THE LEGAL BALANCE BETWEEN THE RIGHT TO FINANCIAL FREEDOM AND THE POWER OF CRIMINAL PUNISHMENT: TAKING ILLEGAL FUNDRAISING AS AN EXAMPLE
Zhong Zhiyong
TABLE OF CONTENTS
I. INTRODUCTION
II. THE RIGHT TO FINANCIAL FREEDOM: THEORETICAL BASIS, RESTRICTIONS AND COUNTERMEASURES
A. Theoretical Basis
B. Restrictions
C. Countermeasures
III. THE ANALYSIS OF CONFLICTS BETWEEN THE RIGHT TO FINANCIAL FREEDOM AND THE POWER OF CRIMINAL PUNISHMENT
A. The Conflict between the Right to Free Borrowing and the Offense of Illegal Deposit-taking from the General Public
B. The Conflict between the Right to Private Placement and the Offense of Issuing Shares, Corporate or Enterprise Bonds without Government Approval
IV. USING THE POWER OF CRIMINAL PUNISHMENT TO RESTRICT THE RIGHT TO FINANCIAL FREEDOM: LEGITIMACY AND ITS LIMITATION
A. Legitimacy
B. Limitation
V. USING THE POWER OF CRIMINAL PUNISHMENT TO RESTRICT THE RIGHT TO FINANCIAL FREEDOM: LEGISLATIVE IMPROVEMENT AND JUDICIAL PRACTICE
A. Legislative Improvement
B. Judicial Practice
VI. CONCLUSION
This paper will take illegal fundraising as an example and focus on the relationship between the right to financial freedom and the power of criminal punishment. This right originates from ownership theory, financial freedom in economics, and freedom of contract in law. However, using the power of criminal punishment against fundraising is the biggest threat to financial freedom. The real legitimacy for restricting the right to financial freedom is to protect unspecified investors from infringement and to prevent social risk. Therefore, we argue qualified investors to be defined as specified investors for a legal person, while lineal descendants or collateral relatives within three generations, employer and enterprises in which somebody invests as the specified for a natural person. We also argue for the adoption of the offense of illegal fundraising and that borrowing from or issuing securities to unspecified investors of over 50 or specified investors of more than 200 by a legal person should constitute a criminal offense. Borrowing from the unspecified of 200 participants or more by a natural person should also constitute a criminal offense. But a natural person borrowing from the specified and a legal person borrowing from or issuing securities to the first and second types of specified investors are excluded. The relationship between civil rights and government power is a big issue in China and has not been solved completely yet. There are many lawful or unlawful fundraising cases every year but people do not know where the legal line is. If the right to financial freedom can be established, then using government power of criminal punishment against such rights may be its biggest threat. We will take illegal fundraising in this article as an example for discussing the relationship between civil rights and government power, more specifically, the relationship between the right to financial freedom and the power of criminal punishment.In 2006, China established the Joint Inter-Ministerial Meeting for Handling Illegal Fundraising, led by the China Banking Regulatory Commission (CBRC). Even though positive results have been achieved in fighting against illegal fundraising, the overall situation still remains grim. The East Coast and populous provinces in the Central and Western regions have numerous illegal fundraising cases and key fields involve high risks, such as quasi-finance, real estate, Internet finance, agricultural cooperative and wholesale and retail businesses. New modes or means of illegal fundraising appear incessantly. In 2018, the police initiated about ten thousand investigations for illegal fundraising, up 22 percent in comparison to the previous year. The number of illegal funds collected totaled about 300 billion yuan, which is an increase of 115 percent.The government argues that illegal fundraising has become a critical problem that creates conflict and destabilizes society because ordinary people’s interests are seriously damaged and the normal financial order is disrupted. Therefore, law enforcement agencies stepped up efforts to subsequently crack down on illegal fundraising. The Supreme People’s Procuratorate, in 2012, stated it would continue increasing efforts to crack down on illegal fundraising, while the attorney general advocated strict punishment for illegal fundraisers in 2019.However, scholars have questioned cases such as Sun Dawu’s illegal deposit-taking from the general public against the backdrop of financing difficulties of small and medium-sized enterprises (SMEs) and peasants. Can we establish the right to financial freedom? Is there any conflict between the right to financial freedom and the power of criminal punishment? If the answer is yes, how can we resolve it? We tried to answer these questions in this article.II. THE RIGHT TO FINANCIAL FREEDOM: THEORETICAL BASIS, RESTRICTIONS AND COUNTERMEASURESThe right to financial freedom means the right to obtain funds from others through measures not forbidden by law when a natural or legal person has a financing need. Such right can be divided into the right to free borrowing and the right to free lending by different parties, while by different financing manners, the right to free borrowing and lending and the right to issue securities freely in the name of non-public offering, the right to a private placement.Financial freedom, ownership theory and freedom of contract form the theoretical basis for the right to financial freedom.1. Financial Freedom. — Financial freedom originated from economic freedom. The theory, which resembles a spiral as it goes from one negation to another, was developed based on early financial freedom, beginning 300 years ago, up until the need for financial regulation in the 1930s. In the 21st Century, almost all countries strengthened their regulatory systems after the 2007 US sub-prime crisis, but they did not deny the necessity and fundamentality of financial freedom. Of course, the consensus is to reduce the frequency and damages of a financial crisis as far as possible while, at the same time, ensure financial freedom.China experienced an overheated economy several times, but a nationwide financial crisis has not occurred since the reform and the opening-up policy was adopted. One reason for this is that the government indirectly guarantees the banking system. Another reason is that the financial market is monopolistic and moderate competition has not been achieved. The reform set by the government aimed to establish a market economy but the three core elements which are land, capital, and labor force, have not been liberalized yet. China should also set free capital as one of the aims of the economic reform, which depends on recognizing financial freedom and treating this freedom as its components by theoretical and practical circles.2. Ownership Theory. — Ownership means that owners can enjoy exclusive rights such as the right to possess, use and seek profits from and dispose of their own objects by law. So, natural or legal persons can dispose of their funds, including lawful lending and borrowing from others. Wu Xiaoling, former Vice President of the People’s Bank of China (PBOC), pointed out in a speech on deregulating informal finance that the state needs to allow capital owners to use their funds freely out of respect for ownership.3. Freedom of Contract. — The doctrine of freedom of contract has two aspects: confirmation of the effect in which the lawful contract between parties is superior to the statutory non-mandatory norm and the respect of freedom in such matters as the conclusion of a contract, choice of content and form and determination of liability for a breach of contract. No entity or individual is allowed to illegally interfere