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Enterprises routinely face a range of criminal risks in their operations including bribery, labour disputes and tax violations. Real estate companies, due to the nature of their business, are at higher risk of triggering specific criminal offences in the course of land acquisitions, project developments and property sales. Drawing on practical experience, this article focuses on analysing two major criminal offences in the real estate development process, and offers recommendations for risk prevention and control.

Illegal transfer and resale

Article 228 of the Criminal Law defines the crime of illegal transfer and resale of land use rights as requiring a violation of land administration regulations, with the intent to seek profit and circumstances that are deemed serious. Legislative interpretations by the Standing Committee of the National People¡¯s Congress further clarify that the conduct constituting this offence must contravene legal provisions such as the Land Administration Law and the Urban Real Estate Administration Law.

Real estate development companies are most likely to commit this offence during transactions in the secondary land market. According to article 39(1) of the Urban Real Estate Administration Law, land use rights acquired by way of grant may only be transferred if at least 25% of the total development investment has been completed. In practice, to circumvent this restriction, or for reasons such as financing or tax planning, companies commonly use special purpose vehicle (SPV) equity transfers to achieve project interest transfers, while direct transfers of land use rights are rare.

From a civil adjudication perspective, some argue that such arrangements, which conceal illegal objectives and may harm the public interest, should therefore be invalid. However, in practice, these transactions are generally recognised as lawful and valid.

The Supreme People¡¯s Court, in He v Changkun Industrial Park Management Committee and Changshu Municipal Bureau of Land and Resources (2017), stated that ¡°current law does not contain any mandatory provisions invalidating the use of equity transfers by real estate companies to achieve the transfer of land use rights or real estate projects¡±. Accordingly, such equity transfers do not present civil law risks, and there should be no basis for criminal liability.

Nevertheless, in judicial practice, the use of equity transfers does not provide absolute immunity from the crime of illegal transfer and resale of land use rights. In certain cases the courts, applying a substance-over-form review, have treated changes in control through equity transfers as de facto transfers of land use rights and imposed criminal liability on real estate companies. Therefore, when considering SPV equity transfers, it is essential to review local precedents and assess regional judicial risks in advance.

Illegal absorption of public deposits

Article 176 of the Criminal Law stipulates that illegally absorbing, or disguising the absorption, of public deposits, thereby disrupting financial order, constitutes the crime of illegal absorption of public deposits. In addition, article 2 of the Interpretation of the Supreme People¡¯s Court on Several Issues Concerning the Specific Application of Law in the Trial of Illegal Fundraising Criminal Cases provides that, where there is no genuine real estate sale, or the principal purpose is not the sale of real estate and funds are illegally raised through methods such as a return of principal sales, sale and leaseback, agreed repurchase, or sale of property shares, then, provided the conditions set out in article 1(1) of the above-mentioned interpretation are satisfied, such conduct shall be convicted and punished as the crime of illegal absorption of public deposits under article 176 of the Criminal Law. Such acts are also prohibited under article 11(2) of the Measures for the Administration of the Sale of Commodity Buildings.

Courts generally consider the following factors when determining whether the relevant offence has been committed:

1. 1. Whether there has been public promotion of sales through television, newspapers or other channels;
   2. Whether the sales activity has obtained the required pre-sale or sale permits;
   3. Whether the property developer¡¯s repurchase amount constitutes a fixed return;
   4. Whether the developer has promptly completed sub-unit registration and actual delivery for purchasers; and
   5. Whether the property is subject to objective circumstances such as seizure or mortgage that would prevent its sale.

In practice, even if the developer conducts a lawful sale and the property can be properly registered and delivered, if the sales process includes financing terms such as fixed-return repurchase or leaseback, it may still constitute illegal absorption of public deposits.

In cases involving post-sale leaseback or repurchase arrangements, it is common for the developer to establish a repurchase or lease relationship with the purchaser before the legal relationship of property sale is formed. In recent years, some developers have attempted to legitimise sale and leaseback or repurchase arrangements by involving related third parties, or by signing an initial letter of intent, and only formalising the leaseback contract after project completion.

While such arrangements may be valid as civil contracts, whether they can fully eliminate the criminal risk of illegal absorption of public deposits remains subject to debate.

Both SPV transfers and post-sale leaseback or repurchase arrangements have become common commercial practices in recent years. However, some real estate companies lack awareness of the potential risks involved. These risks fundamentally arise from the dynamic interplay between commercial innovation and legal regulation.

Only by conducting thorough criminal compliance reviews during the transaction design phase, implementing dynamic risk monitoring during contract performance, and analysing relevant regional judicial precedents before disputes arise, can companies establish a comprehensive criminal risk control system throughout the entire project cycle and achieve stable operations amid industry transformation.

Zhang Bingxu is an associate at Starrise Law Firm