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From inflated capital to financing fraud, which criminal risks most threaten companies as they grow?

In today¡¯s complex and ever-changing business environment, entrepreneurs should not only possess keen market insight and outstanding operational capabilities, but also establish a systematic criminal legal risk prevention and control system. Many entrepreneurs lament that ¡°it is difficult to grow a business, and even harder to sustain it¡±, which reflects both the objective laws of the market economy and the lagging and weak construction of legal compliance in corporate governance.

In practice, most enterprises do not intentionally violate the law, but often fall into the abyss of criminal liability due to blind adherence to so-called ¡°industry practices¡± or ignorance of legal boundaries, resulting in the loss of both assets and personnel. This article aims to systematically deconstruct key criminal risk points for enterprises from both commercial and legal perspectives, providing rational and solid legal guidance to help enterprises enhance compliance governance and achieve steady, long-term development.

Establishment of enterprises: Criminal risks in the foundation of governance

The lawful establishment of an enterprise is the starting point of corporate governance and its compliance directly affects the stability of long-term development. Some founders, in pursuit of efficiency, use fraudulent means such as false supporting documents or inflated registered capital to complete business registration, for example, using bridge funds for capital verification and then quickly withdrawing the funds, or forging capital verification and audit materials. Such conduct essentially constitutes the crime of falsely reporting registered capital.

In the capital contribution process, high-frequency risks such as false capital contributions and withdrawal of capital contributions also warrant vigilance. Common practices include shareholders using related-party transactions or fictitious debts to circulate contributed funds back to personal accounts, which violates shareholders¡¯ capital contribution obligations, and also directly undermines the institutional foundation of the independent legal personality of the corporation.

It should be emphasised that the subscription registration system for registered capital does not relieve shareholders of their actual capital contribution obligations; enterprises must still adhere to the principles of authenticity and maintenance of capital to avoid incurring criminal and civil liabilities.

Financing activities: Boundary between crime and legality in capital operations

The compliance of financing activities directly affects the survival and growth of a business. To obtain bank loans, some enterprises produce false audit reports or fabricate bank transaction records. If such actions result in significant losses to financial institutions or involve serious circumstances, they may constitute the crime of loan fraud.

Additionally, some enterprises, under the guise of ¡°internal subscription¡±, raise funds from employees, their relatives, friends and other unspecified members of the public, promising high returns. This conduct essentially meets the criteria for the crime of illegal absorption of public deposits.

Furthermore, window-dressing during the financing process may not only violate laws regarding the illegal disclosure or non-disclosure of important information, or the fraudulent issuance of securities, but may also overlap with crimes such as fraud, contract fraud, and issuing false invoices or value-added tax invoices, exposing the enterprise and responsible individuals to severe criminal consequences.

Commercial operations: High-risk areas in transaction practices

To secure business opportunities or alleviate financial pressure, enterprises may exaggerate their creditworthiness, fabricate investment projects, or provide false guarantees. If such actions cause significant losses to counterparties, even in the absence of an intent to unlawfully appropriate assets, they may still constitute the crime of contract fraud.

In the context of talent competition, enterprises that maliciously poach employees with high salaries and obtain technical secrets or client lists from their former employers are highly likely to commit the crime of infringing trade secrets, which may also result in substantial civil compensation and reputational damage.

In business co-operation, privately transferring benefits, such as accepting or offering property to personnel of the other party, also crosses the legal threshold for the crimes of offering or accepting bribes by non-state functionaries.

Internal governance: Intersection of corporate autonomy and criminal liability

A robust internal governance mechanism forms the cornerstone of an enterprise¡¯s ability to prevent and control criminal risks. Key functional positions such as procurement, finance, business operations and human resources, which have direct authority over corporate resources, are often focal points for criminal risks, including misappropriation of funds, embezzlement, and illegal operation of competing businesses.

In practice, some actual controllers of enterprises lack legal awareness, treating corporate assets as personal property and arbitrarily using company funds for personal consumption or investment. They mistakenly believe that ¡°repayment after the fact¡± exempts them from liability. However, once internal control disputes arise or external audits are conducted, such conduct is highly likely to be deemed embezzlement or misappropriation of funds.

Market exit: Legal boundaries at termination of operations

Enterprises must also strictly adhere to legal norms during dissolution or bankruptcy. Some shareholders, when a company is insolvent, attempt to evade debts by transferring assets through gratuitous or significantly undervalued transactions before filing for bankruptcy. If such actions are verified, they may constitute the crime of obstructing liquidation or fraudulent bankruptcy.

Fraudulent acts such as concealing or destroying accounting vouchers and books, or fabricating debts during bankruptcy proceedings, will also trigger criminal liability. Improper arrangements during the exit phase may further serve as grounds for piercing the corporate veil in civil litigation, and for criminal prosecution.

Criminal risk prevention is not a remedial measure to be taken after the fact, but should be a vital part of corporate governance, deeply embedded in the enterprise¡¯s operations. It requires business operators to possess both commercial acumen and legal rationality, maintaining strict compliance while pursuing efficiency and growth.

The role of lawyers extends beyond traditional litigation to include the design of compliance systems, risk assessment and the establishment of internal controls, providing enterprises with ongoing and effective legal protection. Only through systematic compliance governance can enterprises achieve steady and sustainable development amid fierce market competition.

Xia Yu is a senior associate at Kangda Law Firm. She can be reached by phone at +86 186 1029 0619 or by email at yu.xia@kangdalawyers.com