A private fund management company may be the subject of the crime of using entrusted property in breach of trust

Li Yong

　　□ judging from the nature of the act of breach of trust, to determine whether the act constitutes the crime of using entrusted property in breach of trust, it is necessary to return to "breach of trust", which originated in German criminal law.

　　□ from the perspective of the principle of subordination of administrative offenders, the crime of using entrusted property in breach of trust is a typical administrative offense, and its constituent elements are subordinate to financial laws and regulations, and the determination of "other financial institutions" needs to refer to financial laws and regulations.

　　□ from the perspective of interpretation, the fund management business activities engaged in by private fund management companies have financial attributes, and it is interpreted that financial institutions are still within the scope of the semantics of the criminal law. Interpreting a private fund management company as a financial institution does not go beyond the objective predictions of ordinary citizens.

　　In recent years, with the rapid development of the private equity industry, private equity fund management companies have frequently violated fiduciary obligations and abused entrusted funds, which has become a hidden danger of systemic financial risks. It is necessary to use criminal law to regulate, but the crime of using entrusted property in breach of trust, which is the key crime of regulation, is rarely applicable, mainly because there is controversy over whether a private fund management company is a financial institution under the criminal law. The subject of the crime of using entrusted property in breach of trust as provided for in Article 185-1 of the Criminal Law of the People's Republic of China is "commercial banks, stock exchanges, futures exchanges, securities companies, futures brokerage companies, insurance companies or other financial institutions". In the author's opinion, a private fund management company can become the subject of the crime of using entrusted property in breach of trust.

　　First, in terms of the nature of the breach of trust. To determine whether an act constitutes the crime of breach of trust and use of entrusted property, it is necessary to return to "breach of trust", which originated in German criminal law. Section 266 of the German Penal Code protects not only property rights, but also the relationship of trust between the perpetrator and the victim, the victim's freedom of disposition and good faith in market transactions. The prevailing view in Germany is that damage to property resulting from a breach of the duty of good faith and a relationship of trust is an essential feature of the crime of breach of trust. The core essence of the crime of breach of trust and use of entrusted property under the Criminal Law of the mainland is to punish the asset management behavior that violates the fiduciary duty of good faith and damages the property interests of the client, and the legal interests protected are the fiduciary faith and the property interests of the client. The essence of the legal relationship of private equity funds is the legal relationship of trust, with fiduciary obligations as the core. It is generally believed that the fiduciary duty includes the duty of loyalty and the duty of care, the duty of loyalty includes the rules of avoiding conflicts of interest and the rule of non-profit, and the duty of care requires the fund manager to be professional, prudent and diligent in making business decisions. The Regulations on the Supervision and Administration of Private Investment Funds stipulate that fund managers shall abide by laws and administrative regulations, fulfill their duties, and fulfill their obligations of honesty, trustworthiness, prudence and diligence. This provision adopts the theory of fiduciary duty. In the current private fund market, where management is not standardized, it is very easy for private fund management companies to abuse the trust relationship of trust, carry out black-box operations, embezzlement, unauthorized use of customer funds and other violations, which not only harm the interests of investors, shake the public's trust in the entrusted wealth management of financial institutions, but also seriously disrupt the financial and social order, which is a typical breach of trust and conforms to the essential characteristics of the crime of using entrusted property in breach of trust.

