By Qiang Lyu, Attorney-at-Law
In international trade and cross-border business transactions, disputes involving goods, funds, entrusted property, or commercial assets occasionally arise. When one party refuses to return entrusted property or obtains assets through deceptive means, foreign businesses often ask whether the matter constitutes a civil dispute or a criminal offense under Chinese law.
Two criminal offenses that are frequently confused are Embezzlement and Fraud.
This article provides a brief overview of the crime of embezzlement under Chinese law and explains how it differs from fraud in commercial practice.
What Is Embezzlement?
Under the Criminal Law of the People’s Republic of China, embezzlement generally refers to a situation where a person unlawfully appropriates property that was originally entrusted to him for safekeeping, or property that was found or discovered, and refuses to return it after a demand for return.
The key characteristic of embezzlement is:
The property was initially obtained lawfully, but the possessor later develops the intention to keep it unlawfully.
Unlike fraud, the property is not acquired through deception at the outset. Instead, the unlawful intent arises after lawful possession has already been established.
Elements of Embezzlement
1. Lawful Initial Possession
In international trade, this may include:
- Warehoused goods entrusted to a logistics provider;
- Products held by an agent or distributor;
- Commercial samples provided for inspection;
- Equipment temporarily entrusted to a business partner;
- Funds or assets held on behalf of another company.
In such situations, possession is originally lawful.
2. Subsequent Intent to Illegally Appropriate the Property
For example:
A foreign supplier entrusts goods to a local distributor for temporary storage. When the supplier later requests the return of the goods, the distributor refuses and sells them without authorization.
The distributor’s intent has shifted from lawful custody to unlawful appropriation.
3. Property of Significant Value and Refusal to Return
Chinese law generally requires that the value of the property reach a statutory threshold and that the possessor refuses to return the property after a demand has been made.
Whether criminal liability exists depends on the specific facts and applicable judicial standards.
A Typical Trade-Related Example
A European company stores industrial equipment worth RMB 300,000 with a Chinese business partner pending customs clearance.
Several months later, the European company requests delivery of the equipment.
The Chinese partner falsely claims that the equipment has been lost, while in reality it has already been sold to a third party and the proceeds retained.
In this situation:
- The equipment was originally received lawfully;
- The intention to appropriate arose later;
- The property value is substantial;
- The possessor refuses to return the property.
Such conduct may constitute embezzlement under Chinese law.
Embezzlement vs. Fraud: What Is the Difference?
The most important distinction is:
When Did the Illegal Intent Arise?
Embezzlement
The property is acquired lawfully at first.
Only later does the possessor decide not to return it.
Example:
A trading company receives goods for storage and later refuses to return them.
Fraud
The unlawful intent exists from the beginning.
The offender obtains property by:
- Misrepresenting facts;
- Concealing material information;
- Creating false impressions;
- Inducing the victim to transfer money, goods, or assets.
Example:
A company falsely claims that it has manufacturing capabilities, presents forged documents, receives advance payments from overseas buyers, and then disappears without delivering any products.
If it can be shown that the company never intended to perform the contract from the outset, the conduct may constitute fraud.
Practical Advice for International Businesses
When conducting business in China, companies should preserve:
- Commercial contracts;
- Purchase orders;
- Bills of lading;
- Warehouse receipts;
- Payment records;
- Emails and chat records;
- Inspection reports and delivery documents.
Proper documentation is often critical in determining whether a dispute should be pursued through civil litigation, arbitration, or criminal proceedings.
Attorney’s Note
Although both embezzlement and fraud involve the unlawful appropriation of another party’s property, the fundamental distinction lies in the timing of the offender’s intent:
- Embezzlement: lawful possession first, unlawful appropriation later.
- Fraud: unlawful intent exists from the beginning and property is obtained through deception.
Businesses involved in cross-border trade should seek legal advice promptly when entrusted property, goods, or payments become the subject of a dispute.
Qiang Lyu, Attorney-at-Law
Focusing on commercial disputes, international trade matters, debt recovery, and criminal defense in China.
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