Written by: Liu Honglin

Recently, a client came to Mankiw for consultation. The story goes like this: the client is a foreign trade company in Guangzhou. After completing a transaction with an overseas company, the company settled the payment with USDT. After receiving the USDT, the company found a domestic service provider to exchange the USDT for RMB. As a result, the service provider disappeared after receiving the USDT, and the client asked, "Where is the integrity?"

Based on the above cases, this article will discuss the legal risks faced by foreign trade companies in the entire process of exchanging USDT for legal currency.

Foreign trade payment settlement process

Traditional way to transfer foreign trade payment

After completing transactions with overseas counterparts, most domestic foreign trade merchants will remit normal foreign trade payments to China or Hong Kong through local regional/local country banks, and then convert the payments into RMB.

Due to my country's strict management of the foreign exchange market and various factors, foreign trade merchants usually find a third party to exchange foreign currencies, transfer US dollars and other foreign currencies to the third party's account, and then the third party transfers the equivalent amount of RMB to the foreign trade merchant's domestic bank account. In the foreign trade industry, there is an industry term for this transaction, called "counter-exchange". (The risks of this behavior will not be discussed in this article)

On this basis, various foreign trade companies are constantly balancing legality and compliance with cost control, and have also developed many other ways of settling foreign exchange that circumvent my country's foreign exchange management.

Foreign trade payment is transferred back in virtual currency

Nowadays, as virtual currencies are recognized and used within a certain range internationally, many foreign traders exchange their local currencies for the stable currency USDT (hereinafter referred to as "U") locally, then exchange USDT for US dollars and transfer them to their own Hong Kong dollar accounts, and finally convert them into RMB through formal channels in Hong Kong through money service operators (MSO; the Hong Kong Customs began to implement relevant regulations in 2012, which stipulates that all individuals and units engaged in currency exchange and remittance operations need to apply for a Hong Kong MSO license from the Hong Kong Customs).

However, due to the characteristics of virtual currencies such as decentralization, easy circulation, anonymity, and fast arrival, especially in the above-mentioned foreign exchange settlement methods, which require very complicated procedures, some foreign trade companies will directly find domestic service providers to provide services such as U and other highly recognized virtual currencies to convert to RMB.

We can find out from public channels that there are still many service providers on the market that provide such services, and even promote such services.

Illegal speech can be found everywhere on the Internet

Legal Risk

Civil legal risks

As mentioned in the foreword, the foreign trade company faces a great risk of service provider performance. Once the foreign trade company transfers U to the service provider's wallet, it loses control of U. As long as the service provider refuses to transfer or absconds, the foreign trade company will face the situation of not receiving the money and not knowing where the currency is. In this case, the possibility of the foreign trade company recovering either RMB or U is relatively low.

According to my country's current regulatory policies and judicial attitude towards virtual currencies, if a civil lawsuit is filed to require the service provider to return U, the court will most likely rule to dismiss the lawsuit (we have discussed this in the Mankiw Law Firm article "Lending Bitcoin and Requesting Return, the Court: I Don't Care About It"), the reason is: although virtual currency can be regarded as a specific virtual commodity, there are currently no relevant laws and regulations in my country to clarify that it is a thing under civil law. Moreover, it does not have the attributes of a kind of thing. In this case, it is not realistically returnable and cannot be quantified using legal currency. It does not meet the scope of civil litigation accepted by the people's court as stipulated in Article 119 (4) of the Civil Procedure Law of the People's Republic of China.

In addition, what if the lawsuit requires the service provider to continue to pay in RMB?

According to Article 1, Item (4) of the "Notice on Further Preventing and Dealing with the Risks of Virtual Currency Trading Speculation" issued by the People's Bank of China and other departments in 2019, any legal person, non-legal person organization or natural person who invests in virtual currency and related derivatives and violates public order and good morals shall have the relevant civil acts invalid, and the losses caused thereby shall be borne by themselves; if they are suspected of disrupting financial order and endangering financial security, they shall be investigated and dealt with by relevant departments in accordance with the law.

We can see the regulatory attitude of our country. Although the country has not explicitly prohibited individual citizens from buying, selling, trading and speculating in virtual currencies such as Bitcoin, the current regulatory trends show that related behaviors not only do not receive effective legal protection, but also sue the service provider to require it to continue to pay RMB. The court often determines that the transaction is invalid and the foreign trade company itself bears the above losses.

