scope of civil lawsuits accepted by the people's court, and dismissed the plaintiff's lawsuit.
In the case (2021) Jing02 Minzhong No. 13799 heard by the Beijing No. 2 Intermediate People's Court, the defendant collected money from the plaintiff and other persons outside the case due to investment in the MFC platform, and was reported to the police by the outsiders for investigation. The court believed that the case was suspected of involving economic crimes. According to Article 11 of the "Provisions of the Supreme People's Court on Several Issues Involving Suspected Economic Crimes in the Trial of Economic Dispute Cases", the court should rule to dismiss the prosecution and transfer the relevant materials to the public security organs. If the public security organs determine that there is no suspicion of economic crimes in this case, Wang Baogui can file a separate lawsuit to assert his rights.
Case 3: The contract for entrusting investment in the MFC platform is invalid, and the plaintiff's losses are shared based on the fault of both parties
The top ten financial and commercial trial cases of 2023 released by the Shanghai High Court: In the case of A v. B in a financial management contract dispute, B introduced the MFC platform to A and persuaded him to invest by claiming that it was a sure win. A then transferred 525,000 yuan to B, entrusting him to invest in the MFC platform, and A went to Malaysia with B to inspect the MFC platform. Later, the platform collapsed and could not be logged in, so A sued B for a full refund of the investment.
The court held that the entrusted financial management contract between the plaintiff and the defendant should be deemed invalid because the agency matters involved financing transactions of tokens or virtual currencies, which violated public order and good morals.
The commissioned event in this case was caused by the defendant's recommendation, introduction and promotion to the plaintiff, so the defendant had certain faults. However, the plaintiff had investment experience in stock speculation and did not exercise sufficient due diligence on the investment funds during the investment process. The plaintiff was primarily at fault for the loss.
In addition, the plaintiff had visited Malaysia to inspect the MFC platform and gained new insights into related investment projects. The subsequent additional investment had a direct causal relationship with the inspection and was not solely due to the defendant’s publicity. Therefore, the defendant’s fault for the losses incurred from subsequent investments can be appropriately mitigated.
To sum up, the court as a whole determined that the fault ratio between the plaintiff and the defendant was 8:2.
The inspiration we can get from the above typical cases is:
For pyramid schemes under the banner of virtual currency, if you know it is a pyramid scheme but still invest in it, and then sue the introducer to bear the losses after it goes bankrupt, the court will dismiss the lawsuit.
If you want to take civil litigation to recover your losses, remember not to file a criminal case first. Criminal cases involving pyramid schemes and illegal fundraising involve a large number of people, are complex cases, and take a long time to investigate.
In judicial practice, many cases involving virtual currencies have relatively weak protection for investors, and the resulting losses have to be borne largely by themselves. Therefore, when investing in related projects, you must be cautious and careful to avoid unnecessary property losses.