　　Secondly, from the perspective of the principle of subordination of administrative prisoners. The crime of using entrusted property in breach of trust is a typical administrative offense, and its constituent elements are subordinate to financial regulations, and the determination of "other financial institutions" needs to refer to financial regulations. In practice, it is inappropriate to one-sidedly rely on the Code Specification and ignore the hierarchical relationship between other financial regulations and their legal effects. "Coding Specification" is an industry standard in legal nature, is a kind of digital code to identify financial institutions, its main function is to facilitate the transaction and transmission of data and information between financial institutions, Article 1 of the "Coding Specification" also stipulates this, that is, "to meet the needs of information system construction and data exchange of financial institutions", "this specification is applicable to the development of new information systems of financial institutions, the construction of data warehouses, and can also be used to guide the upgrading and transformation of existing information systems". According to the principle of subordination of administrative offenders, the judgment of the constitutive elements of administrative offenses is subordinate to administrative law. The administrative law here includes laws, regulations, administrative rules, etc., in order of the hierarchy of effectiveness. Industry standards are not strictly regulated. In the process of judging the subordination of administrative offenders to "finding the law", priority shall be given to finding laws and regulations. The administrative regulations involving private equity funds mainly include: Article 8 of the Administrative Measures for the Suitability of Securities and Futures Investors, promulgated and implemented by the CSRC on August 12, 2022, clearly stipulates that "fund management companies and their subsidiaries" and "private equity fund managers filed or registered by industry associations" are "financial institutions established with the approval of relevant financial regulatory authorities"; Article 2 of the Administrative Measures for the Reporting of Large Transactions and Suspicious Transactions by Financial Institutions implemented by the People's Bank of China on July 1, 2017 stipulates that " Fund management companies are "financial institutions established in accordance with the law within the territory of the People's Republic of China". Both of these documents are administrative regulations that have included private fund management companies as financial institutions, and the effectiveness of these administrative regulations is obviously higher than that of the Code Specification, which is an industry standard. As an industry standard for managing codes, the Code Specification is not the basis for determining the nature of financial institutions, but is dynamic in nature and is constantly updated with the development of administrative laws and regulations and the financial industry. For example, microfinance companies were not originally included in the Coding Specification, but in 2009, the Coding Specification was revised to include microfinance companies, and even some non-financial institutions were included in it for management purposes. The National Financial Standardization Technical Committee pointed out in the "Application of Industry Standards for Financial Institution Coding Specifications" that "according to the needs of relevant work, some non-financial institutions have also been included in the coding scope of the financial institution coding system, such as jewelry houses, auction houses, pawn shops, etc." This further illustrates that the Code Specification is not the basis for determining the nature of a financial institution. Taking a step back, even if departmental normative documents are recognized as the basis for judging the constitutive elements of administrative offenders, there are currently other departmental normative documents that are also formulated by the People's Bank of China and implemented in a newer time than the Coding Specification, and private equity fund management companies have been included in financial institutions, such as the Guiding Opinions on Regulating the Asset Management Business of Financial Institutions issued and implemented by the People's Bank of China on April 27, 2018 Article 7 of the Measures for the Administration of Due Diligence of Non-resident Financial Account Information on Non-resident Financial Accounts, implemented by the State Administration of Taxation, the Ministry of Finance and the People's Bank of China on July 1, 2017, stipulates that "securities investment fund management companies, private equity fund management companies, and partnerships engaged in private equity fund management business" are financial institutions specified in the Measures. Departmental normative documents belonging to the same formulation body should refer to the new provisions, and the Coding Specification as the old provision cannot be applied.

　　Finally, from an interpretive point of view. Interpret a private fund management company as a financial institution that meets the scope of the term used in criminal law and the likelihood of prediction by the general citizen. Article 2 of the Regulations on the Supervision and Administration of Private Investment Funds stipulates that these Regulations shall apply to the raising of funds in a non-public manner, the establishment of investment funds or the lawful establishment of companies or partnerships for the purpose of carrying out investment activities within the territory of the People's Republic of China, which shall be managed by the private fund manager or general partner and carry out investment activities for the benefit of investors. The essence of a private equity fund is a standard share of collective capital trust, and the nature of the fund purchased by the customer is the property entrusted by the customer to the fund company for management. It includes a contractual collective investment fund based on the signing of an entrusted investment contract and a corporate collective investment fund based on joint investment and shareholding to establish a joint-stock company. It can be seen that the fund management business engaged in by a private fund management company has a financial nature, and it is interpreted as a financial institution that is still within the scope of the semantics of the criminal law. From the perspective of ordinary citizens, private funds and public funds are both financial wealth management products. The amount of assets operated by a single private equity fund management company can easily reach hundreds of millions, and even the scale of a single private equity fund may be hundreds of millions, which is an important financial tool for financial integration. Therefore, interpreting a private fund management company as a financial institution does not go beyond the objective predictions of ordinary citizens. From the perspective of system interpretation, Article 180 of the Criminal Law on the crime of "using non-public information for trading" has clearly stipulated that "fund management companies" are financial institutions. That being the case, according to the principle of system interpretation, there is no reason to think that the term "other financial institutions" in article 185-1 of the Criminal Code does not include fund management companies. Some scholars have pointed out that the term "fund management company" in Article 180 of the Criminal Law is limited to public funds. In the author's opinion, this view lacks rationality and persuasiveness. On the one hand, Article 180 and other articles of the Criminal Law of the People's Republic of China do not distinguish between public and private funds, and on the other hand, there is no essential difference in the fiduciary obligations of both public and private fund management companies in the fund management business, and they should fulfill their duties and fulfill their obligations of honesty, credibility, prudence and diligence.

　　To sum up, the crime of breach of trust and use of entrusted property has been criminalized for more than 10 years, and except in a few cases, the crime is almost in a state of "sleep" in judicial practice, and this phenomenon of the crime being empty could have been avoided by proper interpretation. Under the current situation, the crime of breach of trust and use of entrusted property urgently needs to be "activated".

　　(The authors are respectively the director of the Research Office of the Nanjing Municipal People's Procuratorate of Jiangsu Province, a national procuratorial expert, and a clerk of the Research Office of the Nanjing Municipal People's Procuratorate)

Source: Procuratorate Daily