A Discussion on the Intersection of Civil and Criminal Law in the Crime of Illegal Fund-raising

Currently, the global economy is slowing down, and China is in a period of financial restructuring. To prevent the financial system, which is undergoing transformation, from bearing more social costs, the state has implemented stricter regulations on financing channels compared to developed countries. However, this regulatory system has, to some extent, hindered the current financial system's ability to provide a smooth channel for capital circulation. This may lead to companies and individuals in urgent need of funds being unable to obtain them from the existing financial system, forcing them to seek alternative solutions and resorting to illegal fundraising activities.

Zhejiang Province has a thriving private sector, abundant private capital, and active lending activities, making it a high-incidence area for illegal fundraising crimes. Following the "Dongyang Rich Woman" Wu Ying's illegal fundraising case, Zhejiang Province has seen several other illegal fundraising crimes, such as the Zhongjiang Group's fundraising fraud case and the Yuxing Real Estate Agency's illegal absorption of public deposits and fundraising fraud case. These illegal fundraising and illegal absorption of public deposits cases involve tens of billions of yuan and hundreds or thousands of people, severely affecting socioeconomic development and posing significant social harm. Therefore, it is crucial to correctly understand the difference between normal financing and illegal fundraising fraud, allowing civil and criminal legal regulations to function effectively in their respective fields, thereby achieving a complementary effect. This article analyzes and compares the intersection of civil and criminal aspects of illegal fundraising crimes for preliminary discussion.

                                                             I. Circumstances of Illegal Fundraising Fraud

China's earliest regulation on "illegal fundraising" was defined in the Notice on Issues Concerning the Prohibition of Illegal Financial Institutions and Activities (Yinfa [1999] No. 41): "Illegal fundraising refers to the act of an entity or individual raising funds from the public without following legal procedures and approval from relevant departments by issuing stocks, bonds, lottery tickets, investment fund securities, or other debt instruments, and promising to repay the principal and interest or provide returns to investors within a certain period." With economic development, abundant private funds and increased private lending activities have created fertile ground for "high-interest loan" fundraising fraud, leading to frequent incidents.

China's Criminal Law defines four types of illegal fundraising crimes: illegal absorption of public deposits, fundraising fraud, fraudulent issuance of stocks and bonds, and unauthorized issuance of corporate bonds. It does not specifically define the crime of "illegal fundraising." Characteristics of illegal fundraising crimes include: 1. Fundraising without approval from relevant legal authorities, including approval from departments lacking the authority to approve; departments exceeding their authority to approve fundraising; and those fundraising entities lacking the qualifications to do so. 2. Promising to repay principal and interest to investors within a certain period. Repayment forms can include currency, goods, or other forms, with interest often exceeding four times the legal limit. 3. Raising funds from unspecified members of the public rather than a specific few. 4. Using legal forms to mask the illegal nature of fundraising. Twelve types of illegal fundraising crimes exist:

(1) Illegal fundraising under the guise of planting, breeding, project development, manor development, or ecological environmental protection investment;

(2) Illegal fundraising by issuing or disguised issuance of stocks, bonds, lottery tickets, investment funds, or using futures trading or pawn shops;
(3) Illegal fundraising through share subscription or equity participation with dividends;
(4) Illegal fundraising through membership cards, membership certificates, seat certificates, discount cards, or consumption cards;
(5) Illegal fundraising through commodity sales with return rentals, repurchase and transfer, member development, merchant franchising, and "rapid points accumulation" methods;
(6) Illegal fundraising through "hui" or "she" organizations or underground banks;
(7) Illegal fundraising through "virtual" products created using modern electronic network technology, such as "e-shops," "e-department stores," investment entrusted operations, and maturity repurchase;
(8) Illegal fundraising by dividing properties or real estate into equal shares and selling disposal rights to those shares;
(9) Illegal fundraising by signing commodity distribution contracts;
(10) Illegal fundraising through pyramid schemes or secret collusion;
(11) Illegal fundraising by establishing investment funds on the internet;
(12) Illegal fundraising using "electronic gold investment" schemes.

Some companies openly sign loan agreements with the public and openly raise funds. For example, "Yuxing Real Estate," a real estate agency, directly solicited deposits from the public under the company's name, committing the crime of illegal absorption of public deposits and fundraising fraud. Many people mistakenly believed it was legitimate corporate fundraising, leading many retired elderly people into the trap, causing significant social harm. Other guarantee companies directly engage in bank lending businesses, illegally absorbing public deposits while lending to companies and individuals. This severely disrupts the financial market order.

                                   II. Intersection of Illegal Fundraising Crimes and Normal Financing Activities

The law should protect legitimate private lending. Citizens borrowing money from relatives and friends for major events such as building homes, children's education, weddings, or funerals are considered legitimate civil financing activities. However, with economic development, surplus private funds and business financing needs have led to a booming "high-interest loan" market, creating conditions for illegal fundraising crimes.

(1) Intersection of Illegal Fundraising and Private Lending
Example 1: Zhao borrows money from one or more relatives or friends to buy a TV. This is borrowing.

Example 3: Sun borrows money from many unspecified individuals to start a TV business, promising high interest. This is illegal fundraising.

