Gu Lei & Ding Yu: Analysis of the "illegality" of P2P illegal fund-raising

Editor's note

Throughout 2018, the public security organs across the country have filed for more than 10,000 cases of illegal fund-raising, up 22% year-on-year, involving about 300 billion yuan, up 115% year-on-year, affecting various provinces and cities across the country, with an average case value of more than 28 million yuan, up 76% year-on-year. Some cases involve a billion or even 10 billion yuan, causing huge losses to the public. Thus, “The Supreme People’s Court, The Supreme People’s Procuratorate and Ministry of Public Security” recently issued “The Opinions on Issues Concerning to Handling Criminal Cases of Illegal Fund-raising” (hereinafter referred to as “Opinions”) with 12 articles in all, fully responding to the new situation of the present criminal cases of illegal fund-raising, which stipulated the specific regulations on the applicable of law, judicial procedure, criminal policy and extent for discretionary of sentencing. It has a great significance for cracking down on illegal crime of illegal fund-raising in accordance with the law, and protecting the legitimate rights and interests of the people. But what exactly is P2P illegal fund-raising behavior? What are the highlights and regrets of the “Opinions” issued this time? Dr. Gu Lei and senior consultant Dr. Ding Yu from China Academy of Financial Inclusion of Renmin University of China have an in-depth discussion on these issues. We welcome industry insiders to participate in the discussion and give counsel suggestions for the healthy development of online loan in China.

About the authors


Gu Lei, doctor of laws, postdoctoral fellow in finance, senior economist, chief economist of Tianjin Financial Assets Exchange, vice president of China bankruptcy reorganization alliance of international bankruptcy association, researcher of China Academy of Financial Inclusion (CAFI) of Renmin University of China, master tutor. In recent years, he has mainly studied in the illegal crime problems of Internet finance, bankruptcy reorganization, inclusive finance regulation and securities market.

Ding Yu, doctor of economic from University of Cologne, Germany, senior expert of Chinese small and micro credit, senior consultant of China Academy of Financial Inclusion (CAFI) of Renmin University of China. He has so far provided small and micro loan business and risk management technology for more than 20 local commercial Banks and national large small and micro financial institutions.

Analysis of “illegality” of P2P illegal fund-raising

On January 30th, 2019, The Supreme People's Court, The Supreme People's Procuratorate and Ministry of Public Security issued the “Opinions”, which have many highlights that are conducive to cracking down on P2P illegal fund-raising. Of course, the new regulations also have many shortcomings that are to be further summarized and improved in the future.



1.Is P2P business behavior financial innovation or suspected crime?The key lies in the characteristic of “illegality”

The main distinction between P2P as a financial innovation or illegal fund-raising is whether it has the characteristic of “illegality”.

Article 1 of the “Opinions” clearly identifies that the determination of “illegality” is mainly based on the violation of national laws and regulations on financial management. If there is no regulation on financial management in the national laws, it shall be determined by reference to the departmental rules formulated by the Central Bank, China Banking Regulatory Commission and China Securities Regulatory Commission. In other words, P2P platforms engaged in online loan business must strictly abide by the laws and regulations of the state on financial management, and strictly carry out business in accordance with regulatory documents such as departmental rules and regulations. If the P2P platform in violation of the above normative documents, engaged or commissioned to engage in the self-financing, disguised self-financing, setting up capital pools which guarantees or promises break-even interest to organize the business activities beyond the scope of information intermediary such as to sell the financial products and to carry out the type of asset securitization, this business behavior is “illegality”, which can be regarded as illegal fund-raising.


In the financial practice, it is difficult to determine what the “illegality” is. Whether it includes P2P mutual fund platform without relevant financial license, or small loan companies illegally absorb public deposits? We should not generalize them while they need to be specific analysis. For example, although P2P industry does not have a special administrative license, it does not mean that all P2P platforms are necessarily engaged in illegal fund-raising, and even though private fund products are well registered and filing, it does not mean that they will not be suspected of illegal fund-raising.


Therefore, “illegality” mainly depends on whether the fundraising behavior violates relevant national laws and regulations on financial management.For example, the laws and regulations issued by the People’s Bank of China, China Securities Regulatory Commission and China Banking Regulatory Commission all are classified into the category of “national laws and regulations on financial management”, such as “The Interim Measures on the Management of Business Activities of Online Loan Information Intermediary Organs” for P2P industry prohibits setting up capital pools, self-financing and debt transfer; “The Guiding Opinions on the Pilot Projects of Small-loan Companies (No. 23)” emphasizes on preventing the public from absorbing funds; “The Interim Measures for the Supervision and Administration of Private Investment Funds” and “ The Measures for the Administration of Private Investment Fund Fundraising”, which regulate private investment behaviors, supervise that whether the private investment behaviors are the violations of prohibition requirements on sales and whether the investors fulfill the obligations of propriety. That is to say, all internet finance platforms shall not violate the prohibitive provisions of laws, regulations and departmental rules in their respective fields, otherwise these business activities have the characteristic of “illegality”, which can be regarded as illegal fund-raising.