Administrative supervision risks

(1) The payment of goods by foreign trade companies may be frozen due to suspected illegal proceeds

If the service provider successfully transfers the corresponding payment to the bank account of the foreign trade company in accordance with the agreement between the two parties. According to Article 2 of the "Regulations on the Application of Seizure and Freezing Measures by Public Security Organs in Handling Criminal Cases", according to the needs of investigating crimes, the public security organs shall seal and freeze the property involved in the case in accordance with the law, and relevant departments, units and individuals shall assist and cooperate. This method of foreign exchange settlement through service providers is very likely to cause the bank account of the foreign trade company to receive stolen money, so the public security will freeze the funds in accordance with the above regulations. Foreign trade companies still need to regulate their foreign exchange settlement behavior, otherwise they may accidentally become "tools" for criminals to launder money.

(2) Foreign trade companies’ settlement of virtual currencies violates foreign exchange management

Due to its characteristics of "decentralization" and "support for peer-to-peer transactions", virtual currencies play the role of cross-border payment equivalents to a certain extent. The flow of virtual currencies does not rely on the services provided by traditional financial accounts, and existing foreign exchange management measures are difficult to control them.

According to Article 45 of the "Foreign Exchange Administration Regulations", if anyone buys and sells foreign exchange privately, buys and sells foreign exchange in disguised form, speculates on foreign exchange, or illegally introduces the purchase and sale of foreign exchange in large amounts, the foreign exchange administration authority shall give a warning, confiscate the illegal gains, and impose a fine of no more than 30% of the illegal amount; if the circumstances are serious, a fine of no less than 30% of the illegal amount but no more than the equivalent of the illegal amount shall be imposed; if a crime is constituted, criminal liability shall be pursued in accordance with the law.

In light of the above provisions, if the foreign exchange settlement behavior of a foreign trade company is investigated and verified by relevant departments, it may face the risk of not only having the funds confiscated, but also having to bear the risk of a huge fine.

Criminal legal risks

(1) or due to suspected money laundering, etc.

In conjunction with the above “(1) The foreign trade company’s payment for goods may be frozen due to suspected stolen money”, if the upstream source of the RMB funds received by the foreign trade company is the proceeds and profits of seven crimes such as drug crimes and organized crimes of a mafia nature, according to Article 191 and Article 312 of the Criminal Law of the People’s Republic of China, not only will the funds in the account be frozen, but there is a great possibility that the company will be investigated and dealt with by the public security organs for suspected crimes such as “money laundering”, “concealing and hiding the proceeds of crime and the proceeds of crime”, “harboring drug criminals”, and “harbouring, transferring and concealing drugs and drug proceeds”.

(2) or suspected of illegal business operations

The Foreign Exchange Administration Regulations require that all foreign exchange settlement and sales of individuals and enterprises must be handled through financial institutions. Although foreign trade companies use virtual currency as a medium, according to the "legal form to cover up illegal purposes", the final settlement of foreign exchange using virtual currency still has a great risk of being judged as illegal foreign exchange trading by judicial authorities.

In addition, the Supreme People's Court and the Supreme People's Procuratorate's "Interpretation on Several Issues Concerning the Application of Law in Handling Criminal Cases of Illegal Fund Payment and Settlement Business and Illegal Foreign Exchange Purchase and Sale" stipulates that disguised foreign exchange purchase and sale disrupts the order of the financial market, and the circumstances are serious, which constitutes the crime of illegal business operation. According to the "Interpretation", if the amount of illegal business operation is more than 5 million yuan, or the amount of illegal income is more than 100,000 yuan, it shall be deemed that the illegal business operation is "serious". If the amount of illegal business operation is more than 25 million yuan, or the amount of illegal income is more than 500,000 yuan, it shall be deemed that the illegal business operation is "particularly serious".

Generally speaking, compared with foreign trade companies, service providers that undertake virtual currency and RMB settlement are more likely to be convicted of this crime. However, if a foreign trade company meets any of the above circumstances, it will also be convicted of illegal business operation.

summary

In recent years, my country's foreign exchange supervision has become increasingly strict, and some "banks" have also been constantly changing their ways, using more covert methods such as private exchange and USDT to make cross-border payments, resulting in huge capital outflows, which has caused great harm to China's financial stability. Foreign trade companies use virtual currencies such as U to settle foreign exchange, which does save a lot of costs and time to a certain extent, but at the same time brings corresponding civil, administrative supervision, and criminal risks.

Foreign trade companies usually settle large sums of money. Once they encounter unreliable service providers, they will inevitably suffer large losses and it will be difficult to recover. In fact, since regulatory and judicial authorities are more inclined to "substantially" identify disguised foreign exchange transactions, the behavior of bypassing the formal channels for foreign exchange settlement will also be substantially identified as a violation of foreign exchange management. Therefore, it is recommended that foreign trade companies and other companies with similar needs should also be more cautious in choosing the method of foreign exchange settlement.