How to Prevent Fundraising Fraud

Last year, I attended a meeting organized by the Financial Office, primarily to discuss the handling of an illegal fundraising case. Since the case has already been resolved and I feel it has a certain level of typicality, I will use this case as a starting point to discuss how to prevent fundraising fraud.

What is Fundraising Fraud?

In our daily lives, fundraising fraud is often mixed up with illegal fundraising and illegal absorption of public deposits. From a legal perspective, the main charges are fundraising fraud and illegal absorption of public deposits, both of which fall under the umbrella of illegal fundraising crimes. For the general public, whether it’s illegal absorption of public deposits or fundraising fraud, the end result is usually being scammed. Therefore, it’s not unreasonable to consider both as fraud.

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Illegal Fundraising (General Term)
- Illegal Absorption of Public Deposits
- Fundraising Fraud

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Fundraising Fraud (Common Oral Term)
- Illegal Fundraising
  - Illegal Absorption of Public Deposits
  - Fundraising Fraud

Standards for Fundraising Fraud

Generally, illegal absorption of public deposits constitutes a crime if it meets any one of the following three conditions: an amount of 1 million yuan, 150 people involved, or losses of 500,000 yuan. The threshold for fundraising fraud is 100,000 yuan. Special circumstances can further lower these standards, but given the scale of such activities these days, it’s rare for these thresholds not to be met, with cases often involving billions of yuan.

General Standards	Illegal Absorption of Public Deposits	Fundraising Fraud
Amount	1 million yuan	100,000 yuan
Number of People	150	—
Losses	500,000 yuan	—

Brief Case Summary

Although this case has been resolved, for safety reasons, specific details will not be disclosed. Here’s a brief summary.

A company headquartered in a municipality directly under the central government registered a branch in our small town a month before the meeting. The company created an investment plan for a physical project based on the currently popular concept of new quality productivity technology. This project could be divided into numerous smaller projects, promoted to the public through branch outlets to attract investment. However, the written agreements signed by the public did not specify a return rate.

At this point, the project seemed relatively normal, as such investment projects do have some feasibility in reality. Even if it involved illegal absorption of public deposits, if the funds were genuinely used for normal business operations, the judicial authorities would not interfere.

Illegal absorption or disguised absorption of public deposits, mainly used for normal production and business activities, can be exempt from criminal punishment if the absorbed funds are returned before prosecution; if the circumstances are significantly minor and not harmful, it will not be treated as a crime. — Judicial Interpretation [2022] No. 5

However, the public is unlikely to part with their money without some immediate benefit. Without such an incentive, such projects would be nearly impossible to promote. This is where the questionable tactics come in.

The owner of Company A registered a tourism company, Company B, in the capital of another province and opened a business outlet in our town. Anyone who invested in the branch project could receive a certain proportion of free travel vouchers based on their investment amount. These vouchers could be used personally or resold. For example, an investment of 50,000 yuan could yield 25,000 yuan worth of vouchers.

At this point, it was almost certain that the so-called investment project was a front. Even if investigations revealed that Company A had relevant business activities, the scale of these activities would be disproportionate to the funds absorbed.

Ultimately, after half a month of operation, the branch attracted over 40 clients and raised approximately 2 million yuan. Some citizens, upon seeing the project, reported it to the financial regulatory authorities.

Case Study Details

This was my first time participating in a Financial Office meeting. Although I had long known about this department, at the county level, I always felt it was more of a retirement institution, as many of its functions overlapped with vertical management agencies, making its role somewhat redundant. After last year’s financial regulatory reforms, these relationships were further clarified. At the national level, the China Banking and Insurance Regulatory Commission was restructured into the National Financial Regulatory Administration, with local branches established. For example, a county-level branch might be named National Financial Regulatory Administration·Hunan Bureau·Changsha Branch·Yuelu Sub-branch. Local financial management bureaus, however, do not follow a unified standard, especially at the city and county levels. Some are standalone entities like Dongguan Local Financial Management Bureau or Rudong County Local Financial Management Bureau, while others are integrated into city or county government offices, finance bureaus, or called financial work bureaus or commerce and finance bureaus. In general, the financial regulatory responsibilities between central and local governments can be roughly inferred from their names. At the national level, it’s about supervision and regulation, while at the local level, it’s about management.

The reason for elaborating on financial regulatory institutions is that financial management is relatively new to local governments. Even though some places have had financial offices or bureaus for years, they were often set up primarily to facilitate government loans from banks.

