1. Forms and policy boundaries of "off-site funding"
■ Definition
Off exchange fund allocation "refers to the activity of lending funds to investors at a ratio several times higher than the margin they pay, organizing investors to use borrowed funds and margin on specific securities and futures accounts for stock and futures trading, and collecting interest, fees, or profit sharing.
▉ Form of expression
1. System warehousing mode. Mainly refers to the use of account sharding systems by investment intermediaries to split securities and futures accounts into several virtual trading sub accounts, and provide them to investors for stock and futures investment trading.
2. Lending account mode. Mainly refers to the provision of securities and futures accounts owned or controlled by investment intermediaries to investors for stock and futures investment trading.
3. Virtual disk allocation model. Mainly refers to the use of virtual stock and futures trading systems by investment intermediaries to organize investors for stock and futures investment trading, where investors' trading instructions and funds do not actually enter the securities and futures trading markets.
4. Click to purchase and allocate funds mode. The main guidance is for buyers (i.e. fund demanders) to provide stock and futures trading strategies, while investors (i.e. fund providers) provide matching funds and securities and futures accounts. After being matched by matching intermediaries, both parties engage in stock and futures matching transactions and share investment returns as agreed.
■ Policy boundaries violated
According to the relevant provisions of the Securities Law and the Regulations on the Administration of Futures Trading, engaging in "off exchange fund allocation" is suspected of illegal operation of securities and futures business. Engaging in virtual asset allocation is suspected of illegal and criminal activities such as fraud.
2. Real Cases: China Securities Regulatory Commission Exposes 6 Off exchange Fund Allocation Cases
In June 2022, the official website of the China Securities Regulatory Commission exposed a number of typical cases of off exchange fund allocation, including off exchange fund allocation in the lending account mode, off exchange fund allocation in the system sub warehouse mode, off exchange fund allocation in the virtual disk fraud mode, off exchange fund allocation in futures, and six types of criminal judgments against technology providers.
The China Securities Regulatory Commission (CSRC) pointed out that off exchange fund allocation is outside of regulation, with high leverage amplifying market fluctuations and disrupting the normal order of the capital market. In recent years, the CSRC has supported and cooperated with public security and judicial organs to investigate and judge a number of off exchange fund allocation cases.
The China Securities Regulatory Commission exposes 6 cases of off exchange fund allocation
Type 1: Off exchange funding through lending account model
In the illegal business case of Wu, starting from October 2019, Wu operated Guangdong Yisheng Information Technology Consulting Co., Ltd. (referred to as Yisheng Company), developed the Yisheng website platform, and used securities company clients' accounts to provide funding services for stock trading clients. Stock trading clients log in to Yisheng website to register as members, and transfer the "margin" to the designated bank account of Yisheng company. Yisheng company provides stock trading clients with 1 to 10 times the amount of the "margin" as a capital allocation fund, and charges them capital allocation interest and trading fees according to the calculation methods of "daily strategy, interest free strategy, and monthly strategy" to profit from it. From November 2019 to March 2020, Yisheng Company received approximately 38114831 yuan in funds invested by stock trading clients in the name of "margin".
The court ruled that the defendant Wu was guilty of illegal business operations and sentenced him to three years and six months in prison, as well as a fine of 300000 yuan.
Type 2: Off exchange funding in system warehousing mode
In the illegal business case of Lin, Jiang, Lai, and Du, starting from October 2018, the defendant Lin, as the actual controller of Fujian Wanqian Hengye Investment Co., Ltd. (referred to as Wanqian Hengye Company), and the defendants Jiang, Lai, and Du, as the directors of various business departments, used the "Zhanggubao APP" to provide customers with stock trading accounts (sub accounts). Customers operate stock trading on the sub account of the "Shenggubao APP", while Wanqian Hengye Company synchronizes real-time trading on the stock exchange through the parent account opened by the securities firm. At the same time, Wanqian Hengye Company provides customers with capital allocation funds of 3 to 8 times leverage, and charges interest based on the allocation amount. Wanqian Hengye Company profits by earning interest margin and transaction commission margin.