with contractual rights concluded between parties in line with the law. Therefore, it should be lawful when two parties conclude a loan contract with free will or one party concludes a sales contract with another party for issuing securities by private placement.People can dispose of their objects based on ownership freely but must not frustrate public interest or others’ lawful interests. The disposal must satisfy requirements such as the protection of the environment and natural resources and maintenance of the ecological balance. Likewise, people can conclude a contract with free will, but some necessary restrictions are still needed to ensure fairness, equal value and compensation and good faith; coordinate conflicts of interests between different parties and conflicts between individual interests and social or national interests; protect the normal order of transactions and lawful interests of vulnerable parties; and oppose monopoly. In summary, the right to financial freedom should be clearly recognized in Chinese financial law, and proper measures should be used to restrict such rights through civil and commercial laws and administrative law.Although it is necessary to restrict the right to financial freedom, restrictions must be moderate and proper so as not to deny ‘the right to financial freedom’. The relationship between the fundamentality of financial freedom and the subsidiarity of restrictions must be properly handled. First, the infinite expansion of restrictions should be prevented because restrictions are only a method of correction and cannot replace or damage the mechanism of financial freedom in the market economy. This means that only public interest can justify restrictions and imposing too many restrictions on financial freedom runs contrary to the spirit of private law. Second, the method of restrictions ought to be limited, and only the law of the National People’s Congress and its Standing Committee should be allowed to restrict financial freedom, while restrictions should also be imposed on administrative enforcement and judicial practice. Public power has a tendency of unlimited expansion and easy abuse, so we ought to prevent others from intervening in financing contracts too deeply. The Chinese economy is in a period of transition and the government is responsible for cultivating market mechanisms, so there is a special meaning to give full play to the market mechanism and reduce all unnecessary restrictions.III. THE ANALYSIS OF CONFLICTS BETWEEN THE RIGHT TO FINANCIAL FREEDOM AND THE POWER OF CRIMINAL PUNISHMENTIllegal or disguised deposit-taking from the general public was prohibited in 1995 and the State Council defined illegal financial business operations in 1998 while the PBOC issued a notice in 1999 and defined illegal fundraising as operations in which any entity or natural person obtain funds without government approval in the name of issuing shares, bonds, lotteries, investment fund certificates or other documents of creditors’ rights and promises to repay with interests or give other returns. However, the above definition is still unclear and unreasonable, resulting in the expansion of the crackdown on fundraising and serious conflict with the right to free borrowing. Therefore, using the power of criminal punishment to crack down ‘illegal fundraising’ by the government constitutes the biggest threat to financial freedom.Illegal fundraising involves five offenses, among which fraudulent fundraising and fraudulent issuing of shares or bonds are frauds in essence. We will not discuss the two offenses because fraud is not allowed in any society with the rule of law. Illegal operations in securities, futures, insurance and payment and settlement without government approval constitute a crime. However, we will not discuss the offense of illegal operations either because these intermediary businesses involve large sums of money but not justified financing. Issuing shares, corporate or enterprise bonds without government approval requires the instrument to be shares or bonds, so most illegal fundraising cases are prosecuted in the name of illegal deposit-taking from the general public.A. The Conflict between the Right to Free Borrowing and the Offense of Illegal Deposit-taking from the General PublicThe state uses criminal penalty to punish illegal or disguised deposit-taking from the general public which disrupts financial order but the legislation does not define some key concepts such as ‘lawfulness’, ‘the general public’, ‘deposits’ and ‘deposit-taking’, resulting in a great expansion of the offense.1. Free Borrowing: Lawful or Unlawful. — Four conditions must be satisfied to prove guilty according to the Interpretation on Several Issues concerning the Specific Application of Law in the Trial of Criminal Cases of Illegal Fundraising promulgated by the Supreme People’s Court in 2010, one of which is ‘not approved by the relevant department by law or taking funds in the form of legal business’. Therefore, ‘no government approval’ is one of the conditions to prove the offense of illegal deposit-taking.However, are all fundraisings without government approval ‘unlawful’? Not always. Can a natural person lawfully borrow from others or legal persons for production or living? Yes, this belongs to the scope of the right to free borrowing. Can a legal person lawfully borrow from natural or legal persons? The answer is yes in principle because a legal person exercises the right to free borrowing, while a natural person or other legal entity exercise their rights to free lending or investment when they are willing to do so. Informal borrowing should be lawful if the intentions of two parties are true and there is no fraud or duress.Borrowing from ‘many’ is considered fundraising. Can a natural or legal person lawfully borrow from ‘many’ without any restriction? Probably no. Borrowing between natural persons is mainly based on personal trust and the number of participants is unlikely to be very large. However, such borrowing will still cause some social problems if they go beyond a certain scope. A legal person needs a lot of money and it is hard to avoid creating a problem if such entity borrows from many. So it is necessary to impose proper restrictions.Borrowing between natural persons is lawful and can be done without approval. It is unlikely for any administrative agency to take affirmative action even if it goes beyond a certain scope. A natural person can lawfully borrow from a legal person without government approval and such borrowing will not cause a social problem because specific relationship including employment normally exists in this situation.On the contrary, it is unlawful if a legal person grants loans to natural persons except for financial institutions. The situation becomes complex if a legal person raises money from natural persons. It is lawful for a legal person to borrow from specified investors, such as internal staff, without government approval for its own manufacturing or business operation but unlawful to borrow from natural persons. However, private placement of securities can be done without government approval.Borrowing between legal persons is lawful and can be done without government approval, but the PBOC prohibited it. However, this is unreasonable because borrowing money for an indefinite period from many occasionally does not constitute illegal deposit-taking and an enterprise should have the right to use its funds freely; granting loans occasionally does not necessarily imply doing the business of loan-granting. In practice, borrowing between subsidiaries under the same parent company is not illegal deposit-taking because there is no evidence to prove that it is borrowing from others or allocation of funds.If the