Corporate Criminal Risk Management Practices

Businesses often encounter multiple criminal risks during their operations. In addition to common issues such as bribery, labor disputes, and tax violations, real estate companies—due to the nature of their business—are particularly vulnerable to specific criminal risks at various stages, including land acquisition, project construction, and property sales. Drawing on practical experience, this article focuses on analyzing two high-risk areas within the real estate development process and offers actionable prevention and control recommendations.

The crime of illegally transferring or reselling land-use rights, as stipulated in Article 228 of the Criminal Law, requires, as a prerequisite, a violation of land management regulations and must involve elements such as profit-seeking intent and serious circumstances. A relevant legislative interpretation issued by the Standing Committee of the National People's Congress further clarifies that the illegal acts regulated under this crime must contravene specific legal provisions on land management, including the Land Management Law and the Urban Real Estate Management Law.

Real estate development companies may be involved in crimes related to the illegal transfer and resale of land-use rights, primarily during transactions in the secondary land market. According to Article 39, Paragraph 1 of the "Urban Real Estate Management Law," when transferring real estate that was acquired through land-use rights obtained via land grants, developers must first meet the statutory requirement of having completed at least 25% of the total development investment. In practice, however, companies often circumvent this restriction—or pursue strategies like financing or tax optimization—by adopting a special-purpose vehicle (SPV) equity-transfer model to facilitate the transfer of project interests. As a result, direct transfers of land ownership are extremely rare. While this approach avoids directly altering the land-use right registration, whether it still risks triggering criminal liability remains a matter of ongoing debate.

From the perspective of civil litigation, while some argue that such scenarios involve using legal means to conceal illegal purposes or harm the public interest—thus claiming the transfer should be deemed invalid—practice generally recognizes these transactions as lawful and enforceable. In Case No. (2017) Supreme People's Court Min Zhong 215, the Supreme Court explicitly stated: "Current laws do not contain any mandatory provisions prohibiting real estate project companies from achieving the purpose of transferring land use rights or real estate projects through equity transfers." Therefore, such equity transfer activities pose no legal risk in civil proceedings. By extension, following the principle of applying a lighter case to clarify a heavier one, it naturally follows that criminal liability should certainly not apply either.

However, in judicial practice, structuring equity transfers as a means to circumvent the law has not proven sufficient to shield individuals from criminal liability under the crime of illegally transferring or reselling land-use rights. In certain cases, courts have employed substantive "look-through" analysis, effectively treating changes in control during equity transfers as actual transfers of land-use rights—and subsequently holding property developers criminally accountable. Therefore, when engaging in SPV equity transfers, it remains essential to review local precedents and assess potential regional legal risks before finalizing the transaction.

Article 176 of the Criminal Law stipulates that illegally absorbing or deceptively absorbing public deposits—activities that disrupt financial order—constitute the crime of illegally absorbing public deposits. Additionally, Article 2 of the "Interpretation by the Supreme People's Court on Several Issues Concerning the Specific Application of Laws in the Trial of Criminal Cases Involving Illegal Fundraising" clarifies that if an entity engages in illegal fundraising by offering methods such as "return-of-capital sales," "post-sale guaranteed leasing," "agreed repurchase agreements," or selling shares of real estate—without any genuine intent to sell properties or without these activities primarily aimed at property sales—the act will be prosecuted and punished under Article 176 of the Criminal Law, provided it meets the criteria outlined in Paragraph 1 of Article 1 of the same Interpretation. Such practices are also explicitly prohibited by Paragraph 2 of Article 11 of the "Administrative Measures for the Sale of Commodity Housing."

Based on the author's experience handling cases, courts typically focus on the following when determining whether a crime has been committed: (1) Whether the sale was publicly promoted to society through channels such as television or newspapers; (2) Whether the developer had already obtained legal pre-sale or current-sale permits; (3) Whether the premium repurchase amount offered by the developer constitutes fixed returns; (4) Whether the developer promptly completed individual household registration for homeowners and physically handed over the properties; (5) Whether the property is subject to any objective impediments—such as being seized or mortgaged—that would prevent its sale. However, in practice, even if the developer conducted a legally compliant sale and the properties could be properly registered and delivered to buyers, the inclusion of financing-related clauses during the sales process—such as fixed-return buybacks or lease-back arrangements—may still lead to the charge of illegally absorbing public deposits.

In scenarios involving after-sales lease-back or buyback arrangements, developers typically establish the legal framework for a buyback/lease-back agreement with buyers even before the actual property sale contract is finalized. In recent years, some developers have attempted to legitimize these practices by arranging for affiliated third parties to carry out the lease-back or buyback transactions, or by first signing letters of intent and then formalizing the lease-back contracts once construction is completed. While such practices may help preserve the validity of civil contracts, whether they can fully sidestep the criminal risks associated with illegally absorbing public deposits remains a contentious issue.

Whether it’s SPV transfers or sale-and-leaseback/repurchase arrangements, these have become relatively common business practices in the real estate industry this year. However, some property developers still lack awareness of the potential risks involved. At their core, these risks stem from the ongoing interplay between commercial innovation and legal regulation. To thrive amid industry transformation, companies must proactively conduct thorough criminal compliance reviews during the transaction-design phase, implement dynamic risk-monitoring systems throughout contract execution, and conduct timely assessments of regional judicial precedents before disputes arise—ultimately building a comprehensive criminal risk-management framework that spans the entire project lifecycle.