China's Supreme Procuratorate Unveils “Chinese OTC King” Zhao Dong Details in Virtual Currency Cases
Source:
http://m.safe.gov.cn/safe/2023/1227/23714.html
http://m.safe.gov.cn/safe/2023/1227/23710.html
Recently, China’s Supreme People’s Procuratorate and the State Administration of Foreign Exchange jointly released typical cases of cracking down on illegal foreign exchange crimes.
Head of the Fourth Procuratorial Department of the Supreme People’s Procuratorate: In China, virtual currency does not have the same legal status as legal tender, and related business activities constitute illegal financial activities. Currently, an increasing number of illegal foreign exchange crimes are being implemented through virtual currency transactions. In the process of handling cases, it was found that using virtual currency as a trading medium to indirectly achieve the currency value conversion between foreign exchange and RMB is a crucial link in the chain of illegal foreign exchange trading and should be punished according to law. Guiding the evidence collection, examination, and judgment of facts related to virtual currency transactions requires familiarity with the technical characteristics of virtual currency transactions to facilitate the efficiency and quality of case handling. This time, we selected two cases of illegal buying and selling of foreign exchange involving virtual currency in Zhejiang and Shanghai, combined with case examples to explain the relevant evidence collection points, providing guidance and evidence review instructions for handling such cases. At the same time, procuratorial organs should make full use of the auxiliary case-handling mechanism of procuratorial technology to make up for the shortcomings in professional knowledge, such as information technology, and enhance the professional level of case handling.
Case of Illegal Business Operations by Zhao and Others
(I) Illegal Payment and Settlement
From March 2019 to May 2020, Xiao, You, Shi, and others colluded with Hua (dealt with separately) to jointly develop, build, and maintain the “Upward Every Day” illegal payment platform. This platform, under the guise of earning commissions for part-time work, recruited a large number of individuals or small micro-merchants to register as “illegal payment clients.” They used the personal WeChat, Alipay, and bank account information provided by these “illegal payment clients” to establish a fund channel, providing payment and settlement services for illegal activities such as overseas gambling websites and “pig-killing” scams, earning commissions in the process. The platform recruited over 100,000 “illegal payment clients” who provided more than 370,000 fund accounts for receiving payments and making transfers. It was found that during the period from April 1 to May 18, 2020, the platform’s illegal payment and settlement amount reached more than RMB 3.19 billion.
From June 2019 to December 2019, Zhao and others, knowing that You’s funds came from illegal payment and settlement platforms, still used personal bank accounts to receive RMB and exchanged virtual currency with You for profit. Zhao made a profit of RMB 35,000, while Zhao Peng and Zhou Kekai made profits of RMB 5,000 each.
(II) Illegal Buying and Selling of Foreign Exchange
From February 2019 to April 2020, Zhao organized Zhao X.Peng, Zhou X.Kai, and others to provide exchange and payment services for foreign currency dirhams and RMB in the United Arab Emirates and China. This gang collected dirhams in cash in Dubai, United Arab Emirates, while simultaneously transferring the corresponding RMB into the designated domestic RMB account of the other party. They then used dirhams to purchase “Tether” (USDT, a stablecoin pegged to the US dollar) locally, and subsequently sold the purchased Tether through the domestic gang for illegal profit, regaining RMB. Through the exchange rate difference, the gang could earn more than 2% profit in each foreign exchange transaction. It was found that Zhao and others exchanged an amount of more than RMB 438.5 million from March to April 2019, with a total profit of more than RMB 870,000.
On March 24, 2022, the People’s Court of Xihu District, Hangzhou City, Zhejiang Province, issued a verdict, sentencing Xiao to eleven years in prison and imposing a fine of RMB 20 million for the crime of illegal business operations; sentencing You to eleven years in prison and imposing a fine of RMB 10 million; sentencing Zhao to seven years in prison and imposing a fine of RMB 2.3 million; sentencing Zhao X.Peng to four years in prison and imposing a fine of RMB 450,000; sentencing Zhou X.Kai to two years and six months in prison and imposing a fine of RMB 250,000. Other members of the gang received sentences ranging from four years to one year and two months, with fines ranging from RMB 2 million to RMB 25,000. After the verdict, Xiao, You, Zhao, and Zhao X.Peng appealed. On September 5 of the same year, the Intermediate People’s Court of Hangzhou City, Zhejiang Province, ruled to reject the appeal and uphold the original judgment.
[Case Handling Process]
(I) Examination and Prosecution
On September 30, 2020, the Public Security Bureau Xihu Branch of Hangzhou City, Zhejiang Province, transferred the part of the facts related to the illegal engagement in fund payment and settlement business by You and Zhao to the People’s Procuratorate on suspicion of the crime of illegal business operations.