borrowing does not need to be approved by the government, the offense of illegal deposit-taking can still be proven when the fundraiser ‘takes funds under the disguise of lawful business activities’. The condition reveals that whichever lawful forms are taken to circumvent the law will not affect the identification of illegal fundraising. This indicates the harshness of the law. In fact, the condition only shows that we should emphasize the substance of the law over form because many fundraisings are lawful superficially but will become illegal when they go beyond a certain scope. Therefore, we should be good at uncovering the disguise but only in a concrete case can we determine whether the fundraising is lawful or not.2. Lenders: Specified or Unspecified. — What is ‘the general public’? The State Council explained it as ‘unspecified investors’ but did not give a further explanation; while the Supreme People’s Court emphasized that the condition must be satisfied to prove guilty but did not provide any clarification either except that confirmation of entity and individual should be included. When the fundraiser is fully aware that their relatives and friends or internal staff accept funds from unspecified investors and takes no action; or the fundraiser recruits external people and treats them as internal staff, the above people from whom the fundraiser takes funds should be regarded as ‘the general public’.However, the above administrative or judicial interpretations cannot provide much guidance to the courts. Parties in some real cases advocated that the extent of familiarity ought to be a standard for judging specified or unspecified investors but courts did not accept the argument. In practice, the undefined scope is the main reason for confirming unspecified investors and there are many specific instances of this such as fundraising that is unrestricted beforehand, not controlled in the process and anyone who wants to participate will be accepted, or most participants are unknown to the fundraiser.The so-called taking of funds from unspecified investors means that illegal fundraising has no clear intended target, wherever funds come from will not go against the fundraiser’s will while it does not depend on the number of participants. The argument has reference value but only in a concrete case afterward can we determine whether the fundraising targets a specific group of people and cannot provide a distinct legal line for distinguishing between specified investors and unspecified investors beforehand. One prosecutor argues that two types of investors should be excluded from the scope of ‘the unspecified’: first, the ‘investor who has sufficient time to get and already know necessary fundraising information’; second, the ‘investor who has the ability to identify and assume risk’. This idea tries to exclude ‘specified investors’, but the scope of the exclusion is limited and exclusion of the first type is unreasonable because investors may not be able to protect themselves even though they have the information needed. Some scholars argue that China should borrow private placement rules from the US, while the essence of US law is to define ‘specified investors’, otherwise unspecified investors.An unspecified investor is first a concept of quantity. However, how many constitute free borrowing? How many constitute illegal deposit-taking? How many constitute a crime? These questions have not been resolved yet. Actually, the concept of specified or unspecified objects is relative. For example, do all people above 18 years old from Xiangying County of Hunan Province belong to the specified or unspecified? At first sight, they belong to the specified, but there are too many people and they belong to the unspecified in essence. Therefore, what ‘the general public’ has not been resolved.3. Borrowing: Private or Public. — Making fundraising information known to the general public through channels such as media, leaflets, promotion meetings, and mobile phone text messages is listed as one condition that must be satisfied to prove guilty of illegal fundraising, including that the information has been spread to the general public and the fundraiser is aware but has taken no action. The latter closes a loophole of the interpretation but produces a problem of whether ‘publicity’ is needed or not. Traditionally, private placement targets specified investors and cannot make promotions publicly, but the US has already canceled the ban of public promotion by private placement. In fact, making the fundraising known to the general public is only a supplementary means to determine whether it is public but not a necessary condition. If the fundraising is made public, it will certainly have publicity. However, it sometimes has publicity even when not made public. For instance, the spread of fundraising information from person to person did not involve any public channel but courts determined that it belonged to make fundraising information known to the general public.However, making fundraising information known to the general public through the above means is only a method the fundraiser chooses to target unspecified investors, which is difficult for it to become an independent condition. If there is a means to spread the fundraising information to society, judges can identify that the fundraiser has an intention to take funds from unspecified investors. If most participants are people other than relatives and friends, this implies that the fundraising is expanded from the circle of acquaintances to the general public. Judges can also identify this as taking funds from unspecified investors. Therefore, identifying whether they are specified or unspecified investors have targeted matters most.Zhejiang took the initiative to distinguish between specified investors and unspecified investors and decriminalized fundraising from specified investors in 2008. Zhejiang requires fundraising to be treated as a private lending dispute if it is targeted relatively specific persons and mainly used for its own lawful production but the fundraiser fails to repay the capital and interests because of operating loss or temporary liquidity problem. Two years later, the Supreme People’s Court made a similar interpretation and requires fundraising not be regarded as illegal or disguised deposit-taking if it is not made public and only takes funds from specified investors among relatives and friends or inside an entity. However, the Supreme People’s Court does not impose any restrictions on relatives and friends, which is too absolute because of no legal definition, while Zhejiang uses ‘a certain range’ to restrict them but has no further explanation.4. Free Borrowing or Taking Deposits. — Promise to repay the capital and interests in the form of currency, equities, real objects or other returns within a certain time limit is also listed as one condition that must be satisfied to prove guilty of illegal fundraising. However, bonds or borrowing is needed to repay the capital and interests but this is not enough to distinguish between deposits and bonds or borrowing. Only lawful financial institutions can take deposits, any others are considered illegal. Illegal deposit-taking means any activity that funds are taken from unspecified investors without government approval, certificates are issued and promises are made to repay the capital and interests. This definition has three key points which are no government approval, unspecified investors and the capital and interest repayment, but it overlooks another more important concept, that is, deposit-taking.Deposit-taking cannot be regarded as any activity where one takes any fund, so the concept needs to be defined. Taking deposits is a specified kind of activity if money received is