2.The funds collected by the victims shall take precedence over the civil debts

Illegal fund-raising cases often involve a large number of people, the amount of illegal absorption of funds is huge, and the biggest difficulty is the problem of returning order of the involved in the collection of funds. For this reason, the “Opinions” put forward the proposition that “the loss of the participants in the refund and indemnity fund generally takes precedence over other civil debts, as well as the execution of fines and confiscation of property”. Compared with previous regulations, the “Opinions” has made great progress in the collection of funds for the refund and indemnity of the victims.


Though in early November 27TH, 2014, the Supreme People’s Court promulgated “The Several Provisions on the Implementation of the Criminal Adjudication of Property involved”, which regulations that the collection of funds for the refund and indemnity of the victims shall take precedence over the civil debts, as well as the execution of fines and confiscation of property, because the people involved in those cases is not much, and the general case hasn’t attracted the victim's attention, coupled with the lack of legal knowledge of the reason, most people thought that all of sealing up and detaining involved property in the cases by the Public Security Organs was confiscated by the state, or processed as part of a heavy fine, and should not be returned to the victims.


In recent years, due to the increasing number of illegal fund-raising cases and the large number of people involved, the refund and collection of funds becomes the only hope for the victims to recover their losses. The “Opinions” has aroused public concern and become a legal account for the majority of investment victims involved in the case. This “Opinions” reiterated the previous provisions of the Supreme People’s Court, that is, for the property involved in the case that does not belong to the defendant should be first unconditionally proportional refund to fund participants. If it is the defendant's own legal property, he or she should give priority to the compensation of the victim, and then pay all kinds of debts (such as the arrears of suppliers), and finally the Court's fine and confiscation of property.

3.Return the property involved in the case in proportion to the participant's contribution

If the funds absorbed from the public are illegal gains, these payments shall be pursued or compensation shall be ordered. However, when the property involved in the case is not returned in full, what exactly is the way to return the funds to the participants?

Regarding the proportion of recovered property involved in illegal fund-raising, the “Opinions” stipulates that the amount of money collected should be returned in accordance with the proportion of the amount collected by participants. In short, The sealing up, detaining and frozen involved property in the cases should return to fund participants after the end of the proceedings. If the property involved in the case is not enough to be returned in full, it shall be returned in proportion to the amount of funds raised by the participants. It is also fully embodies that the damage range financing participants generally take precedence over other civil debt as well as the principles of fines and confiscation of property, to ensure the maximum pulling damage recover the booties. When the illegal gains has not yet been recovered and hasn't been returned in the full specified amount at the trail, the People’s Court shall make a judgment that the illegal gains shall be pursued or compensation shall be ordered so as to minimize the actual loss.


4.Beware of treating economic disputes as crimes

The “Opinions” stresses that in handling cases of illegal fund-raising, we must implement the criminal policy of “combining leniency with severity”, punish the minority and save the majority, properly handle the scope of criminal responsibility to prevent economic disputes from being treated as criminal crimes, and protect the healthy development of Internet platforms to the maximum extent.


First, strictly grasp the legal elements of conviction and punishment to prevent economic disputes from being treated as economic crimes. Criminal punishment may be exempted for of illegally absorbing public deposits, if such illegally absorbing public deposits are used for normal production and business operations without the purpose of illegal possession and the absorbed funds can be cleared up in time; If the circumstances are obviously minor, it shall not be treated as a crime.


Second, to treat people involved in the case differently according to the classification principle. The “Opinions” stresses that the punishment should focus on the organizers, leaders and managers of illegal fund-raising activities, including the core layer, management layer and key personnel of the superior units (head office and parent company) and the management layer and key personnel of the subordinate units (branches and subsidiaries). And to the common business personnel who participate in illegal fund-raising shall not be regarded as direct responsible personnel to investigate legal responsibility no longer commonly, only the organizers and leaders shall be investigated as the criminal responsibility. Compared with previous criminal policies, this is a great progress in the legal system, which fully reflects the criminal policies of “treating people differently” and “combining leniency with severity”, which is conducive to social stability and unity, as well as the stable development of the financial market.