In response to the defense by Zhao and others that they were unaware of You’s involvement in illegal payment and settlement business and the alleged crimes involving funds, the People’s Procuratorate of Xihu District, Hangzhou City (hereinafter referred to as the “Xihu District Procuratorate”), focused on the following aspects during the examination and prosecution process:
Firstly, further extract and analyze valid information from electronic data. To clarify the subjective knowledge of each suspect regarding the main facts, the Xihu District Procuratorate’s technical personnel further restored and extracted information from the mobile phone data of the suspects provided by the public security organs. They analyzed the chat records between You and Zhao’s gang, which confirmed that Zhao and others were well aware of You’s involvement in illegal payment and settlement business.
Secondly, prosecute the crime of illegal buying and selling of foreign exchange. During the review of the extracted mobile phone chat records, the Xihu District Procuratorate found evidence that Zhao’s gang was involved in providing foreign exchange exchange services using virtual currency. They were suspected of illegal buying and selling of foreign exchange. To clarify this part of the facts, the procuratorial organ sorted out 309 transaction records related to foreign exchange in the chat records of Zhao’s gang. Each record had a confirmation of a successful transaction, including information such as domestic receiving account, transaction time, total transaction amount, and buying exchange rate. The total amount involved was more than RMB 438.5 million. To further verify the authenticity of the above transaction records, the procuratorial organ supplemented the investigation by the public security organs and conducted its own investigation, focusing on the following evidence: (1) Retrieving transaction details of 15 involved domestic bank accounts mentioned in the 15 transaction records. The bank transaction details could mutually corroborate with the transaction data in the chat records in terms of amount and time. (2) Taking inquiries from the recipients involved in the 15 transactions to confirm that all 15 payment records were related to the payment of foreign-related fees by overseas individuals. (3) Interrogating Zhao and other gang members to confirm that Zhao and others in Dubai received dirhams in cash and paid RMB to the other party’s designated account as well as buying Tether with dirhams and letting the domestic gang illegally sell it back for RMB. (4) Conducting targeted inspections of electronic data carriers such as computers and mobile phones seized, confirming the virtual currency wallet address controlled by the criminal gang, and then comparing the transaction records of the virtual currency wallet with the bank account statements to clarify the fund flow path of the criminal gang “foreign currency — virtual currency — RMB.”
On February 11, 2022, the Xihu District Procuratorate brought Zhao, You, and others to court on charges of illegal business operations, and added the crime of illegal buying and selling of foreign exchange against Zhao, Zhao X.Peng, and Zhou X.Kai.
(II) Accusation and Proof of Crime
The People’s Court of Xihu District, Hangzhou City, Zhejiang Province, held three public hearings for this case. During the trial, Zhao and others argued that their actions were simply virtual currency transactions and did not constitute foreign exchange trading, and thus, did not amount to illegal business operations.
The prosecutor responded that there were contents related to foreign exchange in the chat records of Zhao’s gang, and the domestic bank account transaction details could mutually corroborate with the data in the chat records in terms of amount and time. Multiple recipients related to the exchange records confirmed that the funds they received were payments from foreigners. All defendants admitted that Zhao and others in Dubai collected dirhams in cash, paid RMB to the other party’s designated account, bought Tether with dirhams, and let the domestic gang illegally sell it back for RMB. The apparent behavior was buying and selling virtual currency, but in essence, using Tether as a medium achieved the currency value conversion between foreign currency and RMB. This constituted illegal buying and selling of foreign exchange, constituting the crime of illegal business operations.
[Significance of the Case]
1. Using virtual currency as a medium to achieve the exchange of RMB and foreign exchange constitutes the crime of illegal business operations. The perpetrators used virtual currency as a medium to earn profits from the exchange of foreign exchange and RMB by providing cross-border exchange and payment services, bypassing national foreign exchange supervision through the unique properties of virtual currency. The exchange sequence of “foreign exchange — virtual currency — RMB” involved in such behavior is a disguised form of buying and selling foreign exchange, and criminal responsibility should be pursued for the crime of illegal business operations.
2. Clarifying the virtual currency transaction chain around the virtual currency wallet address. Based on the transaction characteristics of most virtual currencies, grasping the virtual currency wallet address can query the transaction records of virtual currencies under the wallet address through public channels. In handling such cases, it is essential to focus on clarifying the virtual currency wallet addresses used by the suspects and defendants. This can be achieved by conducting targeted electronic inspections of electronic devices such as mobile phones and computers used by the suspects and defendants, and the software stored on them, to obtain wallet addresses. On this basis, further verification of the registration information of the wallet address, including the bound bank account information, can be carried out.