lent to others or any other activity is financed wholly, or to a material extent, out of the capital of or interests on money received. The above UK definition emphasizes deposit taking’s link with other operations such as loan granting. So, fundraising should belong to free borrowing, not deposit-taking if a natural or legal person takes funds occasionally for their own use.The Law on Commercial Banks passed in May 1995 and the offense of illegal deposit-taking from the general public was established by a decision in June the same year. The legislative history indicates that the offense comes from the above act and cracks down on illegal deposit-taking without government approval, not all fundraising. A commercial bank is an enterprise that engages in currency operations and taking deposits is intended to grant loans or for other operations; so ‘deposits’ should link with loans.In fact, one scholar pointed out very early that money accepted by the fundraiser ought to be used to grant loans; otherwise, it is not an offense. However, the majority denies this and results in treating some rightful financing for its own manufacturing or business operation as a crime, for instance, Sun Dawu Case. ‘Deposits from the general public’ and ‘social funds’ are two different concepts and illegal deposit-taking should be decriminalized or abolished.The good news is that the High People’s Court of Zhejiang decriminalized fundraising for manufacturing or business operation and this is the first attempt made by a local judicial authority in 2008 to admit the legality of informal financing for relaxing financing difficulties of private enterprises under the background of global financial crisis and the essence is to admit the right to free borrowing. In contrast, the Supreme People’s Court is more conservative because exemption from a criminal penalty is only limited to cases in which the money can be repaid timely.Disguised deposit-taking has four key points, namely, no government approval, unspecified investors, not in the name of deposits, and promise to undertake the same duty as deposit-taking. The last point can be understood as capital and interest repayment. What other names can be used except deposits in disguised deposit-taking? Fund mutual association, investment, share selling, and so on. Thus, disguised deposit-taking can cover various forms of fundraising in practice, including four categories which are equity, creditors’ rights, merchandise marketing, manufacturing or business operation, and 12 subcategories. However, is it illegal automatically if someone engages in the above activities? The answer is probably no. For example, issuing shares to specified investors of less than 200 is lawful and does not need government approval. It belongs to the categories that issue securities freely but it also needs to define specified or unspecified investors.5. Prosecution Criteria: Right or Wrong. — The fundraiser should be prosecuted if one of these five criteria is established: first, any natural person or legal entity who takes deposits over 200 thousand or one million yuan; second, more than 30 or 150 households; third, direct economic losses over 100 or 500 thousand yuan; fourth, a bad impact on society; fifth, other serious disruption of financial order.However, the amount criterion is relatively low and probably has no legitimacy while the number criterion does not exclude specified investors clearly. Moreover, the loss criterion is unreasonable because participants bear losses by themselves. The last two criteria are flexible and all-inclusive and can refer to various forms of fundraising but it is prone to abuse of discretion and runs contrary to the modesty-and-restraint principle of criminal law and principle of no penalty without a law. In addition, the prosecution criterion for a natural person is different from a legal entity, which is also unreasonable.B. The Conflict between the Right to Private Placement and the Offense of Issuing Shares, Corporate or Enterprise Bonds without Government ApprovalIssuing shares, corporate or enterprise bonds without government approval constitutes a crime, but this is not in line with the Securities Law of 2005 because issuing securities to specified investors of less than 200 is lawful and does not need government approval. The fundraiser should be prosecuted if one of these four criteria is satisfied: first, the issuance is more than 500 thousand yuan; second, over 30 investors buy the shares; third, the fundraiser does not liquidate or timely repay; and fourth, other serious consequences or severe circumstances. The amount criterion is probably unreasonable and the number criterion is relatively low and runs contrary to the Securities Law of 2005. The third criterion is also unreasonable because investors should bear losses even if it is illegal, which belongs to the necessary price for enjoying investment freedom. The fourth criterion is all-inclusive and against the rule of law.The Supreme People’s Court prescribes two circumstances that constitute a crime, one of which is disguised issuing of shares to unspecified investors in the manner such as equity transfer without government approval. No definition of unspecified investors is the biggest problem, resulting in the expansion of crackdown on fundraising. The second circumstance is issuing of shares to specified investors of over 200, but the fundraising is lawful when participants are less than 200, criminal when over 200 and something is missing which should be handled by the administrative law. Two hundred ought to be the line between lawful and unlawful, not crime and non-crime. Only when the administrative law cannot deal with the situation properly can the criminal law be used as the last resort. The Supreme People’s Court did not adopt the amount criterion, the criterion of inability to liquidate and all-inclusive article. This can be described as progress.
IV. USING THE POWER OF CRIMINAL PUNISHMENT TO RESTRICT THE RIGHT TO FINANCIAL FREEDOM: LEGITIMACY AND ITS LIMITATIONThe right to financial freedom is not absolute and will cause some social problems if it goes beyond a certain scope. So it is necessary to use criminal punishment to restrict such rights. The power of criminal punishment has a natural tendency for abuse and it is necessary to define its border too.Illegal deposit-taking comes from the Law on Commercial Banks, and deposits link with loans, so the fundraiser grants loans after deposit-taking should constitute the offense of establishing a financial institution without government approval instead. Of course, this requires competent authorities to emphasize substance over form, or for a paragraph to be added to stipulate that ‘taking deposits and granting loans without government approval should be treated as the offense of establishing a financial institution illegally’. In addition, this requires that a proper name exists and can be used when cracking down on various illegal fundraising. It is regrettable that other offenses can only be supplementary except the offense of fraudulent fundraising in current criminal law. As such, the offense of illegal deposit-taking from the general public has been used most often.Is it legitimate to use illegal deposit-taking to crack down on illegal fundraising? This is not in conformity with the logic of legal interpretation, wrongfully expands the scope of its application, unhelpful to establish an effective regulatory system of illegal fundraising and does not leave any room for legalizing informal finance. Actually, this crime targets illegal deposit-taking which disrupts financial order. What is ‘financial order’? It is an order that borrowed money will be paid back. Compared with state-owned banks, the rate of bad debts of informal