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Amid changing economic conditions and increasing financial pressures, the demand for corporate financing continues to rise. Some unscrupulous actors exploit this need by committing fraud under the guise of financing partnerships. This has led to the evolution of ¡°trap loans¡± between enterprises into a systematic form of criminal activity. This article aims to help businesses identify risks and offers strategies to protect their legitimate rights and interests.

Legitimate v trap loans

In judicial practice, inter-enterprise lending as a type of private lending requires an accurate distinction between legitimate loans and illegal trap loans. This distinction is crucial in determining whether a case constitutes a civil dispute or a criminal offence. The difference lies in the lender¡¯s subjective intent, specifically, whether the lender intends to illegally seize the borrower¡¯s assets.

In legitimate private lending, the lender¡¯s goal is to recover the principal and earn interest in accordance with the agreed terms. In contrast, perpetrators of trap loans design schemes with the intent of unlawfully appropriating all or part of the borrowing company¡¯s assets from the outset.

Under a legitimate lending agreement, both parties sign a loan contract on the basis of equality and mutual consent. The terms are clear, and while provisions such as interest rates or penalties may be subject to judicial adjustment for being high, they generally reflect the genuine intent of the parties.

On the other hand, contracts involved in trap loans serve as tools of fraud. Perpetrators exploit an advantageous position to induce businesses into contracts that involve misunderstandings, or are unfair, such as dual contracts (one public, one private), fictitious procurement agreements, or guarantee contracts. They fabricate transaction backgrounds, falsify bank records and create the appearance of legitimate loans to prepare evidence for ¡°rights protection¡± actions.

In trap loan schemes, perpetrators systematically create defaults. Tactics include disappearing on repayment dates, requiring borrowers to repay in cash, imposing unreasonable repayment deadlines, and unilaterally declaring the borrower in default. The purpose is to trigger contract clauses that impose exorbitant penalties, inflating debt. Subsequently, their debt collection methods often involve coercion.

A particularly notable feature is their use of fabricated evidence chains, such as forged loan contracts and bank transaction records, to initiate civil lawsuits preemptively. By doing so, they aim to leverage the judicial process to legitimise their unlawful claims. If courts only examine the surface validity of individual contracts, they may be misled into supporting these fraudulent claims. Additionally, perpetrators resort to harassment, stalking, blockades and other forms of soft violence to exert psychological and legal pressure on business owners, ultimately forcing them into submission.

Prevention and remedies

In the face of the systemic risks posed by trap loans, enterprises must establish a defence system that encompasses preventive measures and post-incident responses. At the prevention stage, companies should implement a rigorous financing management framework that ensures full-process control over financing decisions, partner selection and contract review. In practice, criminal groups engaged in trap loans often exploit borrowers¡¯ lax due diligence by fabricating IOUs far exceeding the actual principal, or by signing fictitious purchase contracts to create a facade of legitimacy.

When selecting financing partners, enterprises should go beyond standard business registration checks to conduct in-depth investigations into the counterparty¡¯s shareholder background, affiliated network, and litigation history. Particular caution should be exercised with lenders that have been recently established yet display unusually strong financial capacity.

In the transaction process, proper management of funds is crucial. Enterprises must ensure that all fund transfers are made strictly through corporate bank accounts, with complete and traceable banking records for every transaction. In exceptional cases where cash transactions are unavoidable, evidence should be preserved through multiple means, such as dual-person witnessing and full audio-visual recording, and receipts must clearly specify the nature of the funds.

With respect to contract management, companies should establish a standardised review procedure, with specific checkpoints for key clauses such as interest calculation methods and conditions triggering default liabilities. In practice, template contracts and blank IOUs are often used as a legal facade for subsequent fraudulent litigation. Therefore, all blank clauses in contracts must be completed before signing to eliminate any possibility of post-signature alterations.

When an enterprise suspects that it has fallen into a trap loan, it should promptly activate its rights protection mechanism. The first step is to immediately cease any loan-for-loan repayment behaviour to prevent abnormal debt escalation. At the same time, the company should systematically collect and preserve all relevant evidence, including contracts, bank statements and communication records.

In guiding case No. 87, issued by the Supreme People¡¯s Procuratorate, involving Li Weijun and others¡¯ false litigation in trap loan schemes, prosecutors reviewed hundreds of civil case files and discovered that the IOUs were all standardised templates, with most cases resulting in default judgments.

Through co-ordinated criminal and civil supervision, the procuratorate ultimately revoked 50 false civil judgments, effectively cutting off the criminal group¡¯s illicit profit channel through judicial proceedings. This case underscores the critical importance of evidence preservation and highlights that, in choosing a rights protection strategy, enterprises should abandon the passive mindset of merely responding to civil litigation and instead take the initiative to pursue criminal complaints.

In essence, trap loans go beyond the scope of ordinary civil disputes arising from private lending and constitute criminal offences that disguise fraud under the appearance of legitimate loans. These schemes exhibit a highly organised and systematic structure, in which each deceptive step is carefully interlinked to achieve the ultimate goal of unlawfully seizing the victim enterprise¡¯s assets.

As the financial landscape grows increasingly complex, criminal models have evolved into new variants with greater sophistication. Once trapped in these schemes, enterprises face not only temporary financial losses but also existential threats that endanger their continued operation.

When confronted with such risks, enterprises should abandon the mindset of resolving disputes through civil channels alone, and promptly seek professional legal assistance from practitioners experienced in handling cases involving both criminal and civil elements. Through precise legal analysis and well calibrated litigation strategies, companies can effectively safeguard their legitimate rights and interests and avoid falling into irreparable operational crises.

Xu Rui is a partner and Ma Xueyuan is an associate at Starrise Law Firm