3. Fully utilizing the prosecutorial technology-assisted case-handling mechanism and enhancing the review of electronic data. In cases involving virtual currency transactions and foreign exchange trading, electronic data in mobile phones and computers is of significant value in clarifying the type of criminal behavior, the amount of crime, and subjective knowledge. The information contained in the electronic data provided by the public security organs is extensive, and the procuratorial organs should focus on extracting, sorting, and reviewing valid information related to proving the crime. If necessary, the prosecutorial organs should use prosecutorial technology to assist in the case, further restoring, extracting, and retrieving information from the electronic data provided by the public security organs.
Guo X.Zhao et al illegal business to help information network criminal activities
【 Basic case 】
Guo X.zhao, builder of an illegal currency exchange website.
Fan X.Pin, virtual currency trader in the illegal currency exchange group.
Zhan X.Xiang and Liang X.Zuan, providing virtual currency trading platform accounts and RMB bank accounts to Fan X.Pin.
From January 2018 to September 2021, Chen X.Guo (handled separately), Guo X.Zhao, and others built websites like “TW711 Platform” and “Huosu Platform,” using Tether (USDT) as a medium. They provided exchange services between foreign currency and RMB. Clients deposited foreign currency on the website and, after placing orders in the business section, paid foreign currency to designated overseas accounts. Fan X.Pin then sold the purchased Tether (USDT) through illegal channels, obtained RMB, and paid the corresponding amount of RMB to the client’s designated domestic third-party payment platform account, earning profits from the exchange rate difference and service fees. The illegal exchange amounted to over 220 million RMB. Fan X.Pin received over 6 million Tether (USDT) from Chen X.Guo, exchanging it for over 40 million RMB.
On June 27, 2022, the People’s Court of Baoshan District, Shanghai, sentenced Guo X.Zhao to five years in prison for illegal operation and fined him 200,000 RMB. Fan X.Pin received a three-year-three-month sentence for the same charge and a 50,000 RMB fine. Zhan X.Xiang was sentenced to one year and six months in prison and fined 5,000 RMB for assisting information network criminal activities. Liang X.Zuan received a ten-month sentence and a 2,000 RMB fine. Zhan X.Xiang appealed but withdrew the appeal on November 10, 2022.
【Case Handling Process】
（Ⅰ）Early Intervention
On September 18, 2021, the Baoshan District People’s Procuratorate in Shanghai (hereinafter referred to as the “Baoshan Procuratorate”) intervened in this case at the invitation of the public security organs. To accurately grasp the nature of the case and the direction of investigation, the procuratorial organ, together with relevant units such as public security and foreign exchange management departments, held multiple consultations to determine that the actions of using Tether as a medium for cross-border currency conversion between RMB and foreign currency constituted illegal buying and selling of foreign exchange. As most of the customers and accounts involved in this case are overseas, customer testimony is difficult to obtain, and the flow of funds is difficult to verify. The procuratorial organ and the public security organ judged that the key to evidence collection lies in the clarification of the cross-border fund chain. Therefore, the investigation and evidence collection work focused on this aspect.
On one hand, the criminal behavior pattern of illegal buying and selling of foreign exchange and the degree of involvement of each suspect were clarified. The procuratorial organ comprehensively collected information from the backend accounts of the currency exchange website, order records, bank transaction records, and third-party payment platform transaction records. It also examined the virtual currency-related projects in the order records. It obtained evidence related to the contact information and roles of Fan X.Pin and the members of the currency exchange website, interrogated Zhan X.Xiang and Liang X.Zuan about their profit methods, their contact with the currency exchange website group, the number of bank cards lent, and whether they were involved in transferring funds. The goal was to determine the roles, methods, profits, and the flow of funds in the process.
On the other hand, the flow of funds across borders was traced to identify the process of cross-border fund conversion and the amount of the crime. The case involved three currency flows: (1) Foreign currency from “customer payment account for currency exchange → account controlled by Chen X.Guo and others → overseas virtual currency sales personnel account”; (2) Virtual currency from “overseas virtual currency sales personnel account → account controlled by Chen X.Guo and others → account controlled by Fan X.Pin and others”; (3) RMB from “account controlled by Fan X.Pin and others → account controlled by Chen X.Guo and others → customer designated receiving account for currency exchange”. Since the three currency flows usually did not occur synchronously, to confirm whether they were all manipulated by the same group, the procuratorial organ suggested that the public security organ collect the charging and withdrawing transaction records of virtual currency trading platforms. It should then compare them with the transaction hash values, transaction times, and quantities of virtual currency displayed in the backend data of the currency exchange website. This would establish the correspondence and degree of correlation between the identities of virtual currency trading platforms, legal currency circulation platforms, and communication platforms.
（Ⅱ）Review and Prosecution
On January 13, 2022, the Baoshan Branch of the Shanghai Public Security Bureau transferred Guo X.Zhao and Fan X.Pin for the suspected crime of illegal operation, and Zhan X.Xiang and Liang X.Zuan for the suspected crime of aiding in information network crime, for prosecution.