finance is low and its operation is efficient. Such behavior cannot be said to ‘disrupt financial order’. Obviously, financial order cannot be understood in this way, it should be ‘financial order of regulation’ because the crime is a concrete offense under crimes against financial order of regulation. Disruption of such order mainly embodies these four points:First, illegal deposit-taking will cause a lot of money to break away from the national channel of finance. The so-called national channel means the system of state-owned banks through which funds are transferred to state-owned enterprises. This is a continuous policy that the state controls banking directly so as to centralize limited funds for industrialization before the reform and the opening-up policy was adopted. Such a policy establishes a regulatory order that a private person is not allowed to compete for funds with the state while ‘illegal deposit-taking’ challenges such an order. However, the government ought not to compete with the people for profits and give priority to protect the right to financial freedom that a natural or legal person should enjoy.Second, illegal deposit-taking will cause a large number of social funds to be out of control, which is unhelpful for the state to conduct macroeconomic regulation and control. In fact, macro-control should be transformed from direct to indirect and the government ought to learn how to complete such a task when private parties control a lot of funds. The government should also gradually abandon the practice of directly or indirectly requiring state-owned banks to grant loans for stimulating the economy.Third, illegal deposit-taking will create a problem of unfair competition and break the uniformity in interest rates. Disruption of financial order will be identified if the interest rate is higher than the official rate and there is no exception whether the money comes from relatives, friends, colleagues, neighbors or contractors but borrowing without promising to repay the capital and interests will not be identified as deposit-taking. However, informal lending can compete with the existing financial institutions for funds and will not constitute unfair competition while interest rates should be liberalized. Such behavior is far from breaking the uniformity in the interest rate. Moreover, the PBOC canceled the interest cap of deposits in 2015, which means that interest rate regulation has basically gone.Finally, fundraisers compete with banks for funds from the general public and seriously damages banks’ lifeline of deposit-taking. This indicates that the legitimacy of the offense of illegal fundraising is to protect banks’ monopoly for deposits, which raises serious doubts. Although investment freedom has not been realized yet, lawful channels include lending to others, buying shares or bonds, and so on. Obviously, we cannot say that these channels are all competing with banks for funds.Disruption of financial order not only infringes state ownership but also shows contempt for competent authorities. It is inevitable for the state to use the powerful weapon of last resort, the criminal law, to ensure financial order to protect state ownership and maintain the authority of national regulation. Thus, financial order is easily becoming another name for protecting national interests when the priority is given to the state. Informal fundraising will be cracked down on but it cannot prove the legitimacy of using the power of criminal punishment to restrict the right to financial freedom.One scholar argues that the order cannot be criminal law interest with certainty. Another scholar argues against the order of financial supervision and for the security of public fund and advises the use of the offense of illegal taking public funds to replace illegal deposit-taking from the general public. Another scholar points out that even though the offense of disrupting the order of financial supervision mainly protects social interest, it also protects individual interest. The offense belongs to economic criminal law affiliated to the legal system, and institutional interest is the direct interest while personal interest is the final interest. The conduct that violated the legal order of allocating resources in the market cannot be punished criminally with certainty, property interest damaged or risk to be damaged is also required, which is a dividing line for a criminal offense and an administrative violation. A new concept of law interest should be set up for financial criminal law, with an emphasis on protecting investors’ interests. Financial criminal law in China should turn from ‘law of order’ to ‘law of interest under order’, and establish financial transaction interest as the key part of financial criminal law, and replace ‘financial order’ with financial credit interest simultaneously. The realization of the financial criminal law of ‘responsive’ type depends on the goal of protecting individual interest that has been re-established from maintaining order. Protecting ‘investor’s interest’, ‘property interest’ or ‘individual interest’, not maintaining ‘financial order’ or ‘order of financial supervision’ is emphasized in the above arguments.What is the legitimacy of using the power of criminal punishment to restrict the right to financial freedom? The aim of criminal punishment is to prevent financial crisis, but such a crisis triggered by each illegal fundraising is in fact confined to local payment risk and has no contagious effect normally, so the impact is limited and it is not the main reason to use the power. Fundraising is harmful mainly because fundraisers control huge sums of money while investors have no transparent and unobstructed channels of information when making investment decisions and have no way to know the whereabouts or purpose of the funds. Therefore, criminal regulation of fundraising is to prevent risk, promote information disclosure and foster market credit. However, risk prevention and promotion of information disclosure can only become the ends, not the legitimate reason for using the power.Illegal deposit-taking will bring a huge risk to many ‘depositors’, cause serious damage to the property of the general public and even trigger social unrest. The aim of cracking down on fundraising is to prevent investors from transferring the conflict to the government when they are unable to get their money back. This can have an impact on the political order. In fact, the government is most afraid of social instability triggered by illegal fundraising. For instance, many lenders may petition several times and ring-fence the government, disrupt office order and post letters on the Internet. Most victims are laid-off workers and retirees and their life will be threatened if they are cheated and suffer heavy losses. This can easily trigger mass disturbance, so the government takes harsh measures to crack down on such acts. Therefore, the legitimacy of using the power of criminal punishment to restrict the right to financial freedom seems to prevent social risk, while maintaining financial order is only a superficial reason. Furthermore, financial order is an order that lacks freedom and fairness in China, maintaining such an order by administrative law and scholars question criminal law.Zhejiang decriminalizes the fundraising used for manufacturing or business operation and aimed at unspecified investors in principle but not the fundraising that has serious consequences or extremely affects social stability. The legitimacy of using the power of criminal punishment is based on the impact on social stability. However, Zhejiang does not provide a detailed explanation for ‘serious consequences or serious influence on social stability’. Of course, only a sufficient