Handling of financial fraud cases clarified

Guidelines from the Supreme People's Procuratorate outline 15 key points

The Supreme People's Procuratorate has issued new guidelines to clarify the identification of facts and the application of law in financial fraud cases, underscoring strict penalties for such crimes.

The recently released guidelines outline 15 key points, including general requirements for handling financial fraud cases and criteria for establishing the crime of fraudulent securities issuance. They also detail standards for filing and prosecuting cases involving the illegal disclosure or nondisclosure of important information and the criminal liability of intermediaries and their employees.

According to the guidelines, all parties involved in fraudulent securities issuance and the illegal disclosure or nondisclosure of important information — including listed companies, their controlling shareholders, actual controllers, directors, supervisors, senior management and intermediaries that provide false certification documents — will be held accountable and prosecuted.

In cases where direct economic losses are difficult to calculate accurately, the guidelines call for a professional institution to be commissioned to issue an assessment report. They also provide detailed instructions on calculating the proportion of inflated or understated assets, revenue and profits, as well as the failure to disclose major matters as required.

For complex cases involving multiple layers and numerous company workers, the guidelines recommend tiered and categorized handling. Intermediaries and their personnel who deliberately provide false certification documents or are grossly negligent in their duties, resulting in significant inaccuracies, will also be held criminally accountable.

In June, the Supreme People's Court released details of typical financial fraud cases, reaffirming a "zero tolerance" approach to the crime at every step.

One highlighted case involved a building owned by a city's investment company, which was used as collateral for financing. Due to financing issues in 2020, the building needed to be acquired by the city government. An employee of the company, surnamed Zeng, handled the building's appraisal. An initial appraisal by a company based in Fujian province valued the building at around 60 million yuan ($8.42 million), but Zeng requested the appraisal value be raised to over 80 million yuan. After negotiations, the appraisal company agreed on a value of no more than 80 million yuan.

The company won the bid for the appraisal on Oct 28, 2020. An employee of the company, surnamed Lin, was assigned the task and repeatedly instructed his subordinates to inflate the appraisal value as requested by Zeng and another manager. An appraisal report with a market value of 78.82 million yuan was eventually produced and submitted for review.

Despite recognizing that the valuation was inflated, Lin and the company's management pushed the appraisal through without verifying the data or conducting on-site inspections, ultimately using the qualifications of two affiliated appraisers to approve the report.

In January 2021, the city government acquired the building by paying 78.25 million yuan, based on the fraudulent appraisal report, which was then used to repay the investment company's financing and loan interest. A subsequent evaluation found the market value of the building was actually 38.4 million yuan, resulting in a significant loss of State assets.

A court in Putian, Fujian, found that Lin, as a staff member of the intermediary responsible for the asset appraisal, knowingly colluded with others to fabricate data and provide false certification documents. Lin was sentenced to two years in prison and fined 30,000 yuan.