To ensure accuracy and propose sentencing recommendations, the Baoshan Procuratorate, based on a comprehensive review of the evidence to determine the facts of the crime, focused on the following work: First, further study the nature of the case with the foreign exchange management department to clarify that using virtual currency as a trading medium to achieve the currency value conversion between legal currency and foreign currency, including exchanging legal currency for virtual currency, then exchanging virtual currency for foreign currency, or exchanging foreign currency for virtual currency, and then exchanging virtual currency for legal currency, essentially constitutes illegal buying and selling of foreign exchange. Second, analyze the objective behaviors and subjective knowledge distinctions of each suspect. Guo X.Zhao, hired by the main offender Chen X.Guo, built and maintained the illegal currency exchange website and collaborated with others in illegal buying and selling of foreign exchange, constituting the crime of illegal operation. The amount of the crime should be calculated based on the total amount of currency exchange on the website. However, he provided technical assistance in the criminal group but did not participate in specific business activities or share the illegal gains. Considering this, he was recognized as an accessory. Fan X.Pin, for a long time and unilaterally, helped the main offender Chen X.Guo and others conduct currency exchange transactions between legal currency and foreign currency using Tether as a medium. They also had other connections, such as investments and helping to resolve issues with frozen bank cards. Their relationship was close, and they were considered accomplices in the crime of illegal operation. The amount of the crime was calculated based on the RMB amount of the virtual currency transactions summarized with Chen X.guo and others. During the crime, Fan X.Pin followed instructions to operate transactions. He was recognized as an accessory. Zhan X.Xiang and Liang X.Zuan provided a large number of bank accounts to Fan X.Pin and others for profit. Zhan X.Xiang also provided an ID card for Fan X.Pin and others to register virtual currency trading accounts for the involved transactions. Current evidence cannot prove that these two individuals knew the specific type of crime of illegal buying and selling of foreign exchange, but it can be proven that they had a general understanding of aiding in information network crime. Therefore, they were determined to be aiding in information network crime.
On February 11, 2022, the Baoshan Procuratorate filed a public prosecution against Guo X.Zhao and Fan X.Pin for the crime of illegal operation, and against Zhan X.Xiang and Liang X.Zuan for the crime of aiding in information network crime.
【Significance of the Case】
1. Those who knowingly assist others in the illegal buying and selling of foreign exchange by exchanging virtual currency are accomplices in the crime of illegal operation. In China, virtual currency does not have the same legal status as legal currency. However, helping others indirectly achieve illegal currency exchange between legal currency and foreign currency using virtual currency as a medium is an important link in the chain of illegal buying and selling of foreign exchange. It should be punished according to the law. Those who provide virtual currency transactions for individuals engaged in illegal buying and selling of foreign exchange, either by premeditated collusion or by knowingly helping others engaged in illegal buying and selling of foreign exchange, constitute accomplices in the crime of illegal operation. Those who provide virtual currency transaction services to individuals engaged in illegal buying and selling of foreign exchange but only have a general understanding of the criminal behavior and do not specifically realize that they are helping with the crime can be held liable for aiding in information network crime.
2. Strengthen targeted guidance for evidence collection and evidence review based on the technical characteristics of exchanging foreign exchange using virtual currency. Illegal buying and selling of foreign exchange using virtual currency as a medium involves independent virtual currency transactions and fund transactions. Overseas evidence collection is difficult. It is necessary to establish connections through multi-party comparisons of transaction information. Virtual currency has characteristics such as anonymous transactions, decentralization, and no borders, but transaction records are immutable. Law enforcement personnel should extract data such as virtual currency wallet addresses, transaction hash values, account registration information from virtual currency trading software, virtual currency trading websites, and blockchain browsers. They should clarify the flow of virtual currency and then compare the transaction hash values, transaction times, and quantities generated by virtual currency circulation with bank transfer records, network backend data, chat records, and other data containing real-name information. This will clarify the identity correspondence and degree of correlation between virtual currency trading platforms, legal currency circulation platforms, and communication platforms.
3. Strengthen collaboration in case handling to jointly combat and govern new foreign exchange crimes involving virtual currency. In the process of handling new types of cases involving illegal buying and selling of foreign exchange using virtual currency, foreign exchange management departments and procuratorial organs should strengthen communication and cooperation with public security organs. They should jointly study and solve new situations and problems in case handling, promote the improvement of a pattern of execution cooperation that is lawful, clear in responsibility, and effective. When handling foreign exchange-related criminal cases with novel types and difficulty in determining the nature, procuratorial organs should pay attention to seeking professional assistance from foreign exchange management departments.
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