number of people can seriously affect social stability, so the number criterion, that is, fundraising involving a certain number of people should be illegal or even criminal, is reasonable.Is avoiding social instability the primary legitimate reason for restricting the right to financial freedom? Probably not. Depositors ought not to be treated as victims in the offense of illegal deposit-taking because the crime only infringes on the financial order of regulation, not on depositors’ property rights according to one scholar. This view is one-sided and the above scholar failed to find the essence through the phenomena. The government should serve the people and protect investors from infringement. Therefore, it is too absolute not to protect investors’ property rights because fundraising will not produce the so-called social risk if investors do not suffer property losses.Is it necessary to protect all investors’ property rights through administrative law and criminal law? The answer is no. Specified investors are able to protect themselves, so civil and commercial laws are enough. Unspecified investors have no such ability, thus administrative law or even criminal law is needed to protect their interests. An absolute ban on financial freedom is inappropriate because this runs contrary to the essence of the market economy and infringes upon the financial freedom a natural or legal person enjoys. An absolute laissez-faire approach is not right either because unspecified investors are unable to protect themselves. The government needs to balance freedom and intervention and distinguishes between specified and unspecified investors to promote informal financing. In summary, the legitimate reason for restricting financial freedom is to protect unspecified investors from infringement and to prevent social risk.Is the amount criterion that fundraising above a certain amount will become illegal or even criminal reasonable? If the fundraising involves a lot of money but only a few people, it will hardly have an impact on social stability. The people involved are likely to belong to the rich who are able to protect themselves, so it is unnecessary to use administrative law and criminal law to protect their interests. If the fundraising only involves one household while the amount is above 200 thousand or one million yuan, the person or entity should be prosecuted. This is obviously unreasonable. Therefore, the amount of criterion is unreasonable.Is the loss criterion that losses over a certain amount should be illegal or even criminal reasonable? Participants ought to bear fundraising losses. That is right; otherwise, the expansive application of illegal deposit-taking will play down the risk awareness that investors should have. Unspecified investors must also have risk awareness even if they need the protection provided by the administrative law and criminal law. This is one of the prices that investors must pay when enjoying investment freedom. The government ought to provide proper protection through the definition of specified investors and adoption of the number criterion but not eliminate all risks lest that the law becomes too harsh. Generally speaking, a successful fundraiser will not be prosecuted so long as the fundraising has no serious consequences; a failed fundraiser will be prosecuted if many lending disputes appear and have an impact on social stability. This is typically a philosophy of ‘winner hero, loser bandit’. Illegal or disguised deposit-taking can be exempted from criminal liability if the fundraising is mainly used for normal manufacturing or business operation and the funds raised can be repaid promptly. No timely repayment or refund is listed as a prosecution criterion for the offense of issuing shares without government approval. In practice, local government, to some extent, supports the fundraising for SMEs but follows such logic that fundraising without a problem is informal lending and with a problem, illegal deposit-taking. Of course, this is unreasonable because only success is allowed, so the loss criterion is unreasonable.Criminal justice always takes an active role in China because fundraising targeted the general public involves huge social risk. However, we can see that the power of criminal punishment restricts the right to financial freedom too much from the above analysis. As an accompanying phenomenon in economic development, the space of financial crime will be compressed when economic policy is highly efficient and reasonable. Why is illegal fundraising escalating? Why can this not be effectively contained even though the government has stepped up efforts to crack down on it? Does economic policy go wrong? In fact, the pace of market-oriented reform in other sectors is relatively fast but the financial sector is slow, which is the root of the problem. Formal financing is inclined to support state-owned enterprises and overlooks the need for private sector during the period of transition from a planned economy to the market economy, which is the institutional environment. Financial freedom has not been recognized while administrative law and criminal law intervene in financial activities too deeply. China needs to adjust its financial policy and recognize the right to financial freedom.China criminalizes some disorderly economic behavior in a hurry without knowing its rules and without using civil and commercial laws and administrative law. This brings criminal penalties into economic areas improperly. Chinese rulers adopted a policy of ‘Confucianism on the table, legalism under the table’ historically and most laws in the past were criminal laws. Therefore, harsh punishment exists in Chinese tradition and ordinary people unavoidably have the mentality of cracking down on crimes severely, which constantly reminds us that rational and scientific attitude should be adopted for criminal law. Problems from fundraising ought to be first solved by civil and commercial laws on the basis of recognizing and protecting the right to financial freedom. Restrictive or prohibitive norms of administrative law can be used if the problems still exist. The power of criminal punishment should only be used as a last resort.Freedom and order should be balanced and principles of fairness, tolerance, humanity and effectiveness insisted when using the power of criminal punishment. Criminal punishment should conform to the following criteria: the seriousness of the act towards society, irreplaceability (unavoidability), operability and efficiency. The real purpose of criminal law is to safeguard and expand freedom, so criminal law will not provide adequate protection of rights or intervene in social life too deeply when the intervention is wrong which results in restricting activities of social members or even depriving them of initiative and creativity or hindering social development. Criminal law ought to be used cautiously because wrongdoing and crimes in the financial sphere have not been known fully and because the Chinese economy especially finance has not transformed completely.In summary, the government should recognize the right to financial freedom and use civil and commercial laws before resorting to administrative law and be very wary of using the criminal law as the last option when facing fundraising problems. This is the limitation of the power of criminal punishment.V. USING THE POWER OF CRIMINAL PUNISHMENT TO RESTRICT THE RIGHT TO FINANCIAL FREEDOM: LEGISLATIVE IMPROVEMENT AND JUDICIAL PRACTICEThe use of the power of criminal punishment to restrict the right to financial freedom must be legitimate and confined within its borders. This requires us to improve relevant legislation and exercise restraint during administrative enforcement and judicial practice.