The court sentenced the defendant Lin to six years' imprisonment and a fine of 1.38 million yuan for the crime of illegal business operations; The defendant Lai was found guilty of illegal business operations and sentenced to one year and nine months in prison, with a fine of 160000 yuan; The defendant Du was found guilty of illegal business operations and sentenced to one year and nine months in prison, with a fine of 140000 yuan; The defendant Jiang was found guilty of illegal business operations and sentenced to one year and nine months in prison, with a fine of 90000 yuan.
Type 3: Off exchange funding for virtual disk fraud mode
In the fraud case of Mr. Wang, in April 2020, the defendant Mr. Wang purchased and established a false stock allocation platform of "Jiji Strategy" through the Internet, and established Shanghai Hongze Investment Management Co., Ltd. Wang lured others into depositing funds into his company account for stock investment under the temptation of high returns from buying and selling stocks with matching funds. However, the funds invested by the victim did not enter the real stock exchange, and Wang used this to defraud the victim of their investment funds. From June to August 2020, the victim deposited a total of 1345021 yuan and withdrew 328646 yuan into the "Jiji Strategy", resulting in a loss of 1016375 yuan.
The court believes that the defendant Wang, with the purpose of illegal possession, used fictitious facts and concealed the truth to defraud the victim of property, and the amount was particularly huge. His behavior has constituted the crime of fraud and should be punished. Based on this, Wang was convicted of fraud and sentenced to ten years in prison, with a fine of 100000 yuan. After the first instance judgment was made, Wang appealed and the second instance court upheld the original verdict.
Type 4: Off exchange allocation of futures
In the case of Qiu's illegal business operations, in March 2018, the defendant Qiu established Nanchang Oxygen Information Technology Co., Ltd. Without obtaining a license to operate futures business, Qiu used the futures account of Dong, a client of Meierya Futures Brokerage Co., Ltd., as the main account and rented the "Zhifutong" sub warehouse software to divide Dong's main account into multiple sub accounts. Qiu recruited clients through website promotion and other means, allocated funds for clients, and enabled them to engage in futures trading through sub accounts with a small amount of deposit and without the qualification for futures trading. Qiu made profits by charging high transaction fees and earning interest rate spreads. From January to August 2020, Nanchang Oxygen Information Technology Co., Ltd. had a customer deposit of 26.98124 million yuan and a commission profit of 4303041.42 yuan.
The court sentenced the defendant Qiu to six years' imprisonment and a fine of 1.1 million yuan for the crime of illegal business operations.
Type 5: Technology provider criminally convicted
In the crime of aiding information network criminal activities involving Liu, Li, and Yan, in February 2020, the defendant Liu organized Li and Yan to create counterfeit "Tonghuashun" stock trading software and sold it to others for 300000 yuan, knowing that others may use information networks to commit crimes. From March to May 2020, the defendants Liu, Li, and Yan knowingly provided maintenance and technical support for the operation of genuine Tonghuashun stock trading software on the market, which was a counterfeit. They should have been able to recognize that the software was being used by others to commit crimes during its operation, daily maintenance, and communication, and provided conditions for others to use the software to commit cybercrime. In the criminal activity, the defendant Liu was responsible for receiving and selling orders, the defendant Li was responsible for material preparation (helping to contact rental servers, SMS platforms, and introducing third-party companies to package apps), and the defendant Yan was responsible for technical support for platform operation. From April to May 2020, multiple victims were induced by others to download and use the counterfeit "Tonghuashun" software for stock trading, resulting in financial losses of over 3.9 million yuan.
