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As China¡¯s doors open wider and its footprint in global commerce expands ¨C spurred in part by the Belt and Road Initiative ¨C demand for outbound investment has surged. More individuals and firms are acquiring assets or investing abroad, intensifying demand to move capital across borders.

To manage capital flows and maintain financial stability, authorities have introduced foreign exchange controls, including an annual USD50,000 exchange limit for individuals and mandatory filing for enterprises engaging in outbound direct investment.

Against this limiting backdrop, some investors attempt to transfer funds abroad through informal channels. These include multiple small-value transfers (known as ¡°ant moving¡±), virtual currency transactions, or fabricating trade backgrounds to conduct domestic guarantee for overseas loans, all in an effort to evade regulatory scrutiny.

But such actions not only violate the law but may also expose participants ¨C including corporate finance personnel, high-net-worth individuals and other related parties ¨C to severe legal consequences.

It is important to note that, except for legitimate channels approved by the State Administration of Foreign Exchange, any form of cross-border fund transfer is illegal involving a complex legal framework and multi-jurisdictional regulatory requirements. Improper conduct may result in administrative penalties, criminal liability or even cross-border legal disputes.

To assist comprehensive understanding of legal risks associated with major cross-border fund outflow methods, this brief analysis outlines various fund outflow methods including virtual currency transactions, overseas investment, and cross-border trade and overseas loans under domestic guarantee.

Virtual currency transactions. This involves purchasing virtual currency with renminbi, trading and transferring it on cryptocurrency exchanges, and ultimately converting it into foreign currency. But China imposes strict restrictions on the use and trading of virtual currencies. As they lack legal tender status and mandatory currency attributes, they cannot circulate as legal currency in the market.

All forms of virtual currency issuance and financing activities are prohibited to prevent the anonymity and global liquidity of virtual currencies from being used for money laundering, evasion of capital controls and other illegal activities, which may trigger financial risks.

Although current regulations do not prohibit individuals from holding or trading virtual currencies, in practice, individuals should be cautious about receiving virtual currencies from unknown sources, or transferring to unidentified accounts, to avoid committing offences such as money laundering or concealing and disguising criminal proceeds.

UC mastercard transactions. This involves purchasing the cryptocurrency Tether (USDT) ¨C known as a ¡°Stablecoin¡±, or the internet¡¯s ¡°Digital Dollar¡± ¨C with renminbi, then withdrawing the USDT to a Mastercard before cashing out foreign currency at overseas ATMs, achieving cross-border fund transfers using European UC Mastercards. This approach carries criminal risks similar to those associated with virtual currency transactions.

Cross-border consumption. This involves directly using credit cards abroad and employing methods such as ¡°buy first, refund later¡± or self-dealing to cash out credit card funds overseas. Such practices may constitute criminal offences such as money laundering or tax evasion.

Personal quota transfers. This refers to multiple individuals transferring their unused annual foreign exchange quotas to those with large foreign exchange needs. This ¡°ant moving¡± approach to circumvent foreign exchange controls may result in criminal investigation and corresponding penalties.

Overseas investment and cross-border M&A. These typically involve standard project evaluation and the completion of relevant filing or approval procedures, such as foreign exchange registration and special purpose vehicle overseas investment registration, before the investment is executed. Violation of investment direction regulations may result in criminal risks, including illegal business operations, money laundering, or concealing and disguising criminal proceeds.

Overseas lending. Some domestic firms lend renminbi funds ¨C often via entrusted loans arranged through group finance companies ¨C to wholly owned or affiliated subsidiaries established legally overseas. If the lender fails to conduct strict authenticity and compliance reviews of the overseas lending business, or does not fulfil anti-money laundering and counter-terrorism financing obligations, it may also face legal liabilities for illegal business operations or money laundering.

Fictitious trade. Some domestic companies fabricate trades with overseas companies and, after breaching the contracts, arrange for the overseas companies to forfeit the deposit or pay liquidated damages, thereby transferring funds across borders. Common forms include letter of credit transactions, collection transactions and remittance transactions.

Such methods involve risks of fictitious transactions and breach of contract, and may constitute offences such as illegal business operations, money laundering, assisting information network crime, or concealing and disguising criminal proceeds.

Overseas loans under domestic guarantee. In this method, the guarantor first deposits cash or provides other collateral to a domestic branch, which then issues a letter of guarantee or standby letter of credit to an overseas branch, enabling the overseas branch to provide a loan to the borrower. Although this method is formally legal, it constitutes illegal conduct if used for asset transfer.

Similar situations include using financial derivatives QDII, QDII2, RQDII and other channels for overseas investment, cross-border private equity fund channels (such as QDLP and QDIE) and cross-border renminbi investment and loan funds, as well as using art auctions, technology transfer and licensing to transfer funds abroad.

Key takeaway

To effectively mitigate legal risks when transferring funds overseas, individual and corporate investors should strengthen their legal awareness and gain a thorough understanding of relevant foreign exchange laws and regulations, both domestically and internationally.

It is essential to ensure that all transactions are legal, reliable and stable. Companies should conduct regular compliance reviews of their investment projects and overseas operations, promptly establish risk management systems, and proactively identify, assess and address legal risks related to outbound fund transfers.

Yan Ge is a senior partner and Yuan Yao is a partner at Joint-Win Partners