Around December 26, the State Administration of Foreign Exchange issued two new regulatory documents, the "Management Measures for Bank Foreign Exchange Risk Transaction Reports (Trial)" and the "Regulations on Due Diligence Exemption for Bank Foreign Exchange Business (Trial)", which attracted widespread attention. With the rapid development of the virtual currency market and the increasingly stringent supervision of bank foreign exchange business, how will they promote the compliance reform of bank foreign exchange business, and what impacts will they have on traders?
The significance of the release of the two new documents: new supervision under the background of big data interoperability and comprehensive informatization
The release of the "Management Measures for Bank Foreign Exchange Risk Transaction Reports (Trial)" and the "Regulations on Due Diligence Exemption for Bank Foreign Exchange Business (Trial)" aims to improve the regulatory system for bank foreign exchange business, enhance market transparency, and maintain the order of the foreign exchange market. In the context of the increasing liquidity of big data, these two documents not only help to strengthen the monitoring and management of foreign exchange risk transactions, but also provide banks with a clearer compliance framework, thereby promoting the healthy and stable development of the financial environment and ensuring a more standardized and orderly foreign exchange market.
In terms of foreign exchange transaction risk prevention and control: With the increasing frequency of cross-border trade and investment and financing activities, foreign exchange violations and irregularities are also increasing, such as false trade, illegal cross-border financial activities of virtual currencies, etc., which seriously disrupt the order of the foreign exchange market. The introduction of the "Management Measures for Bank Foreign Exchange Risk Transaction Reports (Trial)" requires banks to monitor and report possible foreign exchange risk transactions, which is like installing a "monitor" for the foreign exchange market, which can timely detect and curb illegal and irregular activities, ensure the convenience of cross-border trade and investment and financing, and better coordinate development and security.
In terms of regulating foreign exchange business of banks: In the past, banks faced problems such as unclear definition of responsibilities and unclear due diligence standards in foreign exchange business. The Provisions on Due Diligence Exemption for Bank Foreign Exchange Business (Trial) provide clear guidance and clarify the circumstances and conditions for due diligence exemption, which not only let banks know clearly how to be diligent and responsible when handling foreign exchange business, but also protect banks from unreasonable penalties after they have fulfilled their duties, which helps banks to accurately grasp the review responsibilities of foreign exchange business and ensure that banks can carry out foreign exchange business normally.
It seems like the regulation of banks, what impact will it have on virtual currency traders?
1. How virtual currencies are being cracked down on under increasingly stringent regulatory measures
The whole chain is under control: The State Administration of Foreign Exchange's crackdown on virtual currency transactions starts with the control of the whole chain. The whole chain refers to the entire process of virtual currency from purchase to transaction to withdrawal. When the State Administration of Foreign Exchange can fully grasp the flow of funds in the transaction chain and the parties involved, any abnormal or illegal behavior may become a target of crackdown. For example, in cross-border virtual currency transactions, if the source, destination, authenticity of the funds and other information can be fully tracked and supervised, any attempt to circumvent foreign exchange management regulations will face higher risks.
Banks discover and report relevant information: Virtual currency transactions are often accompanied by capital flows, especially cross-border capital flows. As intermediaries in capital flows, banks are responsible for monitoring large transactions and abnormal behaviors. When banks discover suspicious transactions, especially capital flows related to virtual currencies, they need to report to the State Administration of Foreign Exchange in a timely manner and warn customers of risks in accordance with relevant regulations. The importance of this link in combating virtual currency transactions is self-evident, because it is an important way for the State Administration of Foreign Exchange to obtain information.
SAFE considers that the conditions for crackdown are met: SAFE has the right to decide whether to crack down on certain virtual currency transactions based on its judgment. However, SAFE's crackdown standards are not fully public and are still somewhat vague. Generally, SAFE will consider multiple factors, including but not limited to the size of the transaction amount, the legality of the source of funds, and whether the transaction involves illegal purposes (such as evasion of foreign exchange, money laundering, etc.). Although there is a lack of clear standards, SAFE can crack down on violations more effectively in the context of increasingly transparent regulatory information.
2. Why does the State Administration of Foreign Exchange release regulatory documents and exemption regulations at the same time? What is the underlying logic?
With the advancement of informatization, SAFE has strengthened its monitoring of virtual currencies and other cross-border capital flows. The application of big data technology enables SAFE to more accurately identify and monitor suspicious behaviors in virtual currency transactions. This not only improves the efficiency of supervision, but also greatly reduces the existence of blind spots in supervision.
However, in order to avoid excessive impact on banking business due to regulatory changes, the State Administration of Foreign Exchange has also issued a special exemption clause. This is to ensure that banks can make a smooth transition when adjusting regulatory measures, thereby avoiding adverse effects on the stability of the financial market.
