Defendant Lü’s case involving fraud, contract fraud, loan fraud, and illegal occupation of agricultural land.

[ Keywords Loan; fraud; intent to unlawfully possess; not guilty

[ Counseling Attorney 】Zou Donghui (Shendu Lawyers Team)

[ Basic Facts of the Case 】

Mr. Lü, a private entrepreneur from a certain city.

The public security authorities have referred the case to the procuratorial organ for review and prosecution, charging Lü with five offenses: illegal occupation of agricultural land, fundraising fraud, loan fraud, fraud, and contract fraud. The procuratorial organ, in turn, has forwarded the case to the court for public prosecution, charging Lü with four offenses: illegal occupation of agricultural land, loan fraud, fraud, and contract fraud. The main alleged criminal facts are as follows:

(1) Crime of Illegally Occupying Farmland

The defendant, Lü, violated land management regulations by illegally occupying agricultural land and transferring 78 mu of land—of which 68 mu were cultivated land—from the villagers. He also unlawfully stockpiled tailings produced by a certain company on this land, causing severe damage to the cultivated land and completely destroying its suitability for cultivation. According to the assessment: the surface of the damaged plots was entirely covered by iron ore sand, with an average thickness of 3.4 meters. All of the cultivated land in the damaged plots suffered moderate damage, covering an area of 68 mu.

(2) Loan Fraud Crime

The defendant, Lü, used a company whose business license had been revoked as collateral, forged invoices for equipment purchases, mortgaged production equipment belonging to himself and other companies, fabricated fictitious purchase contracts, misrepresented the intended use of the loan, falsified the company’s annual review documents, provided invalid audit reports and asset valuation reports from the same company, and had others forge their signatures to prepare “loan application letters” for the bank. In four separate instances, he fraudulently obtained a total of RMB 3.8 million from the bank under the names of others.

(3) Fraud Crime

The defendant, Lü, knowingly engaged in long-term high-interest lending without the ability to repay. In order to meet his obligations to repay debts and cover personal expenses, he fraudulently obtained RMB 100,000 from Zhang by claiming that he needed working capital and offering exorbitant interest rates as an inducement. He also fraudulently obtained RMB 60,000 from Li by claiming that he needed funds to purchase machinery and equipment and expand production, again offering exorbitant interest rates as an inducement. Furthermore, under the pretext of needing working capital to buy mines, mine ore, and pay wages, he provided false property ownership certificates as collateral and, using exorbitant interest rates as bait, fraudulently obtained a total of RMB 2.95 million from Ren and Liu in four separate transactions. Additionally, he fraudulently obtained RMB 979,000 from Li Moumou by claiming that his enterprise needed working capital, again offering exorbitant interest rates as an inducement. The total amount involved in these fraudulent activities sums up to RMB 4.089 million.

(4) Crime of Contract Fraud

The defendant, Lü, knowingly engaged in long-term high-interest lending with an inability to repay. To meet his obligations to repay debts and cover personal expenses, he promised to mortgage his property under the pretext of using the property deed to pay off outstanding bank balances, and then signed a dismantling agreement, thereby defrauding a certain guarantee center of RMB 2 million.

The defendant argues that his actions do not constitute a crime.

This case was tried twice by the court, during which the procuratorial organ twice returned the case to the investigative authority for supplementary investigation. After the defendant had been detained for more than 3 years and 5 months, the court delivered a first-instance judgment, finding the defendant guilty of illegally occupying agricultural land and sentencing him to 3 years and 6 months of imprisonment. At the same time, the charges related to the other three fraud-related offenses were not upheld. Following the pronouncement of the verdict, the prosecution did not file an appeal, and the defendant also did not lodge an appeal; thus, the judgment has now become final and binding.

[ Case Highlights The court adopted the defense arguments of not guilty on charges of loan fraud, fraud, and contract fraud.

[ Typical significance 】

The fundamental distinction between fraud-related crimes and civil fraud lies in whether there is an intent to unlawfully appropriate property. Consequently, whether such an intent exists is typically the central and most challenging issue in disputes between the prosecution and the defense in these types of cases. In this case, the final judgment made an objective and impartial determination on this issue in strict accordance with the principles of legality of crimes and punishments and presumption of innocence in case of doubt, and it also adopted the relevant defense arguments.

With regard to the charges of various fraud-related crimes in this case, the evidence supporting the allegation of intent for illegal possession is either insufficient or entirely lacking; moreover, such evidence is either difficult to verify or, even after verification, fails to establish the existence of an intent for illegal possession. Although the procuratorial authorities adopted some of the defense arguments and did not support the prosecution’s charge of fundraising fraud, they nonetheless maintain that the investigative authorities’ charges of loan fraud, fraud, and contract fraud are well-founded and have therefore filed a public prosecution with the court.

To this end, during the court trial phase, the defense counsel focused intensively on thoroughly challenging and rebutting the evidence presented by the prosecution to prove the intent of illegal appropriation, comprehensively presenting the factual circumstances of the case. At the same time, the counsel elaborated and explained the reasons why the allegations of intent for illegal appropriation under each charge could not be established. Among these:

The main arguments regarding the crime of loan fraud are as follows: 1. In cases where most of the loan has already been repaid, the relatively small portion of the loan that remains unpaid should not be deemed to have been obtained with the intent of illegal possession; 2. Loan practices involving borrowing new funds to repay old ones, as well as loan practices in which interest is converted into additional loans, should not be classified as loan fraud.

The main argument regarding the crime of fraud is that knowingly borrowing funds when a business is already operating at a loss, or using new debt to repay old debt, does not necessarily indicate whether the perpetrator has lost the ability to repay debts or whether they had the intent to illegally appropriate the borrowed funds. Therefore, one cannot subjectively infer that the defendant had the intention to illegally appropriate the loan simply because objective circumstances have led to the enterprise’s inability to repay its debts on time due to disruptions in normal production.

The main arguments regarding the crime of contract fraud are as follows: 1. The fact that the defendant agreed to provide sufficient collateral when obtaining the loan and that the corresponding collateral was indeed capable of serving as security is sufficient to demonstrate that, at the time of applying for the loan, the defendant did not subjectively harbor the intent to fraudulently obtain the loan by promising to provide collateral security with the purpose of illegally appropriating the funds; 2. If we exclude the possibility of a contractual modification, the defendant’s failure to register the mortgage on the mortgaged property after obtaining the loan—assuming no change in the contract—should be regarded merely as a civil breach of contract and should not be characterized as constituting the crime of fraud based on the alleged intent to illegally appropriate the funds; 3. The consequence that the loan involved has not actually been repaid is attributable to the lender’s negligence in fulfilling its obligation to pay court fees and its subsequent failure to promptly and continuously exercise its litigation rights. Under these circumstances, the failure to register the mortgage on the secured property is no longer relevant to the relationship between the parties to the contract.

Moreover, with regard to the defendant’s claim that all the loan funds involved were used for the production and business activities of his affiliated enterprise—and despite two rounds of supplementary investigations and evidence gathering—public security authorities failed to verify this claim. The absence of evidence in this regard is also a major reason why the charge of unlawful appropriation cannot be established.

The main arguments of the above defense were supported and adopted by the court.