Example 4: Li's company borrows money from many unspecified individuals, promising high interest. This is illegal fundraising.

Example 5: Wang borrows money from Wu's company for his own business operations. This is normal financing.

The newly effective regulations are the "Supreme People's Court's Provisions on Several Issues Concerning the Application of Law in the Trial of Cases Involving Private Lending" of June 23, 2015. Article 1 stipulates: Private lending refers to the act of financial financing between natural persons, legal persons, and other organizations, and among themselves. This new regulation has two changes: firstly, the original term "citizen" is changed to "natural person"; secondly, financing between legal persons and other organizations is now permitted, whereas previously, financing between enterprises was prohibited. Examples 1, 2, and 5 represent normal financing, while Examples 3 and 4 constitute illegal fundraising. The main difference lies in the fact that, in the case of private lending, both parties' intentions are genuine, and the interest rate shall not exceed the relevant interest rate stipulated by law. Illegal fundraising involves borrowing money from an unspecified number of people.

The relevant provisions of the "Supreme People's Court's Several Opinions on the Trial of Loan Cases by the People's Courts", issued on August 13, 1991, have been repealed. These provisions stated that: "The interest rate for private lending may be slightly higher than the bank's interest rate, but shall not exceed four times the bank's interest rate for similar loans". Loans exceeding four times the interest rate are commonly known as "loan sharking". Article 26 of the Supreme People's Court's "Provisions on Several Issues Concerning the Application of Law in the Trial of Cases Involving Private Lending" stipulates that: If the interest rate agreed upon by both parties does not exceed 24% per annum, and the lender requests the borrower to pay interest at the agreed-upon rate, the people's court shall support the request. The interest rate calculation standard has changed, from "four times" to "24%".

China does not differentiate between commercial loans and consumer loans, nor does it impose restrictive regulations on the qualifications of borrowers and lenders. This means that the distinction between consumer loans and commercial loans, common in Western countries, is meaningless in China. Both enterprises and natural persons in China can engage in private lending and financing activities.

It must be acknowledged that the law lacks coherence and correspondence between private lending and illegal fundraising. A loan from an enterprise to a citizen is considered legal private lending, and a loan to two citizens is also considered legal. However, lending to 100 or more citizens becomes illegal under financial regulations. Borrowing 10,000 yuan from an individual is legal private lending, while borrowing 100 yuan from 100 individuals may constitute illegal fundraising. There is a lack of logical connection between the principle of autonomy of meaning in civil law and private lending behavior, and the qualification of illegal fundraising behavior in relevant financial regulations. It could even be said that there is a conflict between laws. There is no clear and unified regulation on how many citizens to borrow from, or how much borrowing constitutes a legal amount, especially under what conditions it constitutes a criminal offense. It is reasonable to distinguish between commercial loans and consumer loans based on the distinction between deposits and loans. Differentiating between the absorption of funds for the purpose of lending (commercial loan) and the absorption of funds for the purpose of consumption (consumer loan), and distinguishing between personal loans for consumption and personal loans for production and operation, will help to correctly distinguish between private lending and illegal fundraising and achieve coherence between laws. However, current Chinese laws do not differentiate between commercial and consumer loans, and apply the same laws to loans and deposits, so this cannot be used to distinguish between private lending and illegal fundraising. The key is that the behavior itself violates financial management regulations, thereby causing actual harm or social harm to the financial order, and meets the constitution of this crime. The use of absorbed deposits does not determine the nature of the crime.

Crossroads of Enterprise Financing and Illegal Fundraising

Illegal fundraising crimes are mainly manifested in the business activities of private enterprises, either due to overexpansion or insufficient funds for turnover. They first borrow from relatives and friends, and then from society. First, they borrow from acquaintances; then from strangers. The operating profits are insufficient to cover the financial costs of borrowing, leading to a vicious cycle.

Example 6: Jinlong Textile Company, in order to expand its scale and increase its capital, absorbed funds from its employees at high interest rates for production and operation. Due to operational losses, it failed to pay the principal and interest. This should be treated as private lending and does not constitute the crime of illegal fundraising. However, this excludes financing enterprises such as pawn shops.

Example 7: Yinlong Textile Company, in order to expand its scale and increase its capital, absorbed funds from unspecified members of the public at high interest rates for production and operation. Due to operational losses, it failed to pay the principal and interest. If the consequences are serious, it should be characterized as illegal fundraising, or illegally absorbing public deposits.

Example 8: Tonglong Textile Company, under the guise of enterprise financing, absorbed funds from unspecified members of the public for illegal profit-making activities. This should be characterized as illegal fundraising, or illegally absorbing public deposits.

Example 9: Tielong Textile Company, under the guise of enterprise financing, absorbed funds from unspecified members of the public and illegally appropriated the funds. This should be characterized as fundraising fraud.