Under the Financial Office’s召集, about seven or eight department representatives attended the meeting. Everyone shared their views on the case.

Opinions from the Market Regulation Bureau

Company A’s branch does not have independent legal person status. Inspections revealed that the branch did not operate beyond its scope.
The branch was registered through an online platform, and the market regulation department only conducted a formal review of the submitted materials.
Company B’s business outlet was also registered through an online platform, with the market regulation department only conducting a formal review of the submitted materials.

Opinions from the Tourism Bureau

The registration of Company B’s business outlet violates legal regulations, as Company B is not registered in this province, nor has it registered a branch in this city.
Administrative penalties can be imposed on Company B for setting up a business outlet locally, but since Company B is not based in this province, enforcement is challenging.

Opinions from the Financial Regulatory Sub-bureau

The actions of Company A’s branch are suspected of illegal absorption of public deposits. However, these deposits were funneled into Company A’s accounts, making it difficult to coordinate with financial regulators in Company A’s location for verification.

Opinions from the Public Security Bureau

The actions of Company A’s branch are suspected of illegal absorption of public deposits, but Company A does have relevant physical investment projects. Given the current scale of funds identified locally, further investigation might not yield significant results. The identified funds amount to only about 2 million yuan, while Company A’s project investments in the municipality are clearly much larger. There is an issue of fund commingling, making it difficult to trace the flow of these funds.
Company A has registered branches in multiple locations within the province, likely engaging in similar activities. Only by fully understanding the situation across all branches can the case be properly handled.
Since Company A is registered outside the province, under normal jurisdictional rules, only the public security department in Company A’s registered location can conduct investigations. Otherwise, it might be seen as distant fishing.
The public security department can transfer the investigation results as criminal clues to Company A’s local public security department, but the success of the case is hard to predict.

My Opinion

Company A has not yet collapsed. The current measures are purely to prevent potential future collapse that could harm investors’ interests. Criminal measures are not necessarily required at this stage.
Currently, the identified scale of funds absorbed by Company A’s branch is only 2 million yuan, with a few large investors accounting for over 1 million yuan. From an investigative perspective, if these large investors are found to be relatives, friends, or specific associates of the branch’s responsible person, then the 1 million yuan cannot be defined as illegal absorption of public deposits, potentially derailing the case. However, we cannot wait for the company to continue operating and potentially cause greater harm. While a larger impact might make the case easier to prosecute, it would also likely result in greater losses for the public.
If the goal is solely to protect the interests of local investors, the best approach would be for relevant departments to pressure the responsible persons of Company A’s branch and Company B’s outlet based on existing evidence, aiming to drive them out. Simultaneously, contact each of the 40 investors to urge them to recover their funds as soon as possible. Waiting for Company A to collapse would only exacerbate the situation. It’s too late to act after a company has a nationwide scandal.
Before Company A’s scandal, it was extremely difficult to resort to criminal measures to resolve the issue, and it was beyond the capability of our small locality. While handling local affairs, we just needed to disseminate the information, and ultimately, it was up to the regulatory authorities in Company A’s location to take the lead in resolving the issue.

Case Outcome

Recently, I received follow-up information on this case. Shortly after the meeting, both the branch of Company A and the outlets of Company B were shut down. Most of the more than 40 investors who could be contacted had over 60% of their funds returned, which was equivalent to paying for a lesson. I just checked online, and Company A is now entangled in countless lawsuits, and it is probably not far from a complete scandal and bankruptcy.

Case Insights

For such fundraising fraud schemes, it is indeed difficult to prevent crimes at the initial stage under the current legal framework, as the investigation procedures alone are tightly constrained. However, on a personal level, as long as one firmly believes that there are no free lunches, raises awareness, and does not covet small advantages, one can avoid more than 90% of the scams on the market.

In recent years, it has been common to see some grassroots units in the central and western regions engaging in ‘deep-sea fishing,’ which is often regarded by the media and the public as a symbol of ‘backwardness and ignorance.’ This has led to repeated bans from higher authorities, setting many procedural obstacles to such situations. However, I think we should not completely dismiss this approach. It is likely that these law enforcement units are trying to secure some benefits and recover some losses for the local people within their capabilities. However, under the mindset shaped by regional barriers and prejudices, such voices are often drowned out. The result is that in reality, action is almost always taken only after these fraudulent companies have a scandal, and once a scandal occurs, the losses are astronomical.