Third, to implement the system of leniency for those who take punishment, for the personnel involved in the case who actively cooperate with the investigation, take the initiative to return the ill-gotten gains or pay compensation, and sincerely confess and repent their guilt, the punishment may be given a lighter punishment in accordance with the law. Of which the circumstances are minor, the punishment may be exempted; if the circumstances are obviously minor without serious harm, the offender shall be treated as a crime of omission, which utmost shall reflect the criminal policy of “leniency for those who confess”.


5.For the first time, make a clear for the participants involved in the case can safeguard rights before the court

For a long time, participants in illegal fund-raising are not allowed to attend the trial instead of issuing relevant witness testimony and documentary evidence at most, while are unable to directly face the collegial panel to safeguard their legitimate rights and interests, all the previous judicial interpretation is not stipulated. The “Opinions” for the first time gave a clear response. “on the protection of participants’ rights in fund raising” at article 10 stipulates that “participants in fund raising can elect representatives to put forward relevant opinions and suggestions to The People's Court; If no representative can be elected, The Supreme People’s Court may appoint one. The Supreme People’s Court can decide that the representatives for the participants in fund raising attend the trails in accordance with the facts of the case”, and the participants in fund raising also can choose a delegate to communicate with case handling organs, they not only can issue relevant witness testimony, documentary evidence and material evidence, but also can directly express their opinions before the court, bold safeguarding themselves’ legitimate rights and interests.

Obviously, the “Opinions” fills a gap that the participants involved in the criminal proceeding cases safeguard their rights before the court, which manifests that the respect of judicial organs for the rights of parties, it is a legal progress worthy of thumb up. We hope that this principle should be carried out in all internet economic cases in the future, where the legitimate rights and interests of participants in litigation can be effectively protected.



1.The past and present judicial interpretation of the relatives and friends’ investment deduction clause is inconsistent

Before the “Opinion”, the investment of the doer himself and his close relatives is not included in the criminal amount. For example, on June 1st, 2017, “The summary of the related issues on handing Internet financial crimes on the symposium” of The Supreme People’s Procuratorate Indictment Hall (No. 14 [2017]) regulates: “the criminal suspect who is responsible for or engage in financing behavior and has illegally absorbed public deposits should be affirmed in accordance with its actual total amount of participation in absorption. However, the following amount shall not be included in the absorbed amount of the criminal suspect :(1) the amount of capital invested by the criminal suspect himself and his close relatives...”, and the “Opinions” made a negative provision to this, as long as the near relatives’ investment is in line with the conditions of “knowingly” and “laissez-faire”, it shall be included in the amount of illegal fund-raising crime.


That is to say, there are contradictions between the past and present two “judicial interpretations” of The Supreme People’s Court, The Supreme People’s Procuratorate, Ministry of Public Security and the Supreme People’s Procuratorate Indictment Hall. And there are major differences on whether the amount of funds invested by the suspects’ close relatives should be included in the amount of illegal deposits.


However, a large number of doers who are illegal absorb public deposits crime in the most cases often are no illegal possession crime intentionally, while they lose all the money that they use their own funds and loan from relatives and friends. That is the reason why there is a lot of illegal fund-raising cases that the crime suspect is both the accused and the victim, such as the managers in the project of “the thousands of wooden ganoderma lucidum”, the senior executives in the case of “Shan Lin Financial” and the financial planners of “Gy Funds”, etc. On this occasion, if the judicial organs count the borrowing of close relatives into the criminal amount only on the condition of “knowingly” and “laissez-faire”, it may indulge the subjective assumption of the examination and approval authorities, and push the investors involved in the amount in the boundary state to the danger of being guilty for no reason, thus blurring the judgment. In a sense, the judicial interpretation of the “Opinions” that whether the money invested by the criminal suspect’s close relatives should be included in the amount of illegal fund-raising crime has increased the controversy in the judicial practice and difficulty of the implementation, as well as it is totally different from the requirements that “we must not deal with civil disputes as the criminal case; we must not convert civil witness to criminal responsibility; we must not kill private enterprises and entrepreneurs because of small defects and irregularities;(noted by Jiang Bixin in 2019)” proposed by The Supreme People’s Court at the two sessions(the National People’s Congress and the Chinese Political Consultative Conference), in short, we shall make the law to be the Periapt of private enterprises and entrepreneurs, rather than neither the Golden hoop nor a killer.


2.There is suspicion of double counting in determining the amount involved

Article 5 of the “Opinions” stipulates that “the amount of capital recovered or the amount of repeated investment after the participant gets the return shall not be deducted, but it can be considered as the circumstances of sentencing."

The original intention of The Supreme People’s Court, The Supreme People’s Procuratorate and Ministry of Public Security is to prevent unnecessary double counting. However, the above statement seems not clear, and easy to lead to ambiguity.