Enterprise financing usually refers to bank loans. With economic development and the expansion of international financial financing channels, the concept of enterprise financing is also developing, such as capital increase and share expansion, venture capital, IPO financing, private equity funds, etc. Financing between enterprises is legal. The vast majority of enterprises in Zhejiang Province are small and medium-sized private enterprises. Private capital is abundant, and private lending is active. Due to the tightening of national monetary policy and the weakness of the international economy, it has become increasingly difficult for private enterprises to obtain financing through formal channels from banks, leading them to turn to private lending to make up for the shortfall in funds. For survival, many enterprises borrow at "high interest rates", taking risks similar to those in Examples 6 and 7. Because many enterprises are in a predicament of broken capital chains, they are unable to repay private loans, resulting in a large number of criminal cases related to illegal fundraising. The stories in Examples 8 and 9 continue to spread. However, simply convicting and sentencing not only fails to effectively protect the legitimate rights and interests of creditors, but also accelerates the closure of enterprises, increases worker unemployment, is detrimental to economic development, and can lead to serious mass incidents.

How can we balance the interests of enterprises and society, and unify legal effectiveness and economic effectiveness? This has become an urgent issue that needs to be addressed. In response, several departments in Zhejiang Province jointly issued the "Meeting Minutes on Several Issues Concerning the Application of Law in the Handling of Current Fundraising Criminal Cases", requiring cautious handling of fundraising criminal cases caused by broken capital chains, focusing on key issues, cracking down on a minority, and maintaining stability. For activities that raise some funds from unspecified persons for production and operation needs, punishment should not be readily used. This has considerable guiding significance under the current circumstances, but it is not a long-term solution due to the lack of supervision.

Protection should be given to enterprises that raise funds from relatively fixed personnel for production and operation needs, primarily for legal production and operation activities, but fail to repay the principal and interest on time, leading to disputes. These disputes should be handled as private lending disputes. The act of absorbing funds for legitimate production and operation, as long as it does not cause economic losses to depositors, is to some extent beneficial to economic development. Therefore, if such acts have not caused significant economic losses, it can be considered to have insignificant circumstances and little harm, and lenient punishment can be appropriately applied.

What should be severely cracked down on is the act of absorbing funds from unspecified members of the public under the guise of production and operation or investment needs, and illegally appropriating the funds. This should be handled as fundraising fraud. For activities that absorb funds from unspecified members of the public without legal approval, and use them for illegal profit-making activities such as lending, settlement, bill discounting, fund borrowing, trust investment, financial leasing, financing guarantees, foreign exchange trading, and securities and futures, they should be legally characterized as the crime of illegal fundraising. If the actor has the intention of illegal appropriation, and the social harm is great, they should be severely punished according to the crime of illegal fundraising fraud.

                                                              III. Reflections on the Supervision of Illegal Fund-Raising Activities

The law mainly regulates fund-raising activities in two ways: one is to concentrate efforts on supervising institutions that obtain funds, requiring them to use the funds cautiously to protect the interests of fund providers; the other is to mandate that institutions obtaining funds fully disclose information, allowing fund providers to judge the risks of financing themselves and protect themselves. These two approaches correspond to the indirect and direct financing systems in the financial system. In China's financial practice, the scope of these two systems is extremely narrow, resulting in a large number of fund demanders unable to obtain the funds they need through normal financial systems. Due to the increased financing costs brought about by legal regulation, some fund demanders also hope to circumvent regulatory costs by designing various innovative financing structures. Therefore, illegal fund-raising activities emerge in large numbers.

These numerous illegal fund-raising activities that operate on the fringes of the law and attempt to exploit loopholes should be severely cracked down upon. However, China's current system for combating illegal fund-raising activities has two major flaws, leading to ineffective crackdowns. One flaw is the inability to clearly distinguish between legitimate commercial transactions and illegal fund-raising activities, resulting in the scope of crackdowns sometimes being too broad and sometimes too narrow; another flaw is the characterization of illegal fund-raising activities as illegally absorbing or disguisedly absorbing public deposits, lacking a specific definition of the nature of illegal fund-raising activities, leading to confusion between different types of fund-raising activities, thus brutally cracking down on all unapproved fund-raising activities. This fails to address the reasonable capital needs generated by China's continued economic development, leaves no room for the legalization of private financing in the future, and is inconsistent with the public policy of protecting investors' interests. It is suggested that more fund-raising activities should be included in the direct financing sector's supervision, defining illegal and legal fund-raising. This is both consistent with the logic of the law itself and the reality of financial practice. To this end, we need to expand the scope of application of the Securities Law, expand the definition of securities, so that a variety of financial financing activities can be legally carried out in the real financial securities market.

Currently, illegal fund-raising incidents occur repeatedly, not only disrupting the financial order but also causing victims to be emotionally agitated, easily leading to mass incidents, which clearly goes against the purpose of building a harmonious society. Against the backdrop of a weak international financial and economic situation, illegal fund-raising forms have become more complex. Therefore, the legislature should further improve laws and regulations, law enforcement agencies should perform their duties, promptly investigate and handle cases of illegal fund-raising, severely crack down on criminal activities of illegal fund-raising, prevent mass incidents, strengthen the management of the financial market, and create a good new economic order and framework to maintain the stability of the country and society.

[References]
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[4] Zhu Xiaodong. "A Legal Perspective on Illegal Fund-Raising" [J]. Financial Law Garden, 2003, (9).
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