High-interest loan relending is tempting, but legal risks are hard to escape

Compiled from: Learn Legal Knowledge Daily, Ninghai County People's Court, Zhejiang Tianping, Yufa Sunshine
 
Case review
Chen and Wang were once colleagues and became close friends because they got along well. In May 2019, Chen borrowed money from Wang citing difficulties in capital turnover. Trusting his buddy, Wang agreed without hesitation. From May 23, 2019, to May 24, 2020, over the course of a year, Wang lent Chen a total of 850,000 yuan through WeChat, Alipay, and bank transfers. The two parties agreed on a monthly interest rate of 1%, but Chen only paid 23,400 yuan before stopping. After multiple unsuccessful attempts to collect the debt, Wang sued Chen in court, demanding repayment of the 850,000 yuan loan plus the accrued interest of 85,500 yuan.

 

After taking over the case, the presiding judge found that the evidence provided by Wang only included WeChat, Alipay, and bank transfer records, with no IOU issued. The situation was clearly not as simple as it seemed, so the judge summoned Wang to the court before the trial and took detailed notes.
 
Under the judge's questioning, Wang disclosed all the details of the loan. The borrowed funds all came from loans from various banks, and Chen was aware of this. The agreed monthly interest rate of 1% was additional interest that Chen paid to Wang beyond the bank loan interest. As for Chen using the borrowed funds to set up a gambling website, Wang stated that he was unaware of this.
 
 
Court judgment
The court held that in private lending, if the lender obtains credit funds from financial institutions and then relends them to the borrower, such private lending behavior not only increases financing costs but also disrupts credit order. According to the law, if funds obtained from financial institutions are reloaned, the people's court shall deem the private lending contract invalid.
 
After a contract is invalidated or revoked, the property obtained under the contract shall be returned. If return is impossible or unnecessary, compensation shall be made at a discounted price. The party at fault shall compensate the other party for losses incurred, and if both parties are at fault, each shall bear corresponding responsibility.
 
In this case, Wang reloaned funds obtained from a bank loan to Chen, thus the private lending contract between them is invalid. After deducting the partial payments already made by Chen, Chen shall return 826,600 yuan. Therefore, the court legally ordered Chen to return 826,600 yuan to Wang and dismissed Wang's other claims.
 
 
Laws & Regulations
Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases Article 13
Under any of the following circumstances, the people's court shall deem the private lending contract invalid:
(1) Obtaining loans from financial institutions and relending them;
(2) Relending funds obtained through borrowing from other for-profit legal persons, raising funds from the unit's employees, or illegally absorbing deposits from the public;
(3) A lender without legal lending qualifications providing loans to unspecified members of the public for profit;
(4) The lender providing a loan despite knowing or having reason to know that the borrower intends to use the loan for illegal or criminal activities;
(5) Violating mandatory provisions of laws or administrative regulations;
(6) Contravening public order and good customs.
 
"Criminal Law of the People's Republic of China"  Article 175
Whoever, for the purpose of making profits through relending, obtains credit funds from a financial institution and relends them to others at a high interest rate, if the amount of illegal gains is relatively large, shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention, and shall also be fined not less than one time but not more than five times the illegal gains; if the amount is huge, shall be sentenced to fixed-term imprisonment of not less than three years but not more than seven years, and shall also be fined not less than one time but not more than five times the illegal gains.
 
Where a unit commits the crime mentioned in the preceding paragraph, a fine shall be imposed on the unit, and the directly responsible person in charge and other directly liable persons shall be sentenced to fixed-term imprisonment of not more than three years or criminal detention.
 
"Provisions of the Supreme People's Procuratorate and the Ministry of Public Security on Standards for Prosecution of Economic Crime Cases"
23. High-interest relending case (Article 175 of the Criminal Law): Where, for the purpose of making profits through relending, credit funds from a financial institution are obtained and relended to others at a high interest rate, and any of the following circumstances is suspected, prosecution shall be pursued:
1. For individuals engaging in high-interest relending, the amount of illegal gains is 50,000 yuan or more;
2. For units engaging in high-interest relending, the amount of illegal gains is 100,000 yuan or more.
3. Although the above monetary standard is not met, if the person has received two or more administrative penalties for re-lending at high interest rates and then engages in such re-lending again.

 

[1] The author's perspective
In fact, starting last year, in response to the impact of the COVID-19 pandemic on the real economy, the central bank has continuously guided the money market interest rates downward, resulting in relatively ample market liquidity and lower interest rates for corporate loans from banks. It is understood that most one-year loan interest rates offered by banks to small and micro enterprises are 3.85%, and some banks can further reduce this to 3.5% for high-quality long-term customers. Faced with such low interest rates, it is inevitable that some people will consider borrowing from banks first and then lending the money to others at higher interest rates to earn the spread. However, such behavior may constitute the crime of re-lending at high interest rates and be subject to criminal penalties.