III. Definition of the nature of different trading behaviors under the new supervision
Legal actions:
For ordinary consumers, here is a reassurance: the purchase and trading of virtual currencies, as long as the source of funds is legal, basically will not involve serious legal risks. In addition, if the consumer's transaction complies with the regulations on the annual foreign exchange facilitation quota for individuals, basically there will be no serious legal risks.
For enterprises or institutions , as long as the source of funds is legal, the cross-border capital flow is real, and it complies with relevant foreign exchange management regulations, the State Administration of Foreign Exchange generally will not intervene.
High-risk behaviors:
Involving criminal activities: If virtual currency transactions are used for money laundering, terrorist financing, foreign exchange evasion and other criminal activities, the State Administration of Foreign Exchange has the right to impose penalties in accordance with the law. In this regard, virtual currency itself is not illegal, but its use and transaction background may make it a tool for criminal activities.
Illegal acts such as evading foreign exchange and purchasing foreign exchange by fraud: When virtual currency transactions involve crimes such as evading foreign exchange, purchasing foreign exchange by fraud, or illegal foreign exchange transactions, the State Administration of Foreign Exchange has sufficient legal basis to crack down on them. For example, if the source of funds is concealed through virtual currency platforms or foreign exchange is purchased illegally through underground banks, once discovered, the relevant individuals or institutions will face severe penalties.
Internal bank supervision issues: When implementing foreign exchange management, banks must promptly detect and report related suspicious transactions based on the early warning system. The bank’s internal management system, information reporting mechanism, and whether it actively cooperates with the regulatory authorities will directly affect the intensity of the SAFE’s crackdown on virtual currency transactions.
IV. Cases of penalties by the State Administration of Foreign Exchange
Case of Zhang Qun, Wu Rui and others illegally operating businesses and defrauding export tax rebates by issuing false VAT invoices (Source: Notice of the Supreme People's Procuratorate and the State Administration of Foreign Exchange on Printing and Distributing Typical Cases of Punishing Foreign Exchange-Related Crimes)
Keywords: crime of illegal business operation, crime of defrauding export tax rebates, crime of falsely issuing special VAT invoices, full-chain crackdown
Basic facts of the case: Zhang Qun, Zheng Hua and others controlled Bao Company and teamed up with Gu Jie of Le Company to inflate commodity prices and defraud export tax rebates of RMB 36.63 million. The goods were fictitious exports and treated as waste. At the same time, Wu Rui and Ma Jian used Shun Company to illegally exchange RMB for US dollars and transfer funds across borders, involving an amount of more than RMB 180 million and illegal income of more than RMB 180,000. In addition, Zhang Qun instructed Wang to issue 522 false VAT invoices for RMB 56.25 million, defrauding RMB 3.18 million in taxes.
Case Trial: In September 2021, the Wujin District People's Court of Changzhou City sentenced Zhang Mouqun to 14 years' imprisonment and a fine of RMB 28 million; Zheng Mouhua to 12 years' imprisonment and a fine of RMB 8 million; Wu Mourui to 5 years and 6 months' imprisonment and a fine of RMB 350,000; and Gong Mousen to 11 years' imprisonment for the crime of issuing false VAT invoices. In February 2022, the Changzhou Intermediate People's Court rejected the appeal and upheld the original verdict.
The case focused on clarifying the flow of funds and the amount of illegal foreign exchange transactions, and used evidence such as bank statements and chat records to accurately determine the amount of illegal operations. At the same time, it promoted the full chain to crack down on foreign exchange violations, strengthened cross-border fund monitoring, and prevented the breeding of black and gray industries.
V. Coordination and consensus among departments
Although the State Administration of Foreign Exchange has made some progress in regulating virtual currency transactions, the implementation and execution of relevant policies still takes time because it involves the coordination of functions of multiple departments. How to reach a consensus among departments, especially on regulatory standards and crackdown measures, still requires a gradual process. With the continuous development of financial regulatory technology, the supervision of virtual currency transactions will be more stringent and refined in the future.
VI. Conclusion
Although virtual currency transactions have brought many innovations and conveniences, they are also accompanied by certain legal risks. With the support of information construction and big data monitoring, the State Administration of Foreign Exchange is strengthening the control of virtual currency transactions. For ordinary consumers, as long as they comply with relevant regulations and keep the source of funds legal, their transactions usually do not face legal risks. However, for enterprises and institutions, especially those involving cross-border transactions and capital flows, they need to pay special attention to compliance.
For any illegal behavior, SAFE will impose penalties in accordance with the law to ensure the stability and order of the financial market. In the future, as consensus among all parties gradually forms, the supervision of virtual currencies will be more transparent and efficient.
This article only represents the personal views of the author and does not constitute legal advice or legal opinion on specific matters.