The court ruled that the defendant Liu committed the crime of aiding information network criminal activities, sentenced him to two years in prison, suspended for three years, and fined him 50000 yuan; The defendant Li committed the crime of aiding information network criminal activities and was sentenced to one year and eight months in prison, suspended for two years and six months, and fined 40000 yuan; The defendant Yan committed the crime of aiding information network criminal activities and was sentenced to one year and eight months in prison, suspended for two years and six months, and fined 40000 yuan.
Wei, Liu, and Han committed the crime of illegal business operations, providing intrusion and illegal control of computer information system programs and tools. In the crime, the defendant Wei used the donated Tonghuashun software and purchased Tongdaxin interface channels to develop and sell the securities trading sub warehouse software "Cloud Service Manager", and charged the buyer a fee of approximately one ten thousandth of the daily trading volume or a one-time buyout. From October 2018 to April 2019, Wei provided securities trading services to at least 634 people through the "Cloud Server Manager" software, illegally profiting 741926 yuan. From March 2018 to October 2019, Wei, Liu, and Han used the "Cloud Service Manager" software to illegally provide securities services such as opening virtual sub accounts, entrusting trading, querying, and settling for fund allocation clients, and provided margin funds of 7 to 10 times for fund allocation clients. During the operation, the "Cloud Service Manager" software provided services to a total of 482 people, with a turnover of 362639654 yuan and a profit of 6061214.83 yuan.
The court ruled that the defendant Wei was guilty of providing intrusion and illegal control of computer information system programs and tools, sentenced to three years and six months in prison, and fined 100000 yuan; For the crime of illegal business operations, sentenced to six years in prison and fined 12 million yuan; The two crimes shall be punished together, and it is decided to execute a fixed-term imprisonment of eight years and six months, and a fine of 12.1 million yuan shall be imposed. The defendant Liu committed the crime of illegal business operations and was sentenced to three years' imprisonment, suspended for five years, and fined 80000 yuan. The defendant Han committed the crime of illegal business operations and was sentenced to three years' imprisonment, suspended for five years, and fined 150000 yuan.
Type 6: The marketing and promotion service provider has been criminally sentenced
In the criminal case of Mr. Zheng infringing on citizens' personal information, from May to December 2018, the defendant Mr. Zheng purchased more than 104800 citizens' personal mobile phone numbers from WeChat friends and transferred RMB 4000 through Alipay in order to promote the capital allocation business. Afterwards, Zheng organized company salespersons to call over 80000 mobile phone numbers to promote business, develop multiple clients for stock allocation, and seek profits from it.
The court ruled that the defendant Zheng committed the crime of infringing on citizens' personal information and was sentenced to three years in prison, suspended for three years, and fined 20000 yuan.
In the case of Yin's illegal business operations, the defendant Yin signed a software promotion cooperation agreement with Chongqing Huze Technology Co., Ltd., a partner of Rongxinhui Company controlled by Li and others, in the name of Dashun Company (which has been dealt with separately). Knowing that Rongxinhui Company does not have the qualifications to operate securities business, Yin promoted and recruited customers for its trading platforms "Matchmaking Network" and "Matchmaking Treasure APP", and collected commissions in the form of "(customer handling fee+interest+deferred fee - brokerage handling fee - capital cost) x 95% - deposit channel fee". As of September 2019, Yin has actually received a commission of 6711391.62 yuan.
The court ruled that the defendant Yin committed the crime of illegal business operations and was sentenced to five years and six months in prison, and fined 3.6 million yuan; Revoke the sentence of two years' imprisonment and three years' probation for the previous crime, and impose a suspended portion of a fine of 20000 yuan. Combine the sentences and decide to execute seven years' imprisonment and a fine of 3.62 million yuan.
III. Conclusion Tip
Investors should be wary of the behavior of "off exchange fund allocation", choose legitimate institutions in the investment process, adhere to rational investment, and enhance their risk prevention awareness and self-protection ability to guard against being deceived.
The comprehensive content is sourced from the official website of Shenzhen Stock Exchange and China National Radio Network
