The Shanghai Jing'an District People's Procuratorate recently filed a public prosecution against a cross-border illegal foreign exchange ring that utilized cryptocurrencies, with the total amount involved exceeding 200 million yuan. Five main defendants, including the ringleader Li, were convicted of illegal business operations and sentenced to prison terms ranging from six years to two years and six months, along with fines ranging from 1.5 million yuan to 300,000 yuan. Four other individuals were granted non-prosecution decisions by the procuratorate. The case was triggered by routine monitoring by the State Administration of Foreign Exchange (SAFE), which detected abnormal activity and transferred the case to public security authorities through the 'administrative-criminal' coordination mechanism.
Modus Operandi: Crypto 'Counterparty Settlement' and a Fake Private Bank
According to prosecutors, the illegal foreign exchange platform, referred to as 'Company Z', was registered overseas in 2019. It marketed itself as a 'private bank' and even developed a dedicated virtual banking app to create a facade of legitimacy. However, the company only maintained a local office within China and did not hold any foreign exchange business license, making it essentially an underground bank engaged in illegal currency exchange activities.
When clients needed to transfer money abroad, they were referred to Company Z through study-abroad or immigration agents (such as Fu and Chen). Relationship managers Gao and Li would then arrange for traders and customer service personnel to set up group chats to assist clients. Clients were instructed to purchase cryptocurrencies from various crypto dealers and deposit them into Company Z's overseas crypto wallets. The ring then converted the crypto into foreign fiat currency overseas and transferred the funds to the clients' designated foreign accounts. Throughout the entire process, no actual cross-border fund flows occurred. Instead, the ring utilized a 'counterparty settlement' mechanism: a domestic pool of funds and an offshore pool of funds were settled separately. Company Z charged a 3% service fee for the conversion, while the intermediaries received a 0.5% commission.
Legal Consequences and Industry Implications
In July 2024, SAFE detected suspicious activity from Company Z during routine monitoring and transferred the case to police. Between September and December 2024, four suspects including Gao were arrested, while two others (Chen and another) voluntarily surrendered. A total of nine individuals have been brought to justice so far, with one key suspect still under investigation. The court ultimately found the main defendants guilty of illegal business operations and imposed substantial prison terms and fines.
This case illustrates the emerging trend of using cryptocurrencies to circumvent China's foreign exchange controls via so-called 'counterparty settlement' techniques, leveraging the pseudonymity of crypto to complicate detection. For crypto industry participants, strict regulatory compliance is paramount. Any attempt to use digital assets for illegal cross-border fund transfers will face severe legal consequences. Regulators are urged to continuously upgrade their monitoring systems to identify novel underground banking patterns camouflaged under names like 'private bank' or 'wealth management platform.'