A. Legislative Improvement
Illegal deposit-taking does not involve ‘fundraising’ literally but serves as the main offense against the right to financial freedom, resulting in a problem that the name does not agree with the essence. One scholar argues for ‘dredging’ instead of ‘blocking’ reasonable fundraising, treating it as direct financing and using ‘the offense of issuing securities publicly without government approval’ instead of adopting an expansive definition of securities. However, judicial personnel of high quality is needed but judges in China have not reached the standard yet.Losses suffered should be regarded as investment risk if the fundraiser made full disclosure of information and issued a risk warning, and the fundraising treated as a crime if not and if it would inevitably collapse because of the inability to repay according to concrete circumstances at the time of accepting the funds. However, informal financing mainly depends on personal trust rather than on information disclosure. Regulating information disclosure of issuing securities in public offering faces many difficulties and many costs while regulating free lending in a certain scope and private placement is basically non-operable and unnecessary. Moreover, fundraising without full disclosure of information and risk warning will probably constitute civil fraud and administrative violations. Finally, dependence on judicial personnel to judge whether the fundraising would inevitably ‘collapse’ after the event cannot provide a definite legal line of the lawful and unlawful, crime and non-crime beforehand for participants.The offense ought to be split into two, the offense of illegal fundraising established as raising money from the general public directly in violation of state financing regulation, and the original offense of illegal deposit-taking defined as accepting funds directly or disguisedly for currency operations including loan-granting. However, illegal deposit-taking and loan-granting constitute the offense of establishing financial institutions illegally while raising money from the general public, that is, the public offering will probably constitute the offense of issuing shares without government approval. If financing vouchers have the nature of securities, even though not in the name of shares, the offense of issuing shares illegally should also be identified.The following constitutes public offering: issuing securities to unspecified investors, to specified investors of over 200 together, and any issuing stipulated by other laws and regulations. Non-public offering, on the other hand, is not allowed to use an advertisement, public solicitation or disguised public offering. This definition is expansive because the latter two are included. However, ‘specified investors’ are not defined and other laws and regulations have not stipulated any form of public offering either.Some countries or regions judge public or private offerings by defining specified investors. Issuing securities to specified investors constitutes a non-public offering or private placement. The difference between specified investors and ordinary investors lie in that the former has the ability to protect themselves and does not need the protection provided by the securities law. So, specified investors belong to qualified investors. The so-called qualified investors mean someone who conforms to one of the following conditions: someone who is an institutional investor (sophistication); someone who correlates with the issuer (relationship); or someone whose income or assets reach a certain size and who can identify, judge and assume corresponding risk (wealth). Except that professional investor who has knowledge of finance and economics and investment experience is not allowed to exceed 35, other specified investors have no quantity limit in the US. Moreover, the standard for distinguishing between ‘public offering’ and ‘non-public offering’ is whether a ‘substantial relationship’ has already existed, which is clarified by a series of legal precedents and interpretations of the US Securities and Exchange Commission. Except for that enterprise over a certain size and industrial investment fund and rich person together are not allowed to exceed 35, other specified investors have no quantity limit in the Taiwan region as well.The method of defining public offering by the above country or region is obviously different from China, which only defines private placement and not a public offering. The key point is to define specified investors, clarify the relevant standard and not use quantity limit in principle. China defines public offering, uses quantity limit in non-public offering and treats issuing securities to more than 200 investors as a public offering. By contrast, the definition is stricter and has no exceptions. Although the number standard is much higher, nobody is allowed to be excluded.The legislation of the above country or region is more reasonable, so we argue that only private placement should be defined when amending the Securities Law in the future. We also argue for specified investors to be defined as qualified investors, including three types: institutional investor; someone who correlates with the issuer (such as the controlling shareholder, the actual controller, top managers of the issuer and top managers of the controlling shareholder and the actual controller); and somebody who can identify, judge and assume the corresponding risk. The third type should conform to one of the following conditions: any natural or legal person who subscribes no less than one million yuan in one issue; any natural person that personal or family financial assets together are over one million yuan at the time of subscription and proof can be provided, or any natural person that his or her personal or family income per year is more than 200 or 300 thousand yuan in the last three years and proof can be provided. Moreover, if the issuer has contact with the subscriber beforehand and the existing contact can ensure that the subscriber qualifies for buying securities from the private offering, such issuing will not constitute ‘public solicitation’ or ‘disguised public offering’, otherwise, it will.We argue that issuing securities to investors other than the above three types: unspecified investors are unlawful; more than 50 is a crime and that issuing securities to specified investors of 50 or more is unlawful; over 200 is a crime but the first and second types of investors are excluded. Thus, the balance is kept between the principle and flexibility, between investor protection and facilitating enterprise financing, and the needs of financial freedom can be better satisfied while substantial justice can be realized. We also argue for ‘the offense of issuing shares, corporate or enterprise bonds without government approval’ to be abolished and ‘the offense of illegal fundraising’ should be established. ‘The offense of issuing securities illegally’ should not be established because issuing securities is a form of fundraising; it is unnecessary to distinguish between the two in criminal punishment and one offense can be reduced.A natural person enjoys the right to free borrowing but it is necessary for the government to use the administrative law and criminal law to intervene if there are so many participants which may cause the fundraising to be a risk to social stability. Borrowing between relatives and friends has been decriminalized because it belongs to borrowing among the specified and can be done freely. The specified also includes employer and enterprise in which a natural person invests, and borrowing between them can be done without any limit.Is borrowing from relatives and friends absolutely free? The answer is no. Although borrowing from relatives and friends ought not to be restricted in principle, the problem is that current law does not define such a non-legal concept. The number of relatives and friends is huge and not fixed, so they belong to the unspecified. This argument is reasonable partially but it is obviously improper to classify all relatives and friends as the unspecified. Some courts did not agree to exclude borrowing from close relatives because the fundraiser did not restrict intended target while other courts agreed to exclude relatives or close relatives but consistent judgments have not been found in this matter. Actually, distant relatives probably belong to the unspecified but close relatives do not. Moreover, relatives can be defined by legal concepts such as close relative or degree of kinship.However, researchers disagree greatly with one another over how to define ‘friends’. One researcher argued that no objective standard can be used to define friends. Another researcher tried various theories but questioned by others. Some courts argued that classmates and friends have no legal definition and do not belong to the specified and those funds from friends and colleagues should not be excluded. We argue that the quantity limit should be used because it is almost impossible for the law to define friends while borrowing from lineal descendants or collateral relatives within three generations, employer and enterprise in which natural person invests have no restriction but beyond this, quantity limit too. We also argue that a natural person borrowing from the unspecified of over 50 persons should be unlawful; more than 200 persons should be a crime.A legal person also enjoys the right to free borrowing and can borrow from a natural or legal person without government approval but necessary restrictions should be imposed. Internal fundraising has been decriminalized because internal staff belongs to specified investors, borrowing from them will do little harm to society and it is unnecessary to use the power of criminal punishment to intervene. Who else can a legal person borrow from? Institutional investor and the affiliated person who associates with the borrower such as controlling shareholder, actual controller, top managers of the borrower and top managers of controlling shareholder, actual controller. We argue that the legal person borrowing from specified investors of over 50 should be unlawful, more than 200 a crime, but institutional investor and the affiliated person should be excluded while borrowing from unspecified investors should be illegal, and from over 50 a crime.In summary, we argue for the concept of illegal fundraising, the above definition of the specified and the following provisions of criminal law to be adopted. Any fundraising which conforms to one of the following conditions should be a crime with a jail sentence of fewer than three years or criminal detention, and/or fine for an amount between 20 to 200 thousand yuan: first, borrowing from or issuing securities to unspecified investors of over 50 by a legal person or borrowing from the unspecified of more than 200 people by a natural person; second, borrowing from or issuing securities to specified investors of 200 or more by a legal person but the first and second types of specified investors excluded.Specified investors and the first and second types of specified investors for a legal person will be determined by the securities law while the specified for a natural person refer to lineal descendants or collateral relatives within three generations, employer and enterprise in which this person invests.The Supreme People’s Court set up the China Judgments Online in 2014 and required courts at all levels to publish judgments on it. The author used the search term ‘illegal deposit-taking from the general public’ for criminal cases on December 24, 2017, and got the following results: 3,059 cases in 2017, 3,013 in 2016, 1,313 in 2015 and 1,327 in 2014. This website collects the most complete cases, but only very few cases before 2014 were published on it, and no cases before 2010. The Supreme People’s Court issued the interpretation in 2010, so cases before or after 2010 are very important because cases before 2010 reflect the problems in judicial practice, while cases after 2010 reflect how to apply the interpretation. We finally decided to collect cases before the end of June 2014 and used the database, the law database of Peking University.At the end of June 2014, the law database collected 781 judgments, including 16 classic cases, 572 selected cases and 26 ordinary cases. In fact, there are only 614 cases except for the same case with several documents, the decision of withdrawal or remand for retrial, civil suit collateral to a criminal proceeding, among which three cases were acquitted, others were found guilty. If arguments in this article, especially that fundraising involving less than 50 participants should not be criminalized, were adopted, 240 cases would be acquitted (39 percent), defendants of 259 cases would be found guilty of illegal fundraising and 71 guilties of establishing financial institutions without government approval. There were 30 cases that we could not decide whether they should be classified as crimes or not. Some cases among the 259 may not constitute a crime but we could not determine how many because of lack of facts to distinguish between specified and unspecified investors. Likewise, some cases were likely to constitute fraudulent fundraising but it was easy for prosecutors to prove when the offense of illegal deposit-taking was chosen, so relevant facts might not have been explored fully.Only three cases were acquitted. In one case the court found that only a few people were targeted, and they had a relatively special relationship with the fundraiser and the money was used for the business operation of the company. In another case, the village committee gathered money from 438 male villagers of over 23 years old; the court determined that they belonged to the specified. In the third case, 13 lenders participated: five were the staff of the project department or relatives and eight were participants introduced by the subordinates or friends. There was not enough evidence to prove that the defendant directed people around him to take deposits.Defendants of the 240 cases were found guilty but they would belong to informal lending or constitute administrative violation at most if arguments in this article were adopted. We only discussed whether fundraising is a criminal act or not here because more concrete facts are needed to distinguish between informal lending and administrative violation in many cases. Defendants of two cases among 16 classic cases ought not to be guilty. In one case, the defendant was found guilty because he took money from 41 villagers for his business and repayment of debt. In another case, the fundraiser took 30 thousand yuan from nine villagers. Whatever methods the defendant used, how many participated, how much the defendant raised will have no impact on whether it constituted a crime or not, the court argued. This obviously belongs to the logic of severe punishment. The good news is that only over 200 thousand yuan or 30 households or 100 thousand yuan of losses will be prosecuted for a natural person who raises money from the general public illegally after 2010.Defendants of 228 cases among the 572 selected cases ought not to be guilty. For example, a fundraiser borrowed money from four persons for expanding production, and another fundraiser targeted the general public and took funds from 17 persons, but they were all found guilty. A deputy director made propaganda for a foundation publicly and was found guilty but exempted from criminal punishment because of minor importance. Four public prosecutions were instituted, among which one was canceled, one was withdrawn, and one was prosecuted after supplementary investigation. The district court made three judgments and the intermediate court made two rulings, one remand for retrial and one uphold the verdict. A director was found guilty because she took funds from 32 households in the name of savings agency and promised to pay high interests. However, as a lawful financial institution, deposit-taking of high-interest rate constitutes an administrative violation but not a crime during the period of interest rate regulation. Someone was found guilty when he promised high interests and deposited the money solicited into a rural credit cooperative. In fact, the ‘fundraiser’ in this case only acted as a broker and constituted an illegal behavior but not a crime.Defendants of ten cases among the 26 ordinary cases ought not to be guilty. For instance, a fundraiser targeted the general public, raised funds from 28 households in the name of a hotel and used the funds for the hotel’s operation, another took funds from 16 persons to buy shares and operate his own company and another more fundraiser received money from the unspecified of 24 persons to establish a factory. All three cases were found guilty.This article discusses the relationship between civil rights and government power in China and takes illegal fundraising as an example. The paper examined whether there was any conflict between the right to financial freedom and the power of criminal punishment and how to resolve it if any. The justification for restricting the right to financial freedom is to protect specified investors from infringement and to prevent social risk. Institutional investor, affiliated person, somebody whose income or assets reach a certain size and who can identify, judge and assume corresponding risks should be defined as specified investors for a legal person while lineal descendants or collateral relatives within three generations, employer and enterprise in which somebody invests as the specified for a natural person.We argue for the offense of illegal fundraising to be adopted and that borrowing from or issuing securities to unspecified investors by a legal person should constitute illegal behavior, 50 or more should constitute a criminal offense. Borrowing from or issuing securities to the specified investors of over 50 by a legal person should constitute illegal behavior; more than 200 should constitute a criminal offense. Borrowing from the unspecified of 50 or more by a natural person should also constitute illegal behavior, over 200 a crime. However, a natural person borrowing from the specified, a legal person borrowing from or issuing securities to the first and second types of specified investors should be excluded.We also argue that the offense of illegal fundraising should replace the offense of illegal deposit-taking from the general public to protect unspecified investors. Civil and commercial laws should be used if people are cheated and suffer property losses but it should not constitute the offense of fraudulent fundraising. Law enforcement agencies can take administrative measures to crack down on it but should not use the power of criminal punishment. The offense of illegal fundraising does not need to and should not adopt the amount criterion and the loss criterion lest criminal law becomes too harsh and restricts the right to financial freedom too much.Of course, some relaxing measures can be taken in judicial practice even if the law remains unchanged. In fact, the Supreme People’s Court has decriminalized borrowing among relatives and friends and internal fundraising of an entity but judicial authorities have not done enough and some questions need more research.Further study is required especially on problems in judicial decisions, its social effect and whether the defendants convicted and the general public agree with those decisions which depend on the author’s efforts and also joint efforts of theoretical and practical circles.