In legal theory, the amount of repeated investment should not be deducted until the fund raiser gets back the principal or returns. However, if the participants do not get their principal back, or get a return, but directly continue to invest, this cannot be repeated calculation, and should be deducted. Therefore, The Supreme People’s Court, The Supreme People’s Procuratorate and Ministry of Public Security should further clarify the scope of the amount involved in the case, otherwise, there will be suspicion of double counting, wronging the parties.


We suggest that a new paragraph should be added into the article 5 of the “Opinions” that “on the determination of the amount of crimes”, which is “for the continued investment without recovery of principal, or the investment directly deducting interest, the deduction can be made and the amount involved will no longer be counted as the amount involved in the case”.


In this way, it does not hinder the victim pursuing of recovery, and is consistent with the calculation rules of “the Minutes of the Symposium on Internet Financial Crimes Cases” issued by The Supreme People’s Procuratorate on June 2nd, 2017. Because The Supreme People’s Procuratorate has stipulated early in the article 12 of “the Minutes of the Symposium on Internet Financial Crimes Cases” that “at the end of each investment, investors used the funds in the investment account (including the investment return of principal and interest after the end of each investment) for repeated investment, this amount shall be accumulated, but shall be given the explanations”.

We have reason to extend to the P2P mutual fund platform, fruits of small-loaning companies, no longer repeated calculation and deduction. It not only protects the investors and defendants’ legitimate rights and interests, but also reflects the continuity and consistency of China's legislation without leaving the regrets.


3.Define the scope of advance refund funds

Some funds with a clear ownership, which has not been collecting into the pool of capital, can be stipulated that the owner can be paid compensation directly in advance, and all of recovered funds is unfavorable to be collected into the normal accounts for paying compensation or accounts with financial confiscation without distinguishing right from wrong, because this kind of funds which has found the owner neither need to be paid compensation in proportion nor need to wait for being paid compensation till the end of the trial. However, this “Opinions” did not make such a distinction instead of indiscrimination, which all of recovered funds is to be collected into the normal accounts for paying compensation or accounts with financial confiscation, the legislation is relatively rough with the lack of individual legislative art, and should be clearly define the scope of advance refund funds.

Actually, a lot of local courts carry out such practice early. For instance, the case of Touzhijia in Shenzhen which the return compensate and recover fund were paid in advance before the trial awarded a great praise by the parties. Therefore, The Supreme People’s Court and The Supreme People’s Procuratorate can make a more clear scope of the specific financial refund funds before the trial in line with the fact. There is no doubt that this will be more conducive to the protection of the investors’ legitimate rights and interests, especially the victims.

Most of the civilian do not hesitate to invest their retirement money and family savings in investment platforms and financial products that eventually lead to a large number of losses. In their hearts, they just hope that their hard-earned money will not depreciate and even have some gains. Unfortunately, the regulation on the deposit interest rate of formal financial institutions has led to the civilian increasing tendency to leave formal financial institutions and invest in many grey or black investment platforms, resulting in many cases of fraud and illegal fund raising, which waste a lot of efforts of the government and judicial departments. If we do not fundamentally change the current situation that low deposit rates harm the interests of ordinary people, no matter how much publicity is done to prevent illegal fund-raising, it will be useless. Therefore, considering the economic and social costs caused by illegal fund-raising and various types of investment fraud, the following more reasonable solutions are proposed:

Allowing commercial banks to price deposits freely and raising deposit rates will attract the civilian’s money back to formal financial institutions. At the same time, Banks that focus on private small and micro enterprises can expand their business areas through mergers and acquisitions, and further channel social funds to efficient private enterprises through their mechanisms, thus optimizing the allocation of social resources.

Of course, such reform would be opposed by state-owned financial institutions that have long been monopolized by the government. The reason they cite is that rising interest rates will lead to further decline in investment, unemployment and social unrest during the economic downturn. However, we believe that long-term inefficient capital allocation not only leads to excessive financing costs of private enterprises, but also disrupts the fair order of the market and creates a vicious circle by maintaining low efficiency through low financing costs obtained through monopoly. Therefore, the liberalization of deposit interest rate will not worsen the impact on efficient private enterprises, but will clean up inefficient vicious competition and inefficient production capacity.

To sum up, making use of market economy means will be more efficient to solve the problem of illegal fund-raising. “Rome was not built in a day”. We sincerely hope that The Supreme People’s Court and The Supreme People’s Procuratorate will issue judicial interpretations in the future, consider issues more from the perspective of protecting the parties’ legitimate rights and interests, and concerned on better coordinate the interests of all the parties. Of course, existence is better than nothingness. Even the coexistence of highlights and regrets indicates a hope for the future. We believe that the Internet Era is about seeking survival opportunities in hope, exploring the future, and constantly